Posted on: Tuesday, February 17, 2004

Procter & Gamble challenges Starbucks

By Bruce Horovitz
USA Today

Procter & Gamble is about to give Starbucks a serious run for its one-cup-at-a-time gourmet coffee money.

Along the way, P&G hopes to change the way millions of consumers make and drink coffee.

Today, the maker of Folgers and Millstone will announce a pressurized, single-serve coffee making system developed with four of the nation's biggest coffee appliance makers. The joint partners control three-fourths of the domestic market. The system was created by Black & Decker, which is licensing it to Mr. Coffee, Krups and Hamilton Beach.

Company executives believe this system, Home Cafe, will eventually spell an end to conventional drip coffee systems — just as drip coffee makers nixed percolated coffee in the 1970s. The fallout could be enormous. And it could turn the nation's $19 billion coffee industry on its filtered ear.

At-home coffee consumption has been on the decline since 1998, while coffeehouse sales have been on the rise, says Mintel, a market research firm. Domestic coffee consumption in 2002 — the last year tracked — was down 14.2 percent from 1980's levels while coffeehouse sales have jumped at least 1200 percent since the 1980s, Mintel says.

"This is huge," says Mike Griffith, president of P&G's global beverage division. "It's one of the biggest innovations the industry has seen."

It's not the first single-serve system for coffee house-style coffee. But it's the cheapest. The high-pressure system, which takes just 60 seconds to brew, fosters customized coffee for individuals. Even then, the systems cost up to three times that of drip coffee. When the systems are available in May, they'll sell for about $60. The 18-count coffee pods, which look like tea bags, will fetch $4 per pack. Are American consumers ready to pay this price for home-brewed joe?

"This will be the hottest gift item for holiday '04," says Gary Stibel, founder at New England Consulting Group.

Several names in coffee will be affected by P&G's move. Executives at Starbucks, the world's largest coffeehouse chain, were unavailable for comment. And Nick Lazaris, CEO of Keurig, among the first to sell single-serve systems, was traveling and unavailable. The Keurig home systems sell for up to $250 — about four times the price of P&G's.