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UPDATE: Green Mountain Heats Up Coffee Wars With Keurig Espresso Machine

Date : 11/09/2012 @ 1:47AM
Source : Dow Jones News
Stock : Dunkin Brands Grp., Inc. (MM) (DNKN)
Quote : 46.8  -0.79 (-1.66%) @ 11:57PM
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UPDATE: Green Mountain Heats Up Coffee Wars With Keurig Espresso Machine

Keurig Green Mountain, Inc. (NASDAQ:GMCR)
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--Green Mountain hopes to target higher-end consumers with new brewer

--Machine hits stores two months after Starbucks's espresso brewer

--Keurig's new brewer uses fresh milk, Starbucks's uses milk pods

(Updates with additional commentary from an industry analyst and relative pricing of the product.)

By Annie Gasparro

Green Mountain Coffee Roasters Inc. (GMCR) is arming its line of single-cup brewers with another safeguard against heightened competition: an espresso machine that steams fresh milk to make fancy lattes and cappuccinos one cup at a time.

The maker of Keurig brewers and associated K-Cup coffee pods took off in the mid-2000s, but as the growth of the single-serve coffee industry has started to level off, Green Mountain and its peers are looking to corner a new market of higher-end consumers.

"Some consumers will always go to a coffee shop for their lattes or macchiatos, but others will want to have the same experience at home and be able to offer guests something nicer," said Michelle Stacey, president of Keurig. "It's about changing habits."

Starbucks Corp. (SBUX) came out with its first single-cup brewer--an espresso machine called Verismo--two months ago, and Nestle is expanding its line of Nespresso machines in the U.S. with a new version called "U."

Green Mountain hopes that continued innovation of its Keurig line will help it remain relevant and provide the growth investors are seeking.

The company's stock sky-rocketed after it acquired the rest of the Keurig business in 2006, but it has lately faced concerns about its accounting practices, sales forecasts and intensified competition. The attention of critics--namely hedge fund Greenlight Capital's David Einhorn--has contributed to a rapid decline in its share price over the past year.

Competing with the Starbucks brand and European brewers such as Nespresso could be difficult for Green Mountain, whose loyal base of Keurig owners aren't likely to splurge on the new, fancier brewer, called Rivo. However, Green Mountain said it is looking to attract a new type of customer with the Rivo.

Starbucks's Verismo, and Kraft Foods Inc.'s (KFT) Tassimo brewer use powdered or concentrated milk in pods to make lattes and other specialty drinks, while Keurig's Rivo uses fresh milk from the refrigerator.

"It seemed like it would be pretty easy, but now, almost a full two years later, what looked easy turned out not to be," said Kevin Sullivan, vice president of engineering for Keurig. "But we still got here."

Green Mountain also launched another brewing system earlier this year, called the Vue. Both the Rivo and the Vue use their own, proprietary coffee pods, and don't accept Keurig's traditional K-cups. That is crucial for Green Mountain's growth story, as patents on K-Cup technology recently expired, opening it up to competition from private-label brands. More than 90% of Green Mountain's revenue comes from Keurig brewers, appliances and coffee pods.

Though some find prepackaged milk more convenient, the ability for the Rivo to use any type of fresh milk--from whole to soy--creates a more sophisticated feel. Bill Chappell, a SunTrust analyst who follows the industry, said "it appears that the biggest difference between the Rivo and the Starbucks Verismo is the ability to use fresh milk...and from what we have learned about the Verismo, the use of milk pods versus fresh milk seems to be its biggest drawback."

Green Mountain collaborated with Italian coffee company Luigi Lavazza SpA to create Rivo. Rather than offering coffee pods in dozens of different brands, such as Dunkin' Donuts and Folgers, like traditional Keurigs do, Rivo will only brew Lavazza espresso blends.

"There is such a growing popularity of sophisticated drinks of this nature in the U.S., but until this, nothing has been designed with the American consumer in mind," said Lavazza North America Chief Executive Ennio Ranaboldo.

Green Mountain's Rivo will initially be sold in Bloomingdale's stores, further indicating its target of higher-income consumers. The machine costs $229.99, which is more than basic Keurigs but at the low end of the price range for Starbucks's Verismo machines.

Write to Annie Gasparro at annie.gasparro@dowjones.com

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