Starbucks (NASDAQ:SBUX) made a splash two weeks ago with the launch of its high-pressure Verismo coffee machine. Many investors thought the move would eat into the sales of Green Mountain Coffee Roasters (NASDAQ:GMCR) and its flagship Keurig machines and its K-Cup coffee brewing technology.
But while Green Mountain stock is off about 25% since the Starbucks launch, one other top coffee company also could be in trouble: Nestle (PINK:NSRGY).
The Swiss company is so much more than chocolate. Nestle makes baby food and breakfast cereal, and owns the Hot Pockets and Lean Cuisine frozen food lines.
It also has a popular coffee brand, Nescafe, which is going to feel the pressure from SBUX.
Nestle has its own single-serve coffee platforms, the Nespresso and Nescafe Dolce Gusto. These machines have done fairly well for the company. But as Starbucks enters the $8 billion single-serve coffee market, with its Verismo machine set to debut later this year in North America, it’s bad news for NSRGY.
Nestle’s Nespresso brand has accounted for more than 4% of Nestle Group sales — not an insubstantial sum — and contributed over 10% to NSRGY sales growth. Most importantly, the premium products boost profit margins, making it a key focus for investors during these times of commodity inflation and rising production costs.
Nestle is an attractive income investment for many buy-and-hold investors because of its stable consumer business and diverse product lines. It boasts a roughly 2.8% yield (though the dividend is only paid once a year), and NSRGY is relatively low-risk even when you consider it is a pink sheet stock. The daily volume is regularly more than 400,000 shares, so it’s slightly more liquid than other OTC investments.
Yet Nestle hasn’t reacted as harshly to the Starbucks announcement as GMCR stock has. Granted, that might be because Green Mountain doesn’t really have any other operations to fall back on — its “second act” after the Keurig apparently is just a higher-end version of the same machine, named the Vue.
But while Nestle is a $200 billion company, it certainly will be affected by any success Starbucks sees with its new Verismo line.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com, follow him on Twitter via @JeffReevesIP. As of this writing, Jeff held a position in none of the stocks named here.