Market Share Expansion Remains Primary Focus For Keurig Green Mountain

Keurig Green Mountain (NASDAQ:GMCR), the leader in speciality coffee brewers, ended its fiscal 2014 on a high note, as the company reported strong numbers in its annual report released on November 19. In the fourth fiscal quarter, the company generated net revenues of $1.2 billion, up 14% year-over-year (y-o-y), primarily driven by improved performance of its portion packs. Net portion packs sales increased 22% y-o-y to $950 million in Q4, primarily driven by a 28% increase in the portion pack volumes. However, the brewer and other accessory sales declined by 5% to $180 million, as the brewer volumes declined 8% and brewer pricing declined 11%. ^[1] Effectively, the company’s gross margins grew 160 basis points to 37.6% in Q4, positively impacted by favorable green coffee costs.

Due to the strong performance of its brewers and portion packs businesses over the last few quarters, Keurig Green Mountain managed to post excellent annual net revenue figures, which grew 8% y-o-y to $ 4.7 billion, whereas the GAAP net operating income grew 24% y-o-y to $950 million. Portion pack net sales increased 13% for the year, driven by 18% increase in its volumes. However, the most striking highlight in the report was the decline of brewer and accessories net sales by 1% y-o-y, primarily due to net price realization of brewers.

For the next fiscal year, the company expects the net sales, as well non-GAAP EPS to grow by 6-9% y-o-y. However, Keurig Green Mountain is concerned by the rising coffee prices, despite being hedged 90% for fiscal 2015, as a further bullish trend in green coffee prices might hamper its margins.

See our full analysis of GMCR here

Focus On Increasing Keurig Brewer Customer Base

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. As a counter measure, the company focused on increasing the installed base of active Keurig brewers in households. To drive the volumes, the company lowered its net pricing for brewers. Moreover, with one month left for the fiscal year end, Keurig Green Mountain released its new brewer system: Keurig 2.0 in the U.S.

Keurig was aware of the fact that the product was already in huge demand among coffee lovers, who want to upgrade to a more convenient option. Keurig can now serve a wider range of customer base, with different coffee tastes, as it now serves more than 50 top coffee brands. 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 can readily 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.

The company’s retail customers ordered portion packs more aggressively in the fourth quarter. However, the brewer sales declined 5% in the fourth quarter, resulting in a 1% overall decline in the brewer and accessory sales for the whole fiscal year. The decline was primarily due to a 10 percentage point drop in the net price realization, as the company focused on investing some of the favorable commodity cost to boost the installed base of Keurig brewers. As a result, the volumes grew by 6% y-o-y.

In 2015, the sales figure of Keurig brewers might improve, as more households upgrade from Keurig 1.0 to the slightly more expensive Keurig 2.0.

Keurig Cold: Entry To Cold Beverage Market

Keurig entered into a partnership with Coca-Cola (NYSE:KO), where the two companies are together developing the Keurig Cold machine. The cold brewer provides a huge platform for Keurig to enter into cold beverage market which would expand its business to Carbonated Soft Drinks (CSD) and non-carbonated drinks. According to our estimates, CSDs constitute about 43% of the 30 billion gallon Liquid Refreshment Beverage (LRB) industry in the U.S., forming the largest segment. ^[2]

Keurig Green Mountain plans on introducing Keurig Cold in the fall of 2015 for its North American customers. Currently, the company is still in the development stage, including the manufacturing of pods and appliances. However, the Keurig Cold might find it easier to penetrate into the households compared to the hot beverage systems, as the awareness and brand appeal of the Keurig brand among customers has increased tremendously over the last decade.  Once the Keurig Cold machine is out, the company might look to utilize Coca-Cola’s strong distribution channels. Keurig can also take advantage of Coca-Cola’s global brand appeal to expand its presence internationally, particularly in the budding ready-to-drink coffee and ready-to-drink tea segment, which is the most dominating market in Asia-Pacific, whereas North America is the fastest growing market in this segment. ^[3].

Increased Number Of Licensed Brands To Attract Customers

The number of licensed coffee brands offered by Keurig Green Mountain increased from 30 to 70 over the last 18 months, providing almost 500 different varieties of coffee, tea and other beverage options. Keurig Green Mountain has accelerated its pace in joining hands with major coffee brands and other retail chains such as Dunkin’ Brands(NASDAQ: DNKN), Peet’s Coffee, Starbucks Corporation (NASDAQ:SBUX), Nestle U.S. division and  Kraft Foods Group (NASDAQ:KRFT). These deals give the company an advantage in the industry to widen its market share in the single-serve coffee segment, as these brands constitute 75% of the total U.S. coffee consumption and have a huge customer base. Customers who like Maxwell House’s coffee, Starbucks’ premium coffee taste, Nestle’s creamer with their coffee, or Dunkin’ Donuts coffee, instead of going to the respective coffee outlets to get a cup would rather buy portion packs and enjoy their favorite cup of coffee at home.

In Q4, the company joined hands with famous retail brands, such as Krafts Food Group, Meijer and Supervalu, and has also started shipping its manufactured store brands to Walmart and Sam’s Club. With several big brands under its arsenal, customers who prefer at-home consumption of their favorite coffee brands might opt for Keurig branded portion packs and brewers.

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More Trefis Research

1. Keurig Green Mountain FY 2014 earnings conference call [↩]
2. U.S LRB Market, www.beveragemarketing.com [↩]
3. RTD tea and RTD coffee market, www.marketsandmarkets.com [↩]