Keurig 2.0 May Warm Things Up for Green Mountain

Keurig is attempting to change the coffee market again with the launch of its 2.0 brewer, which does more than make single cups of coffee.

Feb 16, 2014 at 9:15AM

Green Mountain Coffee Roasters' (NASDAQ:GMCR) Keurig brand has so far been a one-hit wonder. Sure, that one hit, the Keurig K-cup brewer, has managed to stay relevant, so it's more House of Pain's "Jump Around" than Buckner & Garcia's "Pac-Man Fever." But it's still just one hit.

The company's attempt at a follow-up, the Vue brewing system, which makes lattes, cappuccinos, and other fancy coffee beverages, has not exactly set the world on fire. But while the Vue has not been the sales success GMCR may have hoped, Jay Brewer of Single Serve Coffee, a blog that covers the single-serve coffee industry, told the Fool the product has done its job.

"The VUE has not been a failure, but a step in new directions for Green Mountain and Keurig," he said. "They continue to innovate and adjust for their current market and we think the VUE has led to the Keurig 2.0."  

Keurig owns the single-serve coffee market

Before considering the 2.0 and the new market that might open up for GMCR, it's worth noting that single-serve coffee was essentially not a category before the K-Cup machines. Now, according to the National Coffee Association's 2013 National Coffee Drinking Trends report,  ownership of single-serve brewers in the United States has risen to 12% of homes.

Keurig has essentially created and owns the single-serve coffee market. Yes, there are other players like Kraft's (NASDAQ:KRFT) Tassimo and Nestle's Nespresso, but neither of those has made its single-serve coffee pods so popular that the competition has to carry them. Keurig not only sells K-Cups in grocery stores and retailers like Bed Bath and Beyond (NASDAQ: BBBY), but in its competitors for your coffee dollar Dunkin' Donuts (NASDAQ:DNKN) and Starbucks.(NASDAQ:SBUX).

Starbucks, which has sold K-Cups since 2011, sold its billionth K-Cup in 2013, according to Businessweek, and the company -- which markets K-Cups alongside its own Verissmo single-serve system in its stores -- sees room for growth.

"We anticipate there's no reason that the U.S. marketplace, over a handful of years ahead of us, can't progress to single-serve consumptions like Germany or like so many other markets," then-CFO Troy Alstead said at a conference last May, as reported by Businessweek.

How big is single-serve coffee for Keurig?

It's fair to say that the K-Cup is GMCR's whole business. In its first quarter fiscal year 2014 report, Green Mountain said that it had net sales of $1.4 billion, but the company acknowledged that "approximately 94% of consolidated first quarter fiscal year 2014 net sales were sales of Keurig Single Cup Brewers, packs, and Keurig-related accessories."

As big as those sales are, the Coffee Marvel blog, which covers the business of coffee production, estimates that the U.S. coffee market is $19 billion annually -- 20% of the total $95 billion global market.

The next step

The Keurig K-Cup is a dominant product, but it's a niche product that only meets some coffee needs.The Vue is the same -- while it makes a different group of beverages than its predecessor, it's still a single-serve brewer. That means that many Keurig brewer owners must own a second traditional coffee brewer for times when an entire pot is more practical. With the 2.0, GMCR hopes to change that as the 2.0 will brew both single cups using a K-Cup and a pot of coffee using the new Keurig K-Carafe pack.

"Both current Keurig brewer owners and non-owners told us the brewer functionality they wanted most was the ability to brew both a single serving and a pot of coffee from one system with Keurig speed, convenience, and brand choice. Our next generation Keurig 2.0 brewers will do just that," said Brian P. Kelley, Green Mountain president and CEO, in a press release.

Single Serve Coffee's Jay Brewer, whose site has reviewed every single-serve brewer and nearly every possible single-serve product, thinks the idea is a winner.

"The 2.0 will appeal to the holdouts who are interested in single-serve coffee but also want a pot of coffee on the weekend or when friends are over," he said. "We think it will be a success as it's one of the biggest complaints about any single-serve coffee platform."

Daniel Kline has no position in any stocks mentioned. He does prefer drinking Starbucks coffee despite living in Dunkin' Donuts country. The Motley Fool recommends Bed Bath & Beyond, Green Mountain Coffee Roasters, and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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