Starbucks (NASDAQ: SBUX) has fallen well behind in the single-serve coffee market in the United States. The chain has about half the sales of market leader Keurig Green Mountain — though most of its sales come from K-Cups licensed by its rival.
Keurig, which is now part of privately owned JAB Holdings, dominates the U.S. market for pod-based coffee machines controlling “virtually all” of it, according to The Washington Post. That’s not an insignificant market as another Post article notes that single-serve coffee — mostly Keurig K-Cups — accounts for about a third of all coffee sold in the U.S.
It’s a huge market that Starbucks has a chunk of only because it licenses the right to make K-Cups from Keurig. Ultimately, due to expiring patents, it could drop the license. However, for now the company’s best chance to increase its single-serve market share — without cutting a check to its rival — would be to expand sales of its Verismo single-serve coffee maker.
That’s exactly what Starbucks plans to do this holiday season with aggressive pricing on its new machine. Keurig however won’t be sitting idly by as it plans its own Black Friday deals.
Starbucks has lowered the price for its brand-new Verismo during the holiday season. Image source: Starbucks.
What is Starbucks doing?
In mid-October Starbucks released a new version of its single-serve machine, the Verismo V. The new coffeemaker improves on its predecessor by allowing for brewing larger cups of coffee, operating more quietly, and the ability to brew after only 15 seconds of warmup. The machine still uses Starbucks proprietary pods and the company has also released a companion milk frother with the machine.
To spark sales of the new single-serve brewer, which regularly sells for $149, the company is selling it for $99 along with a free 12-pack of pods from Nov. 21 through Dec. 25. In addition the company will be offering a bundle for $129 (down from $179) including a Verismo V Brewer, a Verismo Milk Frother and a 12-count box of Verismo pods of choice. Consumers can also buy the milk frother on its own for $39, a discount from the regular $59 price.
One of Keurig’s strengths is its selection of K-Cup pods. Image source: Keurig.
What is Keurig doing?
In addition to offering small discounts on its own website, Keurig will see many of its retail partners cut prices on its signature machine during the holiday season. Not all of the company’s partners have released their Black Friday and Cyber Monday deals, but BlackFriday.com has compiled a number of offers on K-Cup machines for the 2016 holiday shopping season.
Kohl’s plans to offer deals on Keurig’s K250 brewer which sells for $129.99 on the company’s website offering it for $99.99. The retailer will also have the K55 on sale for $89.99, the same price Keurg is selling it for, but a deal on its normal $119.99 price.
J.C. Penney will offer the K55 at $89.99 while it will also sell the K250 for $99.99, but will throw in four K-Cups, a water filter handle, and two filters. Target and Best Buy may have the best K-Cup brewer deal this year with both offering a $15 gift card to anyone who purchases the K50 single-serve brewer for $79.99 (normally $109.99) or the K200 for $89.99 (normally $119.99).
A number of other retailers also have K-Cup brewer deals for the holiday season and while they vary, they generally fall in line with the savings offered above. In the past Keurig brewers have been even more heavily discounted on Cyber Monday, but those deals have not been released yet.
Does Starbucks have a chance?
The new Verismo fixes the most glaring flaws in the previous model while continuing to deliver a higher-end coffee experience than a typical K-Cup machine. The problem for Starbucks — and a better brewer will likely not fix this — is that Keurig controls the market.
With 25% of Americans already owning a K-Cup machine, and the pods being sold in grocery stores (and at Starbucks), it’s simply easier to pick a Keurig brewer. Add in the fact that Keurig has dozens of partners making hundreds of different K-Cup flavors, while Starbucks only offers a handful of Verismo pods, (which generally cost more than K-Cups) and you can see why this is an uphill fight for the coffee giant.
Starbucks arguably has a better machine which makes a superior cup of coffee. That might help it sell some Verismos to its hard-core fans, but it’s not likely to cut into Keurig’s lead even with strong holiday pricing.
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Daniel Kline has no position in any stocks mentioned. He owns two Keurigs and the older Verismo, but may also buy the new one. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.