Issue link: http://read.dmtmag.com/i/491350
40 STiR tea & coffee industry international taurants, resorts and hotels are switching to single serve. Their challenge is reversing the perception that push button coffee is not as tasty as hand made. Let's take a closer look at five solu- tions, from large to small. Closed system roasters Green Mountain Coffee Roaster's Keurig and Nestle's Nespresso closed coffee systems enjoyed a tremendous first-mover advantage that generated $4.4 billion in sales for each of these companies last year but a sharp second- mover whiplash is underway. As soon as the size of the multi-billion dollar purse became known competitors raced to market. In Europe, following a series of court decisions and the expira- tion of patents, non-licensed Nespresso coffee capsules and equipment snatched 20% of market value within 18 months. Competition has curtailed double-digit growth that for a time made Nespresso the darling of Nestle's portfolio. In re- sponse Nespresso is going global, target- ing Asia and North America for expan- sion. In the U.S. Keurig is experiencing the same fate with private label sales accelerating to 12% market share in the year following expiration of key patents on its K-Cups. Unit growth is up 44% year over year in 2013 but in 2012 it was 77%. Sales growth has continued to decelerate. Starbucks is both friend and foe. Starbucks has 14.5% market share in grocery and 18% of total market and climbing. Its Versimo brewer competes with the high-end Keurig espresso makers while royalties add millions to GMCR's coffers. Licensed roasters get an average 60 cents per unit, Starbucks and Peet's Coffee & Tea sell their K-Cups for 20 cents more, but the retail price of Kups (non-licensed K-Cups) has plummeted to as little as 35 cents as mass marketers, gro- cery chains including Kroger, Safeway and SuperValu, and private label brands of- fer convenience and coffee that is "good enough" for price-conscious consumers. The victor is far from apparent The winning machine will be a household device that brews coffee or espresso or more likely both. It will likely brew both single cup and a small carafe. In the U.S. Keurig holds the lead with 16 million machines in homes but this front-runner is headed for a pit stop late in 2014 when it introduces a new Keurig 2.0 machine. The new Keurig features "interactive readability" that will "fundamentally improve and transform the Keurig brewing system" according to GMCR c.e.o. Brian Kelley. Since consumers demand variety any attempt to re-close the system means Keurig must convince its 35 licensed roasting partners to market their coffee in 2.0 K-Cups. More challenging is the company's ability to produce a technically advanced brewer at a very low price without the guarantee that coffee sales will make up the difference. In the first years after Keurig introduced its home brewer GMCR's K-Cups were in the poll-position with 80% market share. K-Cups sold for as much as 85 cents each and averaged 60 cents through 2013. The company earned $4.36 billion last fiscal year with a return on invested capital (ROIC) that has ranged from 15-20% for nearly a de- cade. Nespresso was in an even better position globally but the race has evolved from a Formula 1 contest into something more akin to a NASCAR scramble. In the U.S. non-licensed roasters are rapidly innovating to overcome consumer objections from affordability to sustainability while Nespresso, the global leader that Pods move quickly down the production line at Intelligent Blends, San Diego.