Keurig-Nestlé Deal: Creamer Added K-Cups To Boost Net Sales

The specialty coffee makers, Keurig Green Mountain (NASDAQ:GMCR) announced a multi-year deal with the U.S. division of Nestlé (SIX: NESN), Nestlé USA on July 1, to bring Nestlé’s branded coffee with creamer to its customers. Nestlé is a Swiss multinational food and beverage company and the largest food company in the world in terms of revenue generated, with a market cap of over $200 billion. ^[1] Nestlé is the first brand to offer a 2 in 1 K-Cup pack for hot coffee, combining high quality roast and ground coffee with branded creamer, available in two flavors : Original and French vanilla. The Nestlé Coffee-mate K-Cups will be available at Keurig’s online stores in fall of 2014 and in retail stores in spring of 2015.

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

See our full analysis of GMCR here

Perfect Platform For Keurig Green Mountain

With this deal, the company expects to reach out to its U.S. customers and provide them with Nestlé’s Coffee-mate non-dairy creamer as an added ingredient in single-serve coffee packs for instant brewing. According to the company, the partnership brings new innovation and flavor to the Keurig product line, while offering its customers an easy access to their daily coffee without compromising on the taste. Last month, the company also announced a deal with the restaurant chain, Subway to bring Keurig’s single-serve brewers to almost all of the its outlets in North America. ^[2] In the last few years, the company has been signing several distribution agreements with major brands such as Dunkin’ Brands (NASDAQ: DNKN), Peet’s Coffee, J.M Smucker’s and Starbucks Corporation (NASDAQ:SBUX) to provide its consumers with high quality premium coffee at nominal rates, with a target to expand the customer base. Keurig has increased its pace in partnering with major brands after its patents of K-Cups expired in September 2012.

Last year, Starbucks decided to add Seattle’s Best Coffee, Teavana Teas, and Starbucks Cocoa to the brands offered on Keurig K-Cups, in addition to its previous agreement. This has helped Keurig single-cup coffee makers in entering coffee-drinking households, as well as driving revenue growth and even higher rates of earnings growth in the last few quarters. The success of its previous partnerships makes Keurig Green Mountain even more positive with its recent deal with Nestlé and expects the revenue growth from K-Cups to get a similar boost for the upcoming quarters.

Creamer Addition To Contribute To Revenue Growth

Keurig’s partnership with Nestlé comes as a bonus for customers who prefer Nestle’s Coffee-mate’s non-dairy creamer to their daily coffee. According to Rob Case, President of the Nestlé Beverage Division, Nestlé USA, 27% of all Keurig users prefer Coffee-mate to cream their coffee. ^[3] These customers generally buy the 11 ounce or 15 ounce creamer containers with powdered coffee creamer from the retail stores or online, costing them around $3-4 per container. With the Keurig-Nestlé deal, it would be convenient for these 27% Keurig users, as now they would not have to make an additional effort of buying a separate creamer pack. They can enjoy their coffee by just buying the creamer added K-Cups and that too at nominal rates.

Taking a conservative estimate that an added creamer pack in K-Cups would force the company to increase its price by 8-10%, then one Nestlé creamer added K-cup would cost around $0.38. These 27% customers would prefer these creamer-added K-Cups rather than buying a separate powdered or liquid creamer container from retail stores. Moreover, the rest of the customers not using Nestle’s Coffee-mate creamer in their coffee either prefer non-creamed coffee or they avoid the extra effort of buying a creamer container. If we take an estimate that 20% of the remaining customers also start using the new creamer added K-Cups, it would result to around 40% of the total Keurig users buying the new product. According to our estimate, company might manage to sell around 11,000 K-cups worldwide in 2014 and if 40% of these portion-packs cost $0.03 more, company might earn additional revenue of $132 million from the creamer added K-Cup, which would account for 3% in revenue growth due to K-cup portion packs next year. This is a significant contribution to company’s top-line performance considering that the company expects net sales growth in 2014 to be in high single digits over the fiscal year 2013. ^[4] K-Cup portion packs accounted for 74% of company’s net revenue growth and 38% of its net gross margins in 2013.

Keurig Green Mountain has been joining hands with these brands ahead of its new brewer release. The success of these individual partnerships and deals might play a vital role in initial stages of the new brewer releases.

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1. Nestlé: Largest food company [↩]
2. Keurig Green Mountain’s Partnership With Subway [↩]
3. Keurig’s K-Cups to feature coffee and creamer [↩]
4. Keurig Green Mountain : earnings call transcript Q4,2013 [↩]