Single-cup coffee machines such as Keurig have gained tremendous popularity in the past few years due to the convenience of being able to brew just one cup. This trend will certainly continue as total sales in the U.S. alone will reach $5 billion by 2015, compared to $1.8 billion in 2012. The market appears to be big enough for several companies to establish a niche and achieve success.
On Nov. 13, OTR Global released a report saying that Green Mountain Coffee Roasters (NASDAQ: GMCR ) is losing market share within the Keurig K-Cup market. OTR Global cited private label brands such as TreeHouse Foods (NYSE: THS ) and other similar private labels as gaining popularity.
The analysts reported that Green Mountain Coffee is reducing prices on licensed K-Cup brands and increasing larger value packs. A quick comparison on Amazon.com shows TreeHouse's Grove Square K-Cups are selling for a substantially cheaper price when compared to brand-name K-Cups. Cases of 24 Grove Square K-Cups are selling for $11 to $13 a box while cases of Starbucks (NASDAQ: SBUX ) in similar sizes sell as high as $26.
Why TreeHouse can win
According to a Wells Fargo analysis of Nielsen data, private label pods accounted for 8.7% of total dollar sales within the single-serve market. A year ago, the total dollar sales were at just 0.4%.
Numerous studies on private labels are confirming that consumers are embracing cheaper alternatives. One such study by Market Force Information concluded that 96% of consumers buy private label groceries. The study analyzed shopping behaviors of 6,600 consumers to uncover how consumers feel about private labels.
Eighty-three percent of consumers indicated that they sometimes buy private label brands if the product is better or if it offers a higher value than the national brand alternative in a particular category. Thirteen percent said that they always buy private label if one is offered in their desired product category, and only 4% are either unaware of private label products or never purchase them because they believe national brands offer a better value and product.
A similar study published by Accenture noted that "Consumers no longer view private label as a trade-down and, more often, see private label just as another branded option."
Perhaps the best thesis to owning shares of TreeHouse Foods is made by the company's CEO during its most recent conference call.
Sam K. Reed-Executive Chairman, Chief Executive officer and President
For the individual consumer, there's more choice now, and it is both branded and in the private label segment as well. And the consumers are responding to those choices. And that has been -- that remains to be a very positive matter. With regard to pricing in the category, I think, again, if you think about brand segmentation and differentiation, you have at the high end one coffee company that sells 10 K-Cups for a greater price than anybody else sells 12. And at the low end, you have not really private label but an old brand that goes back over 100 years to A&P stores that is, on a day-to-day basis, the price leader in most instances. And the difference in the prices there on a per-cup basis, it's a spread of 100% from bottom to top. And when you look at the brands, you can see that consumers are responding to the different segments. We're pleased with where we are. I guess I had originally indicated that we expected that whatever share private label eventually settled in, that we would be first in the category because we had made the commitment in every aspect to, in fact, provide a private label option that even the most stalwart advocates of the brands would find to be an equally satisfying beverage experience, and we stuck to that.
The best part of waking up.... Is Folger's in your cup
The J.M. Smucker Company (NYSE: SJM ) can benefit directly from increased consumer adaption of K-Cups as its U.S. retail coffee business. Folgers has been a key earnings driver since J.M. Smucker acquired it in 2009.
J.M. Smucker is set to exit the bulk coffee segment and focus on the more lucrative K-Cup segment. The company reported $290 million in K-Cup related revenue in fiscal 2013, compared to $25 million in bulk coffee sales.
Smucker will be expanding its premium offerings line with two new K-Cup varieties in addition to a Dunkin' Donuts (NASDAQ: DNKN ) Bakery Series which includes flavores such as blueberry, jelly, and chocolate. The company holds distribution and licensing rights to sell the Dunkin Donuts brand.
Dunkin' Donuts K-Cups are not currently sold in AOC (All Outlet Coverage which includes food, drug, mass store channels), and given the brand's premium nature and the potential for success, a partnership to enter the space with Smucker makes perfect sense.
Starbucks has sold over $300 million of K-Cups in AOC channels over the past year, and this provides a benchmark for Dunkin' Donuts' potential. As such, an agreement represents tremendous upside for both J.M. Smucker and Dunkin Donuts. While there is no timing on such an event occurring, given the size of the opportunity it is likely only a matter of time before this happens.
Starbucks estimated that the K-Cup and single-cup category is growing 9 times faster than the overall coffee category. This is great for J.M. Smucker as it offers its Folgers brand K-Cups at a lower price compared to its peers. An 18-cup pack of Folgers Gourmet Black Silk retails for $10.98 at walmart.com, compared to Starbucks K-Cups whose 12-16 cup boxes start at $12.98. Higher-priced premium Dunkin Donuts K-Cups give J.M. Smucker's exposure to the equally important higher end of the K-Cups market.
The day after OTR Global's bearish view of Green Mountain Coffee, analysts at KeyBanc released a bullish view stating that the company has a low probability of losing market share over the next year and does not believe a price war is emerging within the market.
Starbucks remains the clear leader in the K-Cup market with its market-dominating status. In 2012, the company's K-Cup packs was named as one of the top 10 food and beverage launches. Looking forward, Starbucks indicated that it has "aggressive plans to continue to expand and grow the K-Cup offering in 2014 throughout the year."
Foolish investors should definitely follow the single serve coffee market very closely because of its tremendous growth. Green Mountain Coffee should be singled out and placed on investors radars following its recent quarterly results on November 20. Shares rose 14% the day after as the company proved the growth story that many bearish investors expressed doubt in are indeed legitimate catalysts that will propel the company in growing over the coming years.