Keurig Green Mountain's Keurig 2.0 Has Opportunities And Downside Risk

| About: Keurig Green (GMCR)


Keurig Green Mountain 2.0 Has some puts and takes to consider.

Keurig Cold is still in development with competing products launching.

Shares of GMCR may come under pressure due to a number of factors.

Every year, Capital Ladder Advisory Group participates in the International Home and Housewares Show (IHH) on behalf of investors. It's a great show that allows for manufacturers/vendors from all over the world to exhibit and demonstrate their new and existing products in the marketplace. In this article, on behalf of Capital Ladder, I will be discussing the Keurig 2.0 and other Keurig products from Keurig Green Mountain (NASDAQ:GMCR) that were highlighted and discussed at the IHH Show last week.

The Keurig 2.0 launch has been highly anticipated by investors over the last several months. The brewer's main objective is to deliver the perfect cup of flavored coffee and teas every time, but in a way that serves to be highly disadvantageous to the competition. The Keurig 2.0 has embedded technology which will enable the brewer to only utilize Keurig and licensed Keurig K-cups. In addition to this feature, the new Keurig 2.0 has the ability to brew a full carafe unlike any at-home Keurig brewer in the past. This is old news right?

Here's what you may not know. The Keurig 2.0, while directly locking out the usage of private label competitors like TreeHouse Foods (NYSE:THS) and others which are growing market share in the coffee pod category, won't allow the end-user to use their My K-cup or any product of likeness to introduce their choice of coffee grounds. The Keurig 2.0 is strictly a K-cup and V-pack system. What else is new to the Keurig 2.0? Unlike the Vue brewers which were discontinued recently, the Keurig 2.0 won't be able to brew espresso or cappuccino. So if you desired these specific flavors once offered in previous brewer systems, the Keurig 2.0 doesn't have the functionality to deliver on these beverage choices. With that said, we would think the company will add this functionality down the road.

In our product testing of the Keurig 2.0 at the IHH Show, we found the Keurig 2.0 to be just as effective in brewing technology as its predecessors. Unfortunately, only prototype brewers were ready for public demonstration and all functions were not available at the time of demonstrations. Nonetheless, we trust in what was able to be demonstrated and the taste of the coffee produced by the Keurig 2.0 was no different than other Keurig brewer systems. The Keurig 2.0 will be available in 3 model types with varying water reservoir sizes comprising of the major aspect of model differentiation. The bottom line with the Keurig 2.0 is pretty straight forward; there's more technology in the product line, but from an end-user perspective, if I like fresh coffee grounds I can't use it.

I remember in 2012 when Keurig Green Mountain debuted its Vue brewer system. After demonstrating the product line, seeing the breadth of choices and understanding the lack of compatibility with K-cups in the Vue system, I thought it would be a tough sell to the consumer. With a staunchly increased price point that I felt the consumer wouldn't pay up for and the existing line of Keurig brewers to compete directly with, I labeled the Vue product line doomed from the start or "dead on arrival". In short, the development of the Vue along the lines of practicality and pricing efficacy in the total system simply was not well thought through.

Given the gained experience from the failed Vue system, I don't believe the Keurig 2.0 will suffer the same fate as the Vue. Having said that, the Keurig 2.0 will struggle in other ways in my opinion. Remember, just like the Vue, the Kuerig 2.0 is a closed-ended ecosystem and frankly it is one which limits the consumer. Grounds outsell pods every day of the week and doubly on Sunday. By eliminating the use of coffee grounds in the Keurig 2.0, the brewer effectively disengages a certain percentage of the coffee drinking segment right from the start. What about those Keurig and Vue existing users who use coffee grounds more often than K-cups? One day their brewers may cease to operate properly and force them to purchase a new brewer system. It doesn't appear that the Keurig 2.0 is a viable option for this segment of the coffee drinking population either. Let's face it, the brewer is not the money maker or revenue driver for Keurig Green Mountain; the money is in the K-cups. With that said, the Keurig business is a razor/razor blade business so they do have to keep selling brewers regardless of the functionality of the brewer.

There is always going to be innovation and competition on the brewer side of the single-serve coffee equation and Keurig Green Mountain has always done well at fending off the competition until recently. The Hamilton Beach FlexBrew is doing a strong job of taking market share in the category with its low-cost single-serve brewer which is compatible with K-cups. At $49.99 and nearly half the cost of a low-end Keurig machine, the consumer is being lured to the brewer. The next generation FlexBrew model will have a higher price point, but it will also be more stylish than its predecessor and utilize higher end materials.

At the IHH Show we witnessed many retail buyers initiate distribution discussions regarding the FlexBrew single-serve system including Bed Bath & Beyond (NASDAQ:BBBY), Target (NYSE:TGT) and Costco (NASDAQ:COST) to name a few.

As stated earlier, competition is a driving force within the single-serve coffee category, but innovation is another driving force which is highlighted by the Remington iCoffee Cup single-serve brewers. The iCoffee uses patent pending, steam brewing technology to brew a cup of coffee. The steam brewing process takes a great deal of the bitterness out of the coffee taste through this technology. The iCup received the most traffic of any exhibitor in the single-serve coffee category at the show and we may hear more about distribution in the coming months. Lastly, the iCup from Remington will also be Keurig 2.0 compatible. This highlights another issue with the Keurig 2.0 which suggests that while the brewer is non-compatible with competing K-cups, it doesn't make it difficult to use Keurig 2.0 K-cups in other competing brewers. Pricing for the iCup has yet to be outlined to the public.

Kitchenaid (NYSE:WHR) will launch a new line of coffee and espresso makers later this year with brewed over beans technology. Kitchenaid has partnered with Nespresso in a joint line of products aimed at the espresso market.

Unfortunately, the Keurig Cold did not debut at the International Home and Houseware Show this year and won't likely be available until 2015. With the company hoping to highlight its latest coffee brewer and make this the focus of retailer buyer intentions, this was probably the best strategy to go with. I did, however, introduce the topic with Keurig executives in discussion concerning the Keurig Cold and some impediments to the developmental process of the machine. One obstacle they are currently contending with is outside temperature, shipping and packaging leakage. It seems as though under certain temperatures, the carbon element can become pressurized and result in pod leakage. A "work-around" is being addressed presently with regards to this issue.

There were plenty of conversations surrounding the Keurig Cold platform by exhibitors, analysts, investors and the competing company officials. The predominant sentiment regarding the Keurig Cold, which carried over into the Bevyz Fresh product, was not positive for the Keurig Cold. Many retail buyers tested the Bevyz Fresh machine, many were disappointed with the carbonation efficacy. When the retail buyers discovered that Keurig Green Mountain was an investor in Bevyz Global, a private company incorporated in Malta, it raised concerns for the buyers that Keurig wouldn't be able to carbonate effectively either in their Keurig cold brewer.

I spoke with these retailer buyers from the likes of Bed Bath & Beyond, Target, Best Buy (NYSE:BBY), Office Depot (NYSE:ODP), Staples (NASDAQ:SPLS) and J.C. Penney (NYSE:JCP) to name a few. They were informed that Keurig was using a different carbonation technology than that of the Bevyz Fresh brewer and while this technology does have its obstacles, the development is ongoing.

The competing, single-serve cold beverage platform by Bevyz Global. is a multipurpose platform which dispenses hot, cold and sparkling beverages at the touch of a button. The Bevyz Fresh machine will launch in the coming weeks on-line and in retail locations this fall. The price of the machine has been set at $299.99. For more information on the Bevyz Fresh machine, one can read a previous article published here. It has been widely published that Bevyz has partnered with Del-Monte, Pepsico (NYSE:PEP) and Cuisinart for its brewer platform.

In conclusion, there seem to be some opportunities still to address in the single-serve beverage category for both hot and cold platforms. Seeing how both categories are growing year-over-year, there is likely plenty of room for competition and further growth in the category to come. With that said, the cold beverage platforms may not prove to be what investors currently think they should be or will be. Until proven product efficacy in the market reveals itself, Keurig Green Mountain's lofty valuation may come under attack in the coming quarters. Based on the tough year-over-year comparisons, recent deceleration in revenue growth and an unclear picture regarding international growth, it may be prudent for investors to wait on initiating long positions in shares of GMCR.

Disclosure: I am long BBBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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