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Promise in US coffee pods but patent uncertainty dogs Green Mountain – analyst

By Ben Bouckley , 06-Jun-2012
Last updated the 06-Jun-2012 at 16:22 GMT

Promise in US coffee pods but patent uncertainty dogs Green Mountain – analyst

The coffee pod revolution is here to stay in the US, and the expiry of patents relating to Green Mountain’s coffee pods next year could even cut prices further and strengthen its grip.

That’s according to Euromonitor International drinks analyst Jonas Feliciano, who said that growth reported by Green Mountain in early May was well below the 50% the company had sought.

After the firm’s stock price fell, analysts blamed both market leader Green Mountain Coffee Roasters’ (GMCR’s) inability to forecast the market and uncertainty over upcoming patent expirations in September 2012, he said.

“But whether or not GMCR will lose share once their monopoly on the K Cup model expires, coffee pods as a market are here to stay,” Feliciano added.

Scratched the surface

Pods had only “scratched the surface” in the US, Feliciano said, despite retail volume growth of 523% from 2006 to 2011 and movement from niche product to workplace and household mainstay.

He added: “While pod penetration is still relatively low compared with other types of coffee in the US, single serve coffee pod machines now account for 20% of total volume sales, up from 4% in 2006.”

Machine sales themselves were also predicted to rise 20% from 2011 to 2016, largely driven by the pod explosion, Feliciano said.

In some ways the US pod explosion mirrored Western European growth – where pods represent 2% of US off-trade fresh coffee retail volume in 2011, compared with 23% in France – where France, for instance, saw massive growth in 2005/6 due to breakthroughs by Kraft Foods (Tassimo) and Sara Lee.

With consumers increasingly leading on-the-go lifestyles, pods quickly became a hit as the machines allowed them to brew single serve cups of coffee similar to beverages they purchased in local cafés," Feliciano said.

Many thought the recession might change things, due to premium positioning for pods, but Feliciano said that Nestlé targeted affluent households with Nespresso, which led to pods overtaking standard fresh ground and fresh coffee beans in terms of retail sales – taking a 50% value share.

But despite ‘on the go’ lifestyles for both French and American consumers, Feliciano said it would be naïve to expect the latter market to go the same way.

US consumption differences

Firstly, due to lower average off-trade coffee consumption of 276.4 cups per year in the US (395.1 in France), while the French preferred stronger, shorter coffee drunk throughout the day, as against the US preference for coffee in the morning.

Feliciano said: “Because of these fundamental differences in consumption, it is unrealistic to think that the US market can reach the levels of France; however, as manufacturers continue to provide consumers with customisation and price segmentation, pods will continue to take share from other coffee types.”

Of the machines available in the US, he added, Keurig’s was popular for its speed, ease of use and affordability, while the firm had struck licensing deals with Caribou, Starbucks and Dunkin’ Donuts that allowed at-home consumers to recreate an on-trade experience.

The expiry of GMCR's K cup meant that more coffee roasters would also make pods for Keurig machines, thereby driving prices further down and making the product more accessible to consumers, Feliciano added.

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