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Keurig 2.0 May Warm Things Up for Green Mountain

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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."

Read/Post Comments (5) | Recommend This Article (3)

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 16, 2014, at 3:01 PM, nonothingperson wrote:

    GMCR sells the Keurig machines at breakeven prices. The machines make no money. They are the platform for kcup coffee sales. These sales are stagnant. New machines for cappuccino are still kcup coffee sales where coffee sales are flat. The new GMCR/Coke relationship is the same sales concept. Build machines to sell one shot cups of Coke products. GMCR started reasearch 5 years ago to build soda dispensing machines under a project called Geyser. The machines are not ready. The recipe for Coke products in the machines are not ready. I would not invest in GMCR until they give some deadlines for production and sales of Coke products. Until then if anything I believe a short would be better in GMCR.

  • Report this Comment On February 16, 2014, at 3:37 PM, JohanStrauss wrote:

    I've tried Keurig's "coffee". It's swill. Sad to say, we're getting one of these things at work. I told my boss I'll have to get a My K-cup filter so I can brew my own (hand-ground) coffee, instead of the stale swill spewed out of plastic pods. (Side note: Since I'm the only one in my household that drinks coffee, I've been single-serving for years. Mostly through a Braun KF-12 and a gold mesh filter, but more recently through a vintage Silex 2-cupper, among other devices. I had, at one time, contemplated a Keurig until I read the many reviews about their short life span and problems with leaking. I'll stick with what I have, thanks.)

  • Report this Comment On February 16, 2014, at 5:23 PM, CrazyDocAl wrote:

    nonthingperson, they do not sell the Keurig at a break even price. My Ex Gf works for them and gave me the numbers, they do quite well off of each machine. The k-cups is where they make the real money though.

    Do you know that any GMCR employee can buy both the Keurig brewers and k-cups for 50% off list price for anyone? Employees get free coffee (as one would expect) too. My ex bought hundreds of Keurigs over the years. As long as she paid for them with her credit card. She would order them (and coffee) for friends, friends of friends, and family from the GMCR site and have them shipped right to that person's door. Everyone who works there does it.

  • Report this Comment On February 16, 2014, at 5:27 PM, CrazyDocAl wrote:

    JStrauss none of the Keurig brewers last. It's kind of a joke at GMCR. My Ex who works for them would have to return her Keurig back to GMCR about once a year. She laughed because GMCR was making so much off of them they could afford to just send out new ones. Of course most people just throw them away and buy a new one.

    Maybe now that the patents have expired things will change.

  • Report this Comment On February 18, 2014, at 10:29 AM, LQM2 wrote:

    Funny comments about how Keurig coffee sucks and Keurig brewers always break. Yet GMCR had $1.4B sales last year and is one of the top preforming stocks of the last decade. Ever cross your mind that proves your personal anecdote is dead wrong and a terrible basis for an investment decision? Probably not.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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