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Analysis: New single-serve coffee brewers pile pressure on Keurig

By Martinne Geller

NEW YORK (Reuters) - A wave of new single-serve coffee brewers is coming to market in the United States, offering consumers more choices and stepping up pressure on market leader Keurig and its parent company, Green Mountain Coffee Roasters Inc .

This month, Bunn, maker of commercial beverage equipment, will launch a home version of its single-serve coffee machine. The machine, called MyCafe, will work with Keurig's K-Cups, even though it is not licensed to do so.

Also later this month, about two-thirds of U.S. Walmart stores will start selling a machine made by Esio Beverage Co that makes both hot and cold drinks. While that machine does not use K-Cups, it does expand well beyond the capabilities of existing popular brewers.

These machines come fast on the heels of Starbucks Corp's Verismo, a single-serve brewer that makes coffee and espresso drinks. It is now available online, and will be sold at select stores early this month.

Single-serve coffee, which emerged in the United States in the late 1990s, originally centered largely around a few proprietary systems backed by the likes of Nestle SA , Green Mountain and Kraft. The machines were found mostly in offices and upscale homes.

But with the advent of cheaper machines that can make different kinds of drinks and operate with open-source platforms, the market is now getting a jolt.

For its part, Green Mountain says it will continue to be the leader in the small-but-growing retail market, due to its quality, customer loyalty and range of drinks under 30 brands marketed by companies including Dunkin' Brands Group Inc , Caribou Coffee Co Inc and Starbucks Corp .

"Since the early days of single-serve coffee, we have successfully competed against well-resourced companies like Mars and Kraft, many of which offered systems of brewers and beverages," said Green Mountain spokeswoman Suzanne DuLong.

Still, investors are not convinced. Green Mountain stock is down 80 percent from last year's high, after investors began questioning its growth prospects and accounting practices. The shares gained 1 percent to close at $23.63 on Thursday.

PRICING PRESSURE

Green Mountain sells machines at cost to drive adoption, and makes money off the K-Cups. But a wave of unlicensed cups, including private-label offerings from Supervalu Inc and Safeway Inc , is pressuring prices in the overall category.

Chief Executive Larry Blanford told an investor conference in June that Keurig could raise prices on its machines, in order to boost margins. But so far, the opposite is happening.

Green Mountain lowered the price of its new higher-end Vue brewer to $229.99 from $249.99 and said it would launch a less-expensive model for $209.99.

Keurigs range from about $90 to about $200.

Marc Riddick, an analyst with Williams Capital Group who covers Green Mountain, said the pricing environment only stands to grow worse toward year-end.

"As you approach the holiday season, I wouldn't depend on holding so firm on pricing because you've got retail partners and you've got a lot of competition out there," Riddick said.

Single-serve coffee pods are expected to reach $959.1 million in retail sales this year, up 32 percent, according to Euromonitor International. That would account for about 10 percent of the overall coffee market, which is expected to grow by only 6 percent this year.

Excluding the coffee sold to offices, Green Mountain's share of the retail market was 54 percent last year, down from about 60 percent in 2010 and 63 percent in 2009, Euromonitor said.

Coffee brewers - single-serve, espresso and drip machines - are expected to reach $34.6 billion this year, it said.

OPEN-SOURCE COFFEE GROWS

Bunn's new MyCafe system, which will cost $159.99, can work with K-Cups but also with any brand of regular ground coffee, instant coffee or with tea bags, said Aimee Markelz Tracy, senior vice president of Bunn's home products division.

"We tried to make it as universal as possible so that people, however they want to brew their single cup, can do that in a high-quality way," Tracy said.

The MyCafe, which will be sold at Lowe's Cos Inc stores nationwide and select Bon-Ton and Dillards stores, is not the only product betting on open-source platforms.

LBP Manufacturing, maker of the hot sleeves placed around Starbucks cups, will soon sell packages that roasters can employ to make coffee cups compatible with Keurig and other machines. LBP's president told Reuters last month that the market was moving toward open standards.

Tracy said she expects a lot of new brewers to come to market, but questions how well they all will sell.

"I think consumers at the single-serve level have come to expect a certain kind of quality from the taste of their coffee," Tracy said.

Esio will make good coffee but will be more than just a coffee machine, said Lyle Myers, the company's president.

"We have a system for every member of the family," Myers said in an interview, noting that the machine can be used throughout the day, not just in the morning.

Armed with licensing deals with Kraft Foods Group Inc , Campbell Soup Co and Unilever Plc , Esio's initial lineup includes Maxwell House hazelnut coffee, V8 Splash juices, Diet Brisk iced teas, Country Time Lemonade and Crystal Light drinks.

It will not make sodas yet, but that is on the radar, said Frank Leonesio, Esio's founder and chief executive.

The Esio, which will eventually be sold at outlets other than Walmart, works with E-Paks, reusable pouches that can make 14 eight-ounce servings of a drink, served hot or cold.

The packs range in price from $4.98 to $6.48, meaning that the average serving costs between 36 and 46 cents. On Keurig.com, K-Cups range from 60 cents to 94 cents per serving in 24-packs.

Leonesio and his brother have been funding Esio, but they are now talking to outside investors for additional capital. Leonesio also said he was in "high-level discussions" with potential strategic partners in the beverage industry.

While it is obviously too early to say how these machines will fare, Riddick said the competition will help the market.

"Anytime you have the backing of somebody like Walmart, you have to take it as a serious competitor," Riddick said. "All of these efforts grow the pie, and the obvious winner is the consumer."

One company happy to leave the brewer business to others is Dunkin' Brands, which sells its K-Cups at Dunkin' Donuts stores and at Baskin-Robbins stores in California.

"We have no intention of doing our own brewer. We're not in the machine business," Dunkin' Brands Chief Executive Nigel Travis told Reuters in an interview on Wednesday.

(Additional reporting by Lisa Baertlein in Los Angeles; editing by Mary Milliken and Matthew Lewis)

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