Kraft Coffee Pods Could Actually Benefit Green Mountain

Soon after Dr Pepper Snapple (NYSE:DPS) forged a deal with Green Mountain Coffee Roasters (NASDAQ:GMCR) to sell its Snapple iced teas, Kraft Food Groups (NASDAQ:KRFT) announced it will introduce its own Maxwell House and Gevalia coffee pods compatible with Keurig brewers. ^[1] The move is seen as a further blow to Green Mountain since the sales of its own coffee pods could be slurped up by Kraft’s products. Moreover, since the coffee pods will not be licensed, Green Mountain won’t receive any royalties from the sale. Note that the Keurig brewers are owned by GMCR.

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Kraft already has a single-serve brewer system called Tassimo, so the roll-out of coffee pods compatible with Keurig brewers could be a silent admission of its inability to overthrow Keurig’s position as the market leader. If you can’t beat them, join them seems to be Kraft’s mantra.

Even Starbucks, which recently introduced its own coffee brewer, Verismo, continues to license its K-cups. The competition realizes that Keurig brewer sales are likely to remain strong simply because they are compatible with a large number of brands/pods which could ultimately be the deciding factor for choosing the brewer.

Moreover, with the brewers now commanding higher prices, they will contribute more towards GMCR’s profitability. Before the patent expiration, most of the company’s profits were derived through the sale of K-cups and brewers were generally sold at a cost price to encourage consumers to buy the product. However, from the historical data, you can see that the average revenue generated per brewer sold is rising sharply as the company recognizes the need to generate profits through the sale of brewers.

Going forward, we expect the trend to continue with the help of Vue and other higher priced brewers that GMCR is in the process of developing. Vue brewers were launched earlier in the year and are priced much higher than K-cup brewers. Green Mountain is also in a partnership with Italian coffee giant Lavazza, wherein the two companies are collaborating to develop an espresso machine, expected to be launched in 2013. The influx of new entrants will probably mean fewer Green Mountain K-cups are sold per brewer. However, the healthy sales growth of brewers will ensure that the total number of K-cups continue to sell at a brisk rate.

Green Mountain’s association with Lavazza also bodes well with its plan to expand internationally. Recognizing that its days of hyper-growth are over in the U.S., Green Mountain named a new president for international business development recently to explore opportunities beyond North America. Nothing concrete has been mentioned, but Europe and China could be the likely destinations. Europe especially would benefit with Lavazza’s association since Green Mountain is relatively unknown outside North America. ^[2]

We have a $29 price estimate for Green Mountain Coffee Roasters, which is about 20% above the current market price.

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1. Kraft Foods Group Inc To Sell Maxwell House K-cups For Green Mountain Coffee Roasters, Inc.’s Keurig-Reuters, October 11, 2012, reuters.com [↩]
2. Green Mountain Coffee goes international, October 17, 2012, marketwatch.com [↩]