Green Mountain Coffee Roasters Still Percolating Problems

A little less than a year ago I reported in on our experience with Green Mountain Coffee Roasters' (Nasdaq: GMCR  ) Keurig brewer. We were on our third brewer at the time. We're on our sixth now, but we've only paid for one since purchasing our first brewer from the local Costco in late 2010.

In a way, we're famous. Turn to page F-32 and you'll find us among a crowd of K-Cup drinkers responsible for fast-growing warranty reserve on Green Mountain's balance sheet:

Metric Fiscal 2011 Fiscal 2010
Keurig division sales $1,261.5 million $727.8 million
Warranty reserve balance (year end) $14.728 million $6.694 million
Warranty reserve as a % of division sales 1.17% 0.92%

Sources: SEC filings.Our experience has been both good and bad.

You already know the bad: The experience of owning a faulty brewer gets tiring and more than a little frustrating. With our fourth, I spent months unclogging the system till every third cup created a blockage. Nothing helped, not even de-scaling -- a deep-cleaning process involving vinegar.

The good? Green Mountain has done everything it should to keep us happy. I'd have given up long ago if Keurig not spent hours helping first diagnose and solve issues and then replacing brewers when it became apparent we'd done all we could to repair what we had.

Yet for all the company's efforts, it's becoming harder to stick with Green Mountain. Making coffee has become too much like a bad Saturday Night Live skit in which I'm in full surgical gear -- defibrillator in hand -- trying to resuscitate the poor Keurig.

Only here, the audience (my wife) isn't laughing. She's grimacing, mad, and wondering when Green Mountain will make a brewer we can rely on. I'm wondering the same thing. 

Neither of our frustrations are what matters to investors, though. What does? Partnerships. The Starbucks (Nasdaq: SBUX  ) deal in which shareholders place so much faith depends on Keurig brewers being a reliable source of K-Cup sales. And I'm sure fellow coffee partner Dunkin Brands (Nasdaq: DNKN  ) won't hesitate to pull the devices from its shelves if returns become the sort of problem warranty data suggests they are. In each case, failing brewers weaken the company's competitive positioning. Fix the Keurig, Green Mountain, before Starbucks and Dunkin decide they need a more reliable partner.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's Web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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Read/Post Comments (11) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2012, at 6:31 PM, RedandBlack wrote:

    Not good. I just bought one yesterday for my birthday. How long before it breaks?

  • Report this Comment On January 30, 2012, at 6:54 PM, woodNfish wrote:

    Only a Fool would continue to buy the same product after the second one failed. You should also realize that doing the same thing the exact same way and expecting a different result is the popular definition of insanity.

    Green Mountain makes lousy coffee. Why would you expect them to make a decent coffee maker?

  • Report this Comment On January 30, 2012, at 6:56 PM, RedandBlack wrote:

    woodNfish,

    Take a Dale Carnegie class lately? Sheesh.

  • Report this Comment On January 30, 2012, at 7:30 PM, tchi2000 wrote:

    Tim, next time, I would try a CBTL single serve machine made by the Coffee Bean & Tea Leaf!

  • Report this Comment On January 31, 2012, at 11:10 AM, LDJIII wrote:

    Use distilled water in your coffee maker. Your tap water is clogging your system (both the Keurig and your body - tap water and some bottle waters need to be classified as poisons).

    Your coffee maker will run flawlessly and even real lousy coffee will taste better. Distilled coffee makes good coffee taste great and great coffee unbelievable!

    Don't like Green Mountain coffee? Use any brand you wish, the brewer does a real fine job.

  • Report this Comment On January 31, 2012, at 3:57 PM, antislapp4 wrote:

    The real issue isn't just with the accounting for the defective coffee makers, but with the ways GMCR is cooking the books. FCF and CFFO is still negative, isn't it? The SEC is dilatory, but the investigation is still listed in the financials, isn't it? The stock is down from the peak by 50% for a reason.

  • Report this Comment On January 31, 2012, at 6:35 PM, qarlyle wrote:

    We purchased our Kuerig Machine over three years ago and use bottle war. The coffee always taste the same and the machine has never broken. We bought one for both grandmothers and the same thing - both are still working. Its hard not to like the Dunkin Donuts. We also have one at work that goes thru about 200 K-cups per day with no problems.

  • Report this Comment On January 31, 2012, at 8:53 PM, ej1128 wrote:

    Love the Keurig. I have never had a bad cup from it. Make tea, cocoa, all kinds of Green Mountain products with ordinary tap water. I have a single one at work as well. Family members own them also- I like their products and usual choice is Newman's Extra Bold. I like Green Mountain as a company also from what I had read online and from the fool.

  • Report this Comment On January 31, 2012, at 11:05 PM, espressoje wrote:

    As a career coffee guy & former longtime employee of GMCR, I have long enjoyed great coffee. When Keurig came along it was so revolutionary. Yes, there is no substitute for fresh ground drip or in a fresh press or a shot of espresso, but K-Cups addressed the need of so many consumers-good coffee, fresh and fast. We were hooked as well. The brewers worked quite well for so long-until recently for some strange reason. I am on my second brewer-my first one endured over 6 years of heavy use-but this most recent brewer has been problematic. I am hopeful they do solve the problem, in fact I'm confident they will. They do stand behind the brewers. As for woodNfish's comment about the company making "lousy coffee", all I can say is you're ignorant. GMCR hired some of the industry's finest people to buy their coffee-I know many of them personally-and have gone to source where they buy coffee. A comment like that is an example of why you can't believe every idiot that makes a post...I guess that goes for me too, but check it out Ken David's www.coffeereview.com. They do now and have always used high grade arabica coffees and are arduous at quality control when it comes to coffee.

  • Report this Comment On February 01, 2012, at 10:56 AM, TotallyJaded wrote:

    I'm trying to wrap my head around this article, and every time I come back to "The guy had a couple of broken coffee makers. So what?"

    The warranty reserve increased 0.25% while sales increased by over 73%, by those numbers. Whether I'm a manufacturer, investor, or customer, that's a great 2011 story all day long.

    To antislapp's point, there have been all sorts of unusual reports coming from GMCR, like cooked books, perishable inventory getting shifted from one place to another so as not to appear expired, and so on.

    There are legitimate reasons to question the stability of GMCR. Your broken Keurig isn't one of them.

  • Report this Comment On February 02, 2012, at 2:35 PM, TotallyJaded wrote:

    Aaaaand... they're up nearly 23% today.

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