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Keurig 2.0: Green Mountain's Savior or the Last Gasping Breath of a Dying Company?

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Green Mountain Coffee Roasters (NASDAQ: GMCR  ) will soon discover if its remarkable growth story will continue or if it will crash and burn like so many growth stocks before it.

Green Mountain's fate hinges on Keurig 2.0, the company's upcoming brewer that promises to reclose the K-Cup platform after the single-serve pods' patent expired in 2012. Since any company can now make Keurig-compatible K-Cups, Green Mountain designed Keurig 2.0 to only accept the company's new patented K-Cup design.

Basically, the company is relaunching with a new machine and a new patented K-Cup design. This sets up a binary outcome: Keurig 2.0 will either succeed and lift the company to new heights or it will fail and the company will be overrun by its competitors.

Will Keurig 2.0 sink or swim?
Green Mountain shipped 20 million brewers over the last two years. The original Keurig brewer -- let's call it Keurig 1.0 -- has already penetrated 13% of U.S. households. But now that the original K-Cups have gone off patent, a growing number of companies are selling K-Cups without paying Green Mountain a licensing fee. The companies that do sign agreements with Green Mountain -- like Starbucks (NASDAQ: SBUX  ) -- have significant bargaining power because of the ability to bypass Green Mountain altogether. Thus, Green Mountain really needs Keurig 2.0 to succeed.

Unfortunately, Keurig 1.0's success works directly against Keurig 2.0. Consumers who bought a Keurig 1.0 have little incentive to upgrade to the newer version. Keurig 2.0 will have a smaller variety of beverages because it accepts only licensed K-Cups, so the brewer will have to be a significant technological upgrade in order to entice users to switch.

Chief Executive Brian Kelley -- never at risk of providing too much detail on anything of substance -- insists that Keurig 2.0 will be so fabulous that even Keurig 1.0 owners will want to upgrade. Unfortunately, Kelley leaves it at "trust me" instead of providing substantive details on the features that set 2.0 apart from 1.0.

On last quarter's conference call, Kelley explained: "Keurig 2.0 is going to give [consumers] not only what they have today but much more and going to do it at value pricing that they're used to today and we anticipate a large number of current Keurig users choosing to switch into the new system because it's a better one."

The only useful information in Kelley's explanation of Keurig 2.0 is the "value pricing." Since it is crucial that Keurig 2.0 gains widespread adoption, Green Mountain will likely sell the brewer at breakeven or even at a loss. As a result, licensing deals with Starbucks and other large companies will be responsible for the bulk of its profits from the new brewer. Starbucks already has its own brewer, the Verismo, and is unlikely to sign on to the Keurig 2.0 unless it gets favorable terms.

Even if Green Mountain can convince major brands to sign licensing agreements for the new brewer, there is still little reason for consumers to upgrade to Keurig 2.0. Starbucks, Dunkin' Donuts, and other major brands are already available on Keurig 1.0. If a consumer wants to buy a new brewer, there are many competing brewers that have a wide selection of brands as well.

What it really comes down to is whether or not the Keurig 2.0 has amazing functionality that is not available on any other brewer and becomes the new hot thing that everyone runs out to buy. Since most people just want a hot cup of coffee in the morning -- and existing brewers already provide this functionality -- it is hard to believe that Keurig 2.0 will really be a game-changer.

Foolish bottom line
Green Mountain has no choice: It has to close its system if it wants to avoid competition from unlicensed K-Cups. Keurig 2.0 is the company's best shot at closing the system again, but it needs to provide a compelling reason for consumers to buy it. Unfortunately, the company has yet to make its case that the brewer is really a game-changer for consumers -- it seems more like a last-ditch effort to save K-Cup margins from getting squeezed by unlicensed competitors.

Investors should keep an eye out for more details on Keurig 2.0 before coming to a definite conclusion on Green Mountain. Every bit of information that comes out about the new brewer should be vetted by a simple question: Does this feature provide a compelling reason for consumers to upgrade given the available alternatives? If the answer is ever yes, then Green Mountain could be a compelling buy. If the answer is always no, then investors would be better off staying on the sidelines.

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Read/Post Comments (3) | Recommend This Article (2)

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 February 01, 2014, at 11:45 PM, BullionDollar wrote:

    Wow, talk about somebody being short shares. Just how short are you Ted? This article is the worst written in Wall Street history. No basis for anything said in it, it is all completely specualation and based on zero fact. Stay short with Einhorn and keep losing your money. This company is still growing and expanding and making money while doing it. Nice hit piece, but a poor excuse for one.

    46 million shorts are about to pay the piper!!!!!!!! Their pain is long overdue....

  • Report this Comment On February 07, 2014, at 11:06 PM, BullionDollar wrote:

    How is that short working out for you there TED? How much did you lose misleading people along with Einhorn? Oh, you didn't see the Coke deal coming huh? I bet Pepsi hops on board too. Next time, you won't write such squabble.

  • Report this Comment On February 11, 2014, at 5:28 PM, twcooper wrote:

    I don't short stocks -- and this is why! The Coke deal is a big plus for GMCR, though its future still rests on the Keurig 2.0. It's not a stock I would bet against, but I'm not comfortable enough with its competitive position to make a long-term bullish bet. Obviously you think otherwise, and so does The Motley Fool (newsletter)!

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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