The Brewing Coffee War

Get ready coffee drinkers around the globe...the single-cup coffee war is heating up......

Some of the main combatants in this battle include Starbucks (Nasdaq: SBUX) and Nestle ADR (OTC: NSRGY) with its Nespresso brand. The latest front in this battle sees Starbucks coming out this autumn with its own coffee maker branded Verismo in the North American market to compete directly with Nestle's Nespresso. These machines make espresso-based coffee drinks such as lattes in single-cup servings.

One of the first companies to suffer a wound from the fracas was not Starbucks nor Nestle, but Green Mountain Coffee Roasters (Nasdaq: GMCR). This company has been the leader in the United States for single-cup coffee makers with about a 75% market share for its Keurig single-cup brewing system machines. In the first quarter of this year, GMCR sold 4.2 million of the machines which is more than half the 6.5 million brewing machines sold in the entirety of the last fiscal year.

However, the company really doesn't make its money on its machines. Green Mountain's business is built on proprietary technology that merges home coffee and its K-cup pods. It sells its machines at cost, for as little as $100 and makes its profit on the individual pods (such as for Starbucks coffee) which retail for 60-80 cents each.

There will be a major difference between the Keurig machine and the one Starbucks is bringing out. Green Montain's is a low-pressure machine that produces only brewed coffee while Starbucks' machine will be a high-pressure machine which gives it the opportunity to deliver Starbucks-quality espresso beverages at home.

The machines will be produced in partnership with a German company, Krueger. Starbucks has yet to say how much these machines will cost but that the price of the capsules will be “comparable” to existing single-cup serving coffee products already on the market. Last November 1, Starbucks launched sales of Starbucks brand K-cups packs which were a raging success. Within two months of launch, Starbucks had sold 100 million of the packs.

Not to be forgotten is Nestle's Nespresso which dominates the European market for single-cup coffee makers. Sales of Nespresso last year rose by a heady 20% to more than $3.8 billion. Nespresso's profit margin is a very enviable 20%-30%. Nestle achieved those results by geographic expansion (including into the US), spending on advertising (such as with George Clooney), and setting up more than 300 boutique coffee stores around the world that reinforce Nespresso's image as a high-quality, premium brand product.

Nespresso's home turf of Europe may well be the most interesting battleground. Starbucks, which is already revamping its European operations, is soon expected to announce the European launch of its coffee capsule packs. But it faces a marketing juggernaut in Nestle which plans to open 40 more outlets this year including large stores in London and San Francisco to compliment its huge store in Paris.

It is unlikely that Starbucks will be able to beat Nestle and Nespresso on its home turf. Its success in the single-cup coffee war should come at home in the United States. It will be interesting to see if Starbucks can cut into the dominant market share in the US that Green Mountain Coffee Roasters currently holds.

This article was originally written for the Motley Fool Blog Network. Please check out my articles daily at http://blogs.fool.com/tdalmoe/.