Can Keurig 2.0 Provide The Next Wave Of Growth For Green Mountain Coffee?

About: Keurig Green Mountain Inc (GMCR)
by: Trefis

It has been a very strong year for Green Mountain Coffee Roasters (NASDAQ:GMCR) with shares of the company up more than 80% since the start of the year. The company's shares have witnessed some weakness lately due to doubts over Green Mountain's ability to fend off threats from the private labels whose share in the single cup coffee market has been growing. However, with the new Keurig 2.0 slated to be launched in the ongoing fiscal year, this could change. [1]

Green Mountain has been discreet so far about revealing the technical specifications of the upcoming product for competitive reasons. Nonetheless, the new brewers could add a significant amount to the company's bottom line if they were to replicate the success of the Keurig 1.0.

We have a price of $68.57 for Green Mountain Coffee Roasters, about 5% lower than the current market price.

How Green Mountain Benefits From Keurig 2.0

Green Mountain's patents expired in September 2012, leaving the door open for private labels to introduce their own K-cups without an obligation to pay royalty fees to the company. Since then, the share of unlicensed private labels in the single cup serving market has been growing. While the share of private labels stood at 0.4% in October 2012, it had risen to 8.7% by October 2013. [2] Private labels are generally priced 15-20% lower than the Green Mountain's own K-Cups and are a big threat to the company's profitability.

However, the Keurig 2.0 is built on newer technology and contains fresh patents that haven't yet expired. This means that any third-party brand that wants its coffee pods to be compatible with the Keurig 2.0 will have to pay a royalty to Green Mountain. Apart from the increased royalty revenues, this will also lower the competition for the company from private labels, which could result in better K-Cup pricing. Keurig 2.0 can also provide impetus to the company's brewer sales which have witnessed some weakness lately.

What Green Mountain Should Keep In Mind

Pricing of the brewers will be a key. A high price point could deter potential customers and lead to lower adoption rates. This is exactly what happened with the Vue, the brewer that was launched in early 2012. A higher price point, low compatibility and stickiness associated with traditional brewers are the reasons why sales of the brewers never really picked up in the first place.

As Green Mountain looks to debut the Keurig 2.0, the company wouldn't want to repeat its previous mistakes. In the past, Green Mountain sold its brewers near cost price in order to encourage consumers to buy the product and profits were generated mostly through the recurring sales of K-cups. This is the same strategy that the company should follow for the Keurig 2.0.

Green Mountain also needs to take care to not act too fussy or put up unreasonable terms/conditions while tying up with third-party brands or private labels. Customers can get annoyed if their brewer isn't compatible with a large number of brands. For a customer who currently uses the K-Cups of third-party brands/private labels, the new Keurig 2.0 could be a downgrade.

In addition to the Keurig 2.0, Green Mountain will also follow up with the launch of Keurig Cold and Keurig Water, which will allow users to brew energy drinks, juices, sports drinks, carbonated beverages, iced teas etc. [3] The performance of Keurig 2.0 brewers can have a spillover effect on other brewers as well so Green Mountain needs to ensure that it gets its strategy for the new brewer spot on.

Disclosure: No positions.