By Martinne Geller and Mihir Dalal
NEW YORK/BANGALORE Feb 2 Sara Lee Corp SLE.N Executive Chairman Jan Bennink thinks it is time for his company to reinvest in the single-serve coffee market.
Back in 2001, when it teamed up with Philips (PHG.AS) to launch the Senseo machines that brew single cups of coffee in seconds, it was a pioneer of that market.
But in recent years it let that business languish, especially in the United States, allowing Green Mountain Coffee Roasters Inc (GMCR.O) and its Keurig machine to become the dominant player there.
"Our Senseo machine is a very unsexy machine," Bennink told Reuters in an interview on Thursday. "If I talk to my daughter and ask her if she wants a free Senseo machine, she says 'No thank you, Pop.'"
"That's a very simple answer you get from the youth -- they don't want to be associated with Senseo. That will change."
Sara Lee, which reported better-than-expected quarterly profit on Thursday, will discontinue Senseo in North America as of March 31, except on select websites. But at the same time, it is working to make the machine more appealing, especially for young people, to tap growth overseas.
Sara Lee is one of many companies including Nestle, Kraft, Green Mountain, Starbucks and privately held Mars looking to tap the growth of single-cup coffee. While increased competition has some bears worried about the sustainability of current profit margins, bulls point to consumers' growing desire for convenience and high-quality coffee at home
The company last week announced that it took full control of its Senseo business by buying out partner Philips. Bennink said that was a bet on single-serve machines but also machines that grind fresh beans, another area of growth.
In another sign of interest in the single-serve coffee market, Wal-Mart Stores Inc (WMT.N) said it would add the relatively unknown Esio Beverage System to its lineup of coffee machines.
Single-portioned coffee -- known either as cups, discs or pods -- makes up only 8 percent of total worldwide coffee sales, but category bulls say that should grow as more people take advantage of their convenience.
"Americans are showing signs they're hooked," said Bevmark Consulting CEO Tom Pirko. "We're ready for the simplest possible way to make coffee. Bring on the pods. We're now pod people."
He predicted that as more players jump into the ring, equipment prices will come down, which will lure more consumers.
Single-cup coffee brewers now start at about $50 but can cost as much as $800 for models that make barista-worthy espresso drinks with frothed milk and shut themselves off.
The global leader is Nestle SA (NESN.VX), whose Nespresso system holds a 35 percent share, according to Euromonitor International. It is followed by Sara Lee's Senseo brewers with 18 percent, and Kraft Foods Inc's KFT.N Tassimo with 8 percent.
Green Mountain, which controls more than three-quarters of the U.S. market, ranks fourth globally with less than 8 percent.
Green Mountain on Wednesday reported quarterly profit that blew past Wall Street estimates, fueled by strong sales of Keurig machines. The stock soared 24 percent on Thursday, rebounding after having lost more than half its value in less than five months on fears of slowing demand. [ID:nL4E8D17LD]
Not everyone is convinced that Green Mountain can maintain its U.S. dominance. Some 17 percent of its shares are held in short positions, according to the most recent data from Thomson Reuters StarMine, and the rally was likely buoyed by short-sellers rushing to limit their losses.
Stifel Nicolaus analyst Mark Astrachan, who has long been critical of Green Mountain, maintains a "Sell" rating on the stock, citing growing competition in the face of a September patent expiration that will let any coffee brand make and sell coffee for Keurig brewers without paying royalties.
He lifted his 2012 earnings estimate and his fair value estimate on the stock after Wednesday's results, but gave lukewarm praise in a research note, "We concede this was a better quarter than anticipated, particularly given numerous questions about weakening end-demand following disappointing fourth-quarter results."
Last October, hedge fund manager David Einhorn amassed a short position in Green Mountain, and questioned its growth potential, accounting practices and business model in a presentation that pummeled the stock. [ID:nN1E79G0WC]
In an ode to Einhorn, another private investor, Daniel Yu, laid out his own argument for shorting the stock, part of which involves a threat to K-Cups from reusable cups from other companies that let consumers use their own coffee.
“Reusable K-Cups, such as Ekobrew & Solofill, reduces the need for Green Mountain’s K-Cups. Their popularity may keep the Keurig platform relevant, but render the business unprofitable,” Yu said in a Wednesday presentation, a copy of which was obtained by Reuters.
Supporters of Green Mountain say the company is bound to maintain its grip on the United States, since its machines exclusively carry many of the nation's biggest coffee brands, including Starbucks, Dunkin Donuts and Folgers.
"The U.S. consumer wants brands and Green Mountain has almost all the big brands on its system," said Janney Capital Markets analyst Mitchell Pinheiro.
The vast majority of U.S. households still use traditional ground or instant coffee, and a survey by research firm Mintel found that about 36 percent of people who do not use single-cup brewers said these machines were too expensive.
A cup of coffee made at home by a one-cup brewer costs on average about 5 times more than traditionally brewed coffee, according to Consumer Edge Research analyst Robert Dickerson.
Worldwide sales of coffee, including fresh and instant, reached $70.86 billion last year, according to Euromonitor, a rise of 17.5 percent. Sales of single-serve packets accounted for $5.75 billion of that, or 8 percent, but saw a jump of 31.3 percent.
For now, single-serve coffee has the biggest presence in Western Europe and the United States, but after years of growth there, the category leaders are moving into new markets.
Sara Lee has recently made moves in Brazil, which is on track to become the world's biggest coffee consumer in coming years, while Nespresso recently announced a new cafe in New Zealand. [ID:nL5E8CO3JK]
Dickerson from Consumer Edge said moves into China can not be that far behind, given the success of other concepts like high-end Haagen Dazs ice-cream shops, McDonalds (MCD.N), KFC (YUM.N) and Starbucks (SBUX.O).
"You want to enter in with a more premium brand and be able to channel that brand potentially thereafter into general retail,” Dickerson said.
But Aisling Balfe, who covers the food and beverage sector at consultancy Planet Retail, does not think Asia is a top priority right now, given the perception of coffee as a social occasion rather than a morning necessity.
"That market is 10 to 20 years behind the markets in Europe and the U.S.," Balfe said. "People like to go to a coffee shop and enjoy the experience rather than grab a coffee on the go ... It will take a long time for people in Asia to adapt to that kind of culture."
(Reporting By Martinne Geller in New York and Mihir Dalal in Bangalore; Editing by Phil Berlowitz)
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