Green Mountain to Benefit As New Brewer Launch and Entry To RTD Tea Segment Boosts Keurig

Keurig Green Mountain (NASDAQ:GMCR) is scheduled to release its annual report for fiscal 2014 on November 19. ^[1] Keurig’s distribution deals with some of the major coffee and retail brands during the third and fourth quarter, coupled with new product launches, helped the company to strengthen its dominance in the industry. In August, the Vermont based brewer specialist released its most awaited product of the year: Keurig 2.0. ^[2] Moreover, the company added some retail and supermarket chains, such as Meijer and Supervalu, to its huge list of licensed brands.

In the third quarter, the company delivered better-than-expected results, with a 6% year-over-year (y-o-y) increase in net revenues, primarily driven by 10% increase in portion pack net sales. ^[3] The company’s gross profit increased 9%, which led to a 140 basis points improvement in gross margins, due to favorable commodity costs and improved productivity.

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Consumers Might Not Be Bothered By Price Hikes

In mid-August, Keurig Green Mountain announced that it is raising price hikes on all its single-serve portion packs and other traditional bagged, fractional packs and bulk coffee products by nearly 9%, in effect from November 3, 2014. ^[4] Since January, the prices of coffee almost doubled within a span of 4-5 months, before dropping nearly 24% in June. ^[5] The prolonged drought conditions in South American countries, especially Brazil, as well as threats of early occurrence of El-Nino this year might hamper coffee production in these countries. According to the National Coffee Council, production in Brazil, the world’s top coffee producing nation, may drop 18% year-over-year to 40.1 million bags. ^[6] Earlier this year, experts estimated global demand for coffee to be nearly 146 million bags, which might outpace supply by 7 million bags and might drive the price of Arabica beans to $3 per lb. ^[7] However, the company has locked its entire coffee supply for 2014 and are 75% hedged for 2015, as mentioned in its latest quarterly earnings call transcript. ^[8]

In this competitive coffee industry, input cost makes a lot of difference to a company’s overall growth. Companies such as Dunkin’ Brands (NASDAQ: DNKN), Peet’s Coffee and Starbucks Corporation (NASDAQ:SBUX) announced a coffee price hike much before Keurig’s announcement. The high inflation in coffee prices was visible to the customers, who were aware of the reasons for such high prices. As a result, companies did not hesitate in passing on the higher prices to the customers. In this scenario, there is always a threat that customers might shift to other competing brands. However, Keurig Green Mountain minimized the chances of this situation, by adding some of the top coffee and retail brands to its list of K-Cup brands.

Keurig 2.0

Keurig Green Mountain is well known for its technologically advanced and innovative products, including the Keurig 1.0 brewer. However, after the expiration of Keurig’s patents in 2012, many competing companies came out with their brewer systems and K-Cup portion packs. As a result, Keurig started losing its customer base to its rival companies. To counter this situation, Keurig came up with its new brewer system: Keurig 2.0, which was released in the last week of August in the U.S. ^[9]

Keurig 2.0 is the first brewer that can brew a single cup, as well as four-cup carafe from a Keurig brand pack. With improved design, extra convenient features, with wide variety of beverage brand options and other numerous advantages over its previous version, the new brewer is all set to be the next big thing in the hot beverage brewing industry. The product is already in huge demand among the coffee lovers, who want to upgrade to a more convenient option. According to the data provided by Keurig, nearly 60% of the non-Keurig owners and 72% of the current Keurig owners, want a technology that can brew more than one single cup in one go. Keurig 2.0 is one such brewer, which is ready to serve the customers’ growing needs, as it can brew up to 4 packs at a time, with the help of its new larger K-carafe pack. Keurig can now serve a wider range of customer base, with different coffee tastes, as now it serves more than 50 top coffee brands. This will not only increase the brewer’s sales, but will ensure the company’s dominance in the single-serve market as well.

Keurig’s Entry Into Ready-To-Drink (RTD) Tea Segment

In September, Keurig and Coca-Cola expanded their partnership to offer some beverages from the latter’s still brands (non-carbonated) portfolio in the Keurig hot brewing system, in the U.S. and Canada. ^[10] Honest Tea is the first brand of the Coca-Cola Company that would be available in K-Cup packs. The new Honest Tea K-Cup packs feature two products initially, Unsweetened Just Green iced teas and Just Black iced teas, and they will join Keurig’s Brew Over Ice collection. RTD Tea is one of the growing beverage segments, with a double-digit growth to reach $5.1 billion in sales in the U.S. Moreover, the segment is expected to grow at a CAGR of 6% in the U.S. until 2018, providing ample growth opportunities for tea companies. On the other hand, one of the factors for Coca-Cola’s excellent growth in North America was its double-digit percent growth in Honest Tea volumes. Honest Tea marked its one billionth beverage sale in June, with 888 million sales since Coca-Cola became a partner in 2008. ^[11]

Keurig Green Mountain is planning to tap into a market that has a huge growth potential, especially in the U.S. This might boost its K-Cup sales, as it targets those Coca-Cola customers who are already fond of the company’s Honest Tea product. (See: Keurig Green Mountain To Expand Its Ready-To-Drink Beverage Segment With The Launch Of Honest Tea)

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1. Keurig Green Mountain Q4 earnings conference call [↩]
2. Next Generation Keurig 2.0 now available [↩]
3. Keurig Green Mountain Q3 2014: Earnings call transcript [↩]
4. Keurig Green Mountain announces price increase effective November 3, 2014 [↩]
5. Coffee, ICE December 2014 futures [↩]
6. Brazil coffee output set for longest decline since 1965 [↩]
7. Drought in Brazil drives the price of coffee beans to a record high [↩]
8. Keurig Green Mountain earnings call transcript, Q3 2014 [↩]
9. Ref:2 [↩]
10. Keurig Green Mountain, Inc. and the Coca-Cola Company expand agreement to the Keurig hot brewing system [↩]
11. Honest tea press release [↩]