Has Green Mountain Hit Peak K-Cups?

Shares of Green Mountain Coffee Roasters (NASDAQ: GMCR  ) opened lower this morning after a report indicates that the company behind the Keurig coffeemaker is losing ground to third-party providers of the K-Cups that fuel the machine's caffeinated beverages.

OTR Global reports that Treehouse Foods (NYSE: THS  ) and other companies making private-label K-Cups are eating into Green Mountain's market share. This in and of itself isn't a surprise. Key patents for Green Mountain's K-Cups expired 14 months ago, and a deluge of third-party portion packs was inevitable. Green Mountain even conceded this summer that it sees private labels gaining share at its expense in the near term before its initiatives to win that back are effective. 

Treehouse Foods was a renegade even before the patent expiration. Green Mountain moved to sue a Treehouse Foods unit for selling unauthorized portion packs that fit in its Keurig single-cup brewers three years ago. The knockoffs even found their way into the country's largest retailer, where Wal-Mart was selling them for 20% less than Green Mountain-sanctioned K-Cups. If Treehouse was willing to tempt fate then, you can be sure that it's good to go now when selling Keurig refills is perfectly legal.

Green Mountain isn't sitting still. It's been trying to wrestle back the private-label business, arguing that its patent-protected Vue and another new platform rolling out next year will make it risky for distributors that don't team up with Green Mountain. After all, if they don't establish a relationship with the Keurig owner, they won't be able to follow them when they upgrade to the Vue or next year's new platform. Green Mountain's going to lose some deals along the way, but there are some wins to be had in this growing market. 

It will be something for longs and shorts to keep their eyes on, of course, but the stock has rallied since the two K-Cup patents expired last September. The stock has soared 152% since the lifeline of Keurig's patents ran out. Why? Well, Green Mountain has proven that it can continue to thrive in this environment. Analysts see revenue and earnings climbing 11% and 35%, respectively, in its fiscal year that ended in September. That's not too shabby for a company in its rookie season off the K-cup patents, and we'll know for sure how the fiscal year played out when Green Mountain reports a week from today.

Something's brewing
The real problematic part of the OTR Global report lies in the claims of what Green Mountain is doing in light of Treehouse and others grabbing shelf space for its Keurig-compatible refills. OTR Global sees Green Mountain cutting prices on K-Cup brands and offering larger value packs. This would naturally lead to contracting margins, but it also only helps that coffee prices have actually declined since peaking two years ago. The World Bank shows that the price of Arabica coffee has plunged from roughly $6.50 a kiligram at its 2011 top to less than $3 as of last month. 

Is Green Mountain lowering prices because of the private-label threat or is this just the relaxation of greed at a time when consumers expect producers to pass on the lower input costs? We'll have a clearer snapshot next week. Analysts see fiscal fourth-quarter revenue inching just 2% higher, barely keeping pace with inflation, but the key here will be the bottom line. Wall Street's holding out for a healthy 17% pop in earnings per share. If Green Mountain wants to keep the good times brewing, it'd better not miss.

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