Credit: Shutterstock photoGreen Mountain Coffee Roasters, the maker of the Keurig coffee brewer and single-serve K-Cups, has more juice left to squeeze out of its machines.
The company has seen earnings skyrocket 20-fold since 2006. More recently, it's consistently beat consensus earnings estimates and increased earnings guidance. Cash flow and margins also have trended higher.
Now, the company is considering expanding its single-serve product offering beyond coffees, teas and hot cocoas. It's looking at the market for carbonated drinks, juices, sports drinks and even dairy and soups.
Nothing official has been announced. But the company has thrown out some hints, and analysts are hopeful that at its first-ever investor day Sept. 10 in Boston, it will make exciting product or partnership announcements.
"We'll see if they give greater detail on that once they have their investor day," said Marc Riddick, senior analyst at the Williams Capital Group. "I do think it's significant that they are having an investor day. The fact that it's their first one, I think it's a function of them wanting to get out there and tell their story."
Green Mountain ( GMCR ) is certainly the leader in its field. It estimates Keurig has an 85% to 90% market share for single-cup brewers in the at-home segment.
Its portfolio of beverage brands includes Lipton, Snapple, Tazo, Kirkland, Dunkin' Donuts, Celestial Seasonings, Starbucks, Cinnabon, Swiss Miss and the Coffee Bean.
Daily Consumption
The company estimates the average U.S. daily household consumption of non-alcoholic beverages at 19.1 servings per day. Coffee represents 13% of it. And the top 5 categories, which are water, carbonated drinks, coffee, juice drinks and tea, make up 93% of total consumption.
"We think there are some very strong advantages that we brought to the hot beverage platform, the Keurig as consumers know it today, that we believe we can leverage into other adjacent platforms," said Suzanne DuLong, Green Mountain's vice president of corporate communications.
The cold platform would include fruit-based beverages, sports beverages, enhanced waters or carbonated. The specialty platform would have dairy or soups, explained DuLong.
"It will be very interesting to see what the company releases to the public," said Riddick. "The expectation is that they are going to be unveiling new product, which hopefully will be available in time for the holiday season.
"They work quite a bit on their research and development. They take pride in their innovation," he added. "If their technology is good enough that it's a cost-effective and attractive value proposition to the consumer, and the consumer already knows the brand, they'll have a very good opportunity."
While the at-home market represents the most significant portion of Green Mountain's revenue, the company is also looking at expanding the away-from-home market. The three components within that category are workplace, food service, and travel, leisure and hospitality.
"The hot beverage opportunity within away-from-home is estimated to be a $10 billion opportunity. And when we look at the percentage that Green Mountain and Keurig claim of that opportunity, it's actually pretty small," said DuLong.
While the company was focusing on single-serve packs for the office, research showed that 65% of office coffee is still brewed by the pot. That's why it recently introduced its new carafe brewer, Bolt.
The machine brews 64 ounces in about two minutes, half the time of regular brewers. It has a pre-measured pack that keeps fresh and offers a variety of brands to choose.
Green Mountain plans to market it initially to the workplace, specifically targeting offices that have volume-brewing opportunities, such as large and midsize offices. The Keurig single-serve system will still be marketed to smaller workplaces.
Operational Efficiency
Green Mountain is also undertaking various operational efficiencies. Since appointing ex-Coca-Cola executive Brian Kelley as its CEO in late 2012, the company's focus has been not only on growing its business, but also on cost cutting.
"This (hiring a new CEO) is not unusual when you have a company that has been a hypergrowth company and then begins to move on to that next part of its growth curve," said Riddick. "I believe it was a very good hire and it was the right person at the right time, given his background.
"While the focus in the past was on rapid topline growth, what we've seen since the new CEO has come aboard is more attention on operational improvements, execution, as well as continued focus on innovation. It's really more the behaviors of a company that is maturing and becoming more of the establishment as opposed to the upstart company that it used to be."
Double Capacity
As a result, Green Mountain streamlined its manufacturing process, doubling the capacity of larger facilities. It also improved the flow of coffee between the roasting and the grinding in order to maximize freshness.
One of the reasons for expanding its capacity is to be able to attract unlicensed brands and to convert them into licensed ones. Since its K-Cup patents expired last September, several unlicensed competitors have entered the market. Their market share is estimated at 10%.
"From a competitive standpoint, it is different than what it was before the patents expired," said Riddick. "However, what it is now, it is pretty 'traditional.' And when I say 'traditional,' it's exactly what everybody else goes through in competing for business with consumers."
Riddick says that the success of the unlicensed brands really depends on four factors: quality, pricing, their competitiveness, and acceptance by retailers and consumers.
He believes the main risk for the company is its ability to execute. While coffeemakers have benefited from low coffee prices, volatility in this commodity also could play a role.
The stock also has a very high short interest outstanding as well as an SEC inquiry into some aspects of the business. While this represents a risk, Riddick believes it is not the largest concern for the company.
"This is probably one of the most fascinating stories that I've come across in quite some time, because they're at the center of so many different moving dynamics," he noted. "Think about it, maybe 10-15 years ago, nobody had heard of a K-Cup."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
