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Summary

  • A trendy younger generation is changing the coffee industry.
  • A 211% increase in revenue from 2013 to 2014 shows growth is taking off.
  • How Marley's strategic long-term approach has similarities to Monster Beverage Corporation.

Fresh coffee is an essential part of the American morning, and even in traditionally tea-drinking nations, you'll now find Starbucks is more common than in many American cities. And increasingly, people are willing to spend more for better tasting, fresh, and sustainably grown coffee. So it's no surprise that opportunity lies in small growing companies based in this $80 billion dollar industry. One company is called Marley Coffee (OTCQB:JAMN), and there are a few positive signs that they are poised to become a titan in the specialty coffee industry.

In this article we'll cover:

  1. How the younger generation is becoming the driving force behind specialty coffee.
  2. What makes Marley unique in the coffee industry, and how it's on track to capture the super-premium coffee market.
  3. Partnerships that can change this $35 million company to be worth $380 million by the end of 2017.

But first, a little background on the coffee industry:

What's Driving Coffee Growth?

If you take a look at the numbers, you'll find that the global coffee market expands around 2-3% a year.

Not so impressive, if you take it at face value. Less and less of the older generation are drinking coffee, and "non-specialty" coffee blends are declining in market share. In fact, the growth is almost entirely driven by a hipper, more socially conscious younger generation, and by specialty coffee.

In 2012, 40% of 18-24 year olds said they drink coffee daily, up from 31% in 2010.

That is Marley's focus - a specialty coffee brand that caters to customers who really want most premium, and eco-friendly coffee available.

I've personally been approached by excited friends showing off Marley Coffee, prior to any research being done on the company. The trendy musical and "Jamaica" theme surrounding this coffee hits a coolness factor of 10 out of 10 with all generations, not to mention the sustainable practices resonating well with consumers. The key success to Marley Coffee in the future will be due to it "catching-on" with young coffee drinkers. The viral spread of the brand is working. This is similar to Monster Energy Drink, which we cover more extensively throughout this article, and the fact that even though they had competitors, such as Red Bull, the Monster brand "caught-on" and spread.

Marley Coffee:

  1. Sources sustainably grown, ethically farmed and artisan roasted gourmet coffee beans from around the world, including Ethiopia, Central and South America and Jamaica.
  2. Only sells Rainforest Alliance Certified Coffee.
  3. Gives a portion of all sales to the 1love.org foundation.
  4. Has 2 coffee pods with 90+ ratings on CoffeeReview.com
  5. Is a GQ Magazine UK Coffee Winner.

Serving high quality coffee and being socially conscious is a huge part of Marley's brand. Specialty coffee has become in, and like micro-brew beers and food trucks, drinking better quality coffee has become an obsession amongst a growing segment of the population.

About the Stock

Marley's stock is currently valued at $35.2 million, with good daily liquidity at 350,000 shares traded on average. The corporate name is Jammin Java Corp. and is traded under the symbol JAMN. Management has stated that they have enough capital to get to their revenue targets. Investors do not need to fear near term capital raises or dilution.

Key Growth Points

  1. Net revenues increased from $1.8 million in fiscal 2013 to $5.6 million in fiscal year 2014, a 211% increase.
  2. Comparing sales revenue from the latest fiscal quarter for 2014 vs 2013 shows a 143% increase.
  3. A 41% increase in sales velocity in the last quarter across all of their products.

In other words, more people are buying their coffee, and they're making more money from it. Given that their market base is expanding, that growth in sales and profit is not likely to slow down.

Marley's Expanding Partnership with Albertson's

Currently, there are about 86 locations in the world that sell Marley Coffee. Albertson's is one of the largest and most prevalent grocery chains in the mid-west and west coast. They have over 1075 locations spread out across 29 states. Albertsons alone has the potential to multiply their sales volume by 10x. That means Marley's products could soon have ten times the exposure that they do now, as their relationship with Albertsons continues to progress.

The volume does not only relate to Albertson's. Marley has recently made strategic partnerships with a number of grocery chains.

Other Grocery Chains

They expanded into Safeway and Kroger in 2013, while also forging partnerships with supermarket chains like the Roche Bros., Tony's Finer Foods, and more. Safeway is currently one of Marley's biggest distributors.

In 2014, between February and May, they announced ten new partnerships with major chains like Schnucks (Midwest), Kings Food Markets (NJ, NY and CT), Balducci's Food Lovers Market (CT, NY, MD and VA) Great Atlantic & Pacific Tea Company [A&P, Waldbaum's and Pathmark](New York City-New Jersey), Foodtown (NY, NJ and PA), Dierbergs (St. Louis area) and Hannaford Supermarkets (MA, ME, NH, VT and NY), along with two food brokerage firms (Alliance Sales & Marketing and National Sales Associates).

This year, Marley's is also beginning international distribution in the UK/Europe, Austria, South Korea, Japan, Chile & South America, South Africa, Denmark.

It's become clear that Marley has spent the last two years developing strategic alliances with major supermarket chains, and there are probably more announcements coming. The power of this strategy becomes clear when you consider that a recent Safeway promotion for Marley lifted its brand sales by 433%.

While partnering with the large supermarket chains has immediate benefits, the true potential for those relationships are obviously long-term. Expanding, building awareness about the brand, and capturing customer loyalty takes time. These new partnerships with grocery chains ensure that Marley Coffee will be seen (and purchased) by consumers more and more often. It'll also give rise to brand loyalty, as the brand continues expanding thru word of mouth.

Right away we can see there is still massive distribution potential through additional grocery stores, international sales, Walmart, Target, Costco etc. The fact that Albertsons alone has the power to increase sales by 10x shows that the market for Marley coffee is nearly unlimited.

We argue that the main reason why Marley's market valuation is so low is that the company is pursuing a long term strategy instead of chasing short-term profits. The market hates that. When profits are measured by the quarter, not by the year, short-term profits are the name of the game for value-driven investors. Marley is unique in that its largest shareholder is its management, giving them the ability to plan and execute a long term plan.

We could make some comparisons against other coffee vendors, but the closest case to what Marley doing today is Monster Energy and their growth over the last 20 years. It's interesting to note that Monster Beverage has had an 81,000% share price gain in value over the last 20 years. But interestingly, most of that was in the last 10 years and before that, the stock languished between 7 cents and a dollar per share (split-adjusted), while the company grew distribution, and struggled to gain market share. The key we see in Monster is heavily investing in future expansion at the expense of short term profits, exactly what Marley is now doing.

Monster Beverage Corporation (Jan. 1998 - Jan. 2004)

(click to enlarge)During these six years Monster was in the exact same position, albeit a different beverage, as Marley coffee is now. Gaining distribution for their energy drink did not happen overnight, but still took about six years before really hitting an inflection point and ramping exponentially thereafter. You can see from the chart that the stock price fluctuated between .15 to .40 cents a share frequently (split-adjusted basis). That sluggish period was the company's "ramp up" phase, where they spent most of their efforts on aggressive marketing and getting their drinks into stores.

Marley Coffee has also had a similar valuation from 2009 to 2014, along with the same characteristic of patiently adding new distribution partners. No real traction has been gained in the stock, as it has stayed mostly in the range of $.20/share to .80/share for five years while they have been pursuing distribution.

Recent Funding

Marley recently accepted $8.25 million in strategic funding from Mother Parkers Tea and Coffee, Inc, and $2 million of that is slated to marketing the brand over the next two years. This is a great show of confidence from a Marley Coffee roasting partner. Some of these funds have already been deployed in initiatives such as the Marley Coffee partnership with the Colorado Rockies baseball team, and toward listing fees in the Canadian retail grocery market.

Based on the key distribution lining up to sell Marley Coffee, along with this strategic funding, we believe they will soon reach a tipping point in brand recognition and visibility.

Outside its new partnerships with grocery chains, Marley boasts several key advantages that make it stand out amongst coffee companies.

For one thing:

Marley Is Selling Jamaican Blue Mountain Coffee.

Grown in the some of the highest mountains in the Caribbean, the cool and misty weather contribute to this coffee's mild flavor. Unlike other coffees, Blue Mountain has almost no bitterness and has an incredibly smooth, rich flavor, making it a prized (and costly) coffee in the world. This is a huge draw amongst coffee aficionados, which more and more of the younger generation are becoming. And Marley does it right. Take a look at any of their products on Amazon, and you'll find an average of 4-5 star reviews.

Very few coffee companies can offer Blue Mountain, due to the rareness of plantations. By introducing Blue Mountain to an increasingly particular market, Marley represents this super-premium brand of coffee to a whole new generation.

Another competitive advantage Marley boasts are its innovative methods of direct-to-consumer distribution. For example, Marley plans to introduce 1000 coffee kiosks at college campuses and high foot traffic areas.

The Kiosk Numbers

We estimate that each kiosk would do 1/3 the business of a high volume coffee cart, so that would be between 110 - 120 customers a day, on average.

The overhead on kiosk is incredibly low, so we can assume a profit of $0.80 a drink which equates to around $88 a day of profit per kiosk, or $88,000 a day for group of 1000 kiosks.

That'd be $2.6 million a month, or $31 million a year in profit. Keep in mind the company is only valued at $35.2 million, so even if each kiosk does significantly less business than our estimates, you'd still see a huge jump in value for the company.

Another unique way of selling coffee is the Marley's Coffee Bike.

The company has partnered with BikeCaffe to produce a mobile, high-quality coffee shop and are franchising this model out. This is pretty unique, because while there are tons of food carts around in major cities, they are usually dedicated to food or ice cream. Specialty coffee on-the-go is something new. Anyone can buy one of these carts as a franchise-like operation, so it's fantastic for entrepreneurs.

We estimate the market potential of this business to encompass 150 major U.S. cities with an average of 3 bikes per city, for a total of 450 bikes. Most of the profits from these carts go to the cart owner, and Marley only makes money from sales of the coffee.

Cup Price

$1.35

Wholesale Cost

$.22

Cups Per Day

250

Carts in Operation

450

Total Revenue Per Day

$122,000

At an average of 250 customers a day, and a profit of $0.22 per customer, that's a revenue stream of $112,000 per day, $3.3 million a month, and over $40 million a year for Marley. That is, again, greater the entire current market capitalization of the company. This does not include any of their kiosk revenue or grocery store distribution, but is only revenue from the coffee bikes alone.

What Are Potential Marley Partnership Opportunities?

Marley is very much still in the process of "ramping up." That means it is actively seeking partnerships that prepare it for long-term expansion. We expect further announcements of major grocery chain partnerships.

But also, considering that generation Y is the target market for Marley, a partnership with companies that have a high profile amongst that generation could do very well.

  1. Companies like Umpqua bank, which make banking fun, and have a strong reputation amongst younger customers would be a good fit for both coffee served in the banks and/or the coffee kiosks.
  2. Silicon Valley campuses, "Farm-fresh" Restaurants, and trendy fashion outlets like Urban Outfitters would also be good fits for the brand.
  3. Marley has already entered a strategic partnership with the Denver Broncos in September 2013. Partnering as the exclusive coffee provider for additional sports teams is the right demographic that fits the Marley profile. In May they entered into an agreement to be the exclusive coffee provider of the Colorado Rapids Soccer team. Designated as the "Official Coffee of the Colorado Rapids and Dick's Sporting Goods Park".
  4. The company could soon be launching their own coffee shops. Depending on the success of these shops, this could be additional large revenue stream on top of our projections.

As for possible acquirers, there are two that are noteworthy.

  1. Starbucks has been sinking as the go-to coffee vendor amongst the younger generation. This is, in no small part, due to the fact that it's the most well-known and popular. The "hipster" subculture that has helped raise Starbucks to its current status has now mainly abandoned it, and Marley is a brand that's targeted at that culture. Specialty shops, pour-overs, fresher roasts, high quality beans, and skilled baristas are now the name of the game. Starbucks could acquire Marley just for that appeal alone. With Starbuck's backing, Marley products could easily generate revenues north of $200 - $300 million a year quickly, giving Starbucks a stronger presence in grocery stores, a brand that resonates with a hip culture, and the possibility of providing more donations for the 1love.org charity foundation.
  2. Keurig, the king of single cup coffee, also has reason to be interested in Marley. If Keurig owned Marley, it'd have a complete monopoly on Jamaica Blue Mountain Pod revenue, a no doubt tempting possibility.

Finding a 10-Bagger

By Marley's own projections, it plans to expand from 86 retail locations to 10,000 by FY 2015. When you consider all the major grocery store partnerships it's establishing, that's not nearly as far-fetched as it first seems.

Albertson's Partnership Economics:

Price per pound

$13.98

Wholesale Price

$6.98

Pounds sold day / store

4

Daily Revenue

$27.92

Stores

1075

Daily Total

$30,014

Annual Total Revenue

$10,955,110

So each partnership with a large chain significantly increase revenue. The company plans on doing $10 million gross in FY 2015, and $25 million gross in 2016. By 2017, a revenue of over $100 million a year is not unlikely when you consider the following potential sources:

Projected Revenue Sources

Retail Business - Albertsons

$10.9 million

Retail Business - Safeway, Kroger, and other Large Retailers +. international sales

$62.1 million

Retail Business - Mom & Pop stores

$8.4 million

Kiosk Locations

$31.0 million

Mobile Coffee Cart Franchise

$40.0 million

Other, Office and Commercial Roasting

$1+ million

Total

$153.4 million

2017 projections:

Revenue

$153 million

Gross Margin

25%

EV / Revenue

2.5

Total Market Cap

$382 Million

Current Market Cap

$35 Million

Total Shareholder Return

991%

Years

3

Annualized Return

121.8%

A 1,000% increase in 3 years might sound unrealistic, but take into account the growth of the following beverage companies within three years:

Company

Date Range

3 Year Total Return

Keurig Green Mountain (NASDAQ:GMCR)

2008 - 2011

1,633%

Monster Beverages (NASDAQ:MNST)

2003 - 2006

9,100%

Starbucks (NASDAQ:SBUX)

1995 - 1998

367%

Dr. Pepper Snapple (NYSE:DPS)

2009 - 2011

275%

Jones Soda (OTCQB:JSDA)

2004 - 2007

1,250%

Marley Coffee was a stock that has traded at over $5 per share in May of 2011, even before it had the current growth and revenue that we are seeing today. There is no question that the share price could return to these levels based on retail stocks coming back into favor, and the company hitting their growth targets over the next few years. A return to $5 per share would equate to a 1,500% return for investors.

Of course, nobody can really say for sure what will happen in the next three years. But considering Marley's growth potential, its current initiatives, and its long-term prospects, there are some very good reasons to believe that Marley Coffee is on a path of significant progress.

Disclosure: The author is long JAMN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: How Marley Coffee Can Replicate The Growth Of Monster Energy Drink