The single-serve coffee market has become the newest sensation in North America and these machines have been among the top gifts to hit households during the 2012 holiday season. While the single-serve phenomenon took off in the mid-2000s, the machines were largely centered around offices and upscale homes. As coffee enthusiasts are becoming more cost conscious and looking for home brews that are more convenient and delicious than drip coffee, machines such as Keurig and Tassimo are now entering the common household.
One step beyond that are the consumers looking for higher end espresso based specialty drinks, where machines such as Starbucks’ new Verismo, and the Nestle Nespresso recently entered the North American market. As consumer taste buds refine, I have no doubt that these brands will gain market share, but the American lifestyle and consumption of venti sized coffee will prevent the entire phase-out of Keurig and Tassimo machines.
Keurig and K-Cups
In my experience, Keurig only skims the household market, and is more focused on a multi-channel strategy of the commercial segment of office users with a demand for coffeehouse-quality coffee in the office. I don’t know anyone who owns a Keurig machine in their home, and if they do they haven’t loved their coffee enough to express that feeling.
As the office coffee sector is dominated by Flavia, the outlook for Keurig is not the greatest. Parent company Green Mountain Coffee Roasters (GMCR) sell the machines at cost and makes profit from selling K-cups, ranging in price from about $0.40 to $0.90 per cup, as compared to ~$2.00 for the equivalent in coffee shops. With the K-cup patent expired, other companies are producing their own versions of the machine, and selling similar pods. Both machine and pod prices will only drop due to increased competition and the rising popularity of espresso based machines that can handle specialty beverages.
Despite the quarterly results announced after patents expired to boast net profit up 22%, net sales up 33%, and outlook for 2013 boosted, I’m not sensing the same optimism from a consumer’s point of view.
Did I even mention how ridiculously large each K-cup is?
Tassimo and T-Discs
Tassimo specifically targets the household market, bringing favourite brands such as Tim Horton’s, Second Cup, and Nabob to the home, and in particular differs from Keurig by the ability to create specialty lattes, espressos and cappucinos using milk pods.
Although research a few years back showed that Tassimo was no different from other rival single-serve coffee brands, Mondelez (MDLZ), previously part of Kraft Foods, established a strong differentiation position with a clever marketing campaign of its unique barcode technology. Strong in-store sales campaigns, such as the recent launch of Tim Horton’s T-discs, educated users on the ease of the barcode and ability to replicate in-store coffee. It touts that each cup is optimized for brew time, temperature, and cup size.
I was briefly sold on Tassimo, until I came across the higher end Nespresso and Verisimo machines. But for the general user, Kraft has the right marketing campaign, product mix, and price point to exceed Keurig in sales, as consumers continue to demand a machine that offers more choices than your simple brew, and better mimics the selection of Starbucks and Second Cup beverages.
Starbucks (SBUX) recently launched its own Verismo machine in late 2012, and will continue to sell their brews in K-Cups. Although there was great anticipation for the machine, the marketing and launch of the machine was a bit of a blunder. While I usually frequent Starbucks stores about 3 times a week, I was never there on a day they provided sampling of the machine, and there was little to no proactive promotion of the machine during the holiday season.
As I’ve noted before that my devotion to the Starbucks culture has little to do with actually drinking Starbucks coffee, I don’t see the potential for the Verismo system to compete with Keurig nor Tassimo. The selection of roasts is limited, and so is the ability to create your signature Starbucks drinks (you would have to purchase various syrups etc.). Rather, the launch of the machine is just a way for the company to save a portion of their sales from Starbucks lovers wanting to enjoy their java from home. Those trying to cut back on their spending are out of luck, as the pods are priced higher than K-cups and T-discs – Cafe Lattes are still $1.60, and roasts & espressos are $1.00 a cup.
Nespreso’s emergence in the North American market in late 2012, particularly in Toronto, offers a taste of sophistication that Europeans have enjoyed for over a decade. Both technology and branding of Nespresso differentiates it above other competitors – a topic to be detailed at a later date.
Despite the surge in home-brewed coffee and the expectations of increased market penetration, coffee shops are not in hot water yet. While I am on the market for a Nespresso machine, I still haven’t bought one yet, largely due to the fact that I am not home often enough to enjoy it. The convenience and atmosphere of the Starbucks experience just can’t be replaced by a single-serve cup of joe.