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Shares of Green Mountain Coffee Roasters (GMCR -4.2%) slump with a new note out from OTR Global...
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Wednesday, October 10, 2012, 9:57 AM ETShares of Green Mountain Coffee Roasters (GMCR -4.2%) slump with a new note out from OTR Global warning that the price differential between the company's K-Cup products and those from private labels could be as much as 20% to 50% - viewed by analysts as unsustainable. Another significant drag on GMCR's hopes to dominate the space is the growing emergence of heavyweight Kraft.
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Soft drink drinkers only represent 21% of the American market versus 41% for coffee drinkers who drink multiple drinks per day. Coffee drinkers also drink 3, 4 or 5 cups of coffee a day. So, the more volume that is consumed, the more the consumer is affected by pricing. It makes a big difference to the bulk of coffee consumers if two weeks worth of coffee costs of an 80 GMCR costs $51.49 (current GMCR price on web) and on the shelf a comparable 80 count is at $24.99 (Costco price), are you going to try it or continue to pay double for GMCR? Granted, you and others will pay up double the price every two weeks, but many consumers are price consciece. Of course, there will always be consumers that pay up for quality no matter what the price, but most will not, and GMCR will have to react to that. Many of these clones are actually good quality, and the prices are coming down more every month. I beleive Krogers' K-cups were 24 cents versus 64 cents for GMCR.
Even without the information above, GMCR's share of the market has decreased 4% the past two years, each year, and their margins on coffee have been DECREASING - not staying the same ... going down. Are Coke's margins going down? No - coke is actually raising it's price in a month. Why aren't GMCR's margins staying the same - it should based on your thesis shouldn't it?
It will be interesting to see how much GMCR's share of the market decreases with all the clones coming into the market the next few months. I'm guessing instead of 4% drop, it will be double digits.
See you again October 31st, when GMCR gaps down another $10 after earnings .... $7.50 here we come ....
I simply don't get the argument that low cost store brands steal GMCR sales. No one has applied that logic to SBUX: MCD coffee sales steal from SBUX?? No one has argued that SBUX high prices will drive customers to low cost substitutes. If that's the case, I assume SBUX drive-through customers will now opt to brew their own coffee using K-cups because they are much cheaper than the drive-through SBUX coffee. And who is going to drink generic Kroger blend? The % switching to generic will be miniscule. People still drink Coke and Pepsi in spite of numerous store brand and generic colas. If anything, customers are much more loyal to their coffee brand than their soda brand. That's how SBUX and DNKN are such strong brands even though you can buy coffee anywhere.
I also believe that it is much easier for any contract manufacturer to make K-cups or Vue products than you think. It is not a huge barrier to entry. Many companies you never dream of that you think you are buying from don't make much of their products anymore - e.g. cereal industry.
Most of you on this website are conneseurs of coffee and need the high quality no matter what, but you need to do your analysis on what the majority of the population will migrate to. If you see it on the shelf, people are buying it.
Meet you all back here in a year to see where the stock goes to. I'm short.
To imagine brands of unknowns attempting to bring a cheaper K-cup into this market is difficult to fathom. GMCR has standing agreements with almost every quality roaster, and now offers over 200 choices.
Newman's Own is for sale at Sam's club, 80 cups for $36.00, 45 cents a cup for a damn fine cup of coffee, brewed fresh in less than a minute. How much less can a competitor deliver a cup of coffee for the Kuerig and make money. how much will they spend to ramp up manufacturing, marketing, and distribution and still initially be offering very limited choices, compared to the quality market leader GMCR.
GMCR continues to deliver gross sales of around a billion a quarter, every Kuerig brewer placed creates a stream of K-cup sales, cash flow and profits. The shorts continue to grasps at straws, but I predict the long haul is going to continue to favor the folks who own this market and now have 20 Million thirsty brewers looking for a quality K-cup to brew. Don't let these tired short stories pull you away from a great investment and a fine company, making a great cup of coffee. I'm having a steaming cup of dark Barristo Prima as we speak, join me?
Long GMCR, great buying opportunity may buy more today!