Keurig Green Mountain’s Partnership With Subway To Boost Volumes Of Brewers and K-Cups

On June 10, the Vermont based K-Cups maker, Keurig Green Mountain(NASDAQ:GMCR) announced its partnership with the restaurant chain, Subway to bring Keurig’s single-serve brewers to almost all of the Subway chains in U.S. and Canada. Currently, more than half of the restaurants in North American locations have been using Keurig system brewers. ^[1] Recently, top fast food restaurant chains have been focusing more on their breakfast segment, coffee being the center of focus. With the quality of beverages, convenience and affordability of the Keurig’s products, Subway is looking to provide its customers with high quality premium coffee at nominal rates.

We have a $80 price estimate for Green Mountain Coffee Roasters, about 50% lower than the current market price.

See our full analysis of GMCR here

A Giant Platform For Keurig Green Mountain

This deal might prove to be a blockbuster move for Keurig Green Mountain, as Subway not only provides an added platform for the company’s revenue growth, but a huge platform as well. Subway is the largest single-brand restaurant chain in terms of number of restaurants world-wide, with around 42,000 stores in 107 countries, overtaking McDonald’s (35429 stores) in 2010. However, it is ranked second behind McDonald’s in terms of worldwide sales. Subway’s revenue growth is excellent with $18.1 billion net revenues in 2013, making it one of the fastest growing franchises in the world. ^[2] The Keurig K150 brewer might expand the Subway’s hot beverage menu, providing freshly brewed and high quality coffee to its customers. This brewer system has been certified by the National Sanitation Foundation (NSF) for quality foodservice, ensuring that it meets health and safety standards intended for commercial consumption.

This will help Keurig brewer systems to reach out to more customers, giving a boost to brewer and portion packs’ volume growth, which might subsequently translate to improved revenue growth. According to our estimates, K-Cup portion packs account for 78% of the company’s total valuation and contribute 74% to the company’s gross profits in 2013.

K-Cups: Volumes To Rise Significantly

Subway does not report its customer count, but the fast food chain mentions the average number of sandwiches and salads. On its website, Subway reports that it sells 2,800 sandwiches and salads per minute worldwide. ^[3] This accounts for nearly 35,000 sandwiches and salads per restaurant sold annually. In developed nations such as the U.S. and Canada, Subway’s combined largest market, the estimate may rise to 38,000 sandwiches and salads per restaurant annually. There are nearly 30,000 stores in these two nations combined. Taking a conservative estimate that Keurig brewers would be available in minimum 80% of these restaurants and that 1 coffee is sold per 20 sandwiches (5% of the sandwich sales), Subway would sell 45 million coffee cups annually. This would translate to net K-Cup annual sales of around $15 million for Keurig Green Mountain as one K-Cup costs $0.33, according to our estimates. If we consider, that 1 coffee is sold per 10 sandwiches, the net sales’ estimate may rise up to $30 million. In any case, the company expects a boost in sales of K-Cups when this move go into effect, due to incremental coffee sales at the Subway restaurants.

Keurig Brewers: Incremental Sales

The company plans to install its Keurig brewers in almost all Subway restaurants across North America by the next couple of quarters. The revenue from the sales of Keurig brewers will be an incremental bonus for the company. If we continue with our conservative estimate that 80% of these total 30,000 restaurants across North America will install the Keurig K150 and that on an average 3 brewers are installed per store initially, the company will enjoy incremental revenue of $6 million annually from brewer sales. Later this year, the improved version of brewer: Keurig 2.0 will be released with more retail price. If Subway restaurants, install the newer version, the incremental revenue might rise. In any case, the company expects a rise in brewer volumes and in the future, if Keurig coffee proves to be a success at Subway restaurants, stores in well developed locations might install more number of brewers per restaurant.

This partnership might turn out to be a game-changer in the fast food industry with two big brands collaborating with each other to provide their customers the ease and accessibility of premium products. If the collaboration with Subway turns out to be a profitable move, Keurig Green Mountain might look for potential opportunities to collaborate with other growing in-demand fast food chains as well. As a matter of fact, other fast food chains would be more interested in serving Keurig’s coffee following the success of this move. Fast food industry might prove to be the perfect platform for Keurig Green Mountain to reach out to more customers, due to a few major reasons such as increasing demand for coffee as a breakfast beverage at fast food joints and increasing customer traffic in the fast food industry. Furthermore, with the release of Keurig Cold, the cold beverage brewer, many food chains might want to provide their customers with cold beverages at nominal rates. It would be interesting to watch how this deal turns out for both the brands.

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1. Keurig and Subway announce hot beverage partnership [↩]
2. Subway: List of World’s most valuable brands, www.forbes.com [↩]
3. Subway FAQ’s [↩]