Green Mountain Coffee Roasters' 3 Steps to Stable Growth

Over the last few days, the hype surrounding Green Mountain Coffee Roasters' (NASDAQ: GMCR  ) deal with Coca-Cola  (NYSE: KO  ) has eased. In the two weeks after the news broke, Green Mountain's stock jumped about 50% but has since fallen back a bit. Last week, Green Mountain confirmed the issuance of more than 16 million new shares to a subsidiary of Coca-Cola, at a price of $74.98 per share, a 28% discount to yesterday's closing price.

Luckily for Green Mountain investors, the company had the good sense to line up a $1.1 billion share repurchase plan. In addition to the dilution mitigation, Green Mountain is going to have plenty of cash from the share issuance to fund the launch of its Keurig Cold system. In a complete turnaround from two years ago, everything is coming up roses for Green Mountain.

Step 1: Get big brands on board
Coke is just one of the most recent -- well, and the most interesting -- additions to Green Mountain's lineup. Keurig machines can brew everything from Starbucks (NASDAQ: SBUX  ) to Dunkin' Donuts, Caribou to Krispy Kreme. Green Mountain has made sure to get all the biggest names in coffee on its machines, thereby ensuring that no one else is going to pop up as a meaningful competitor.

This strategy showed its strength in 2013, when Starbucks launched its own single-serve brewer with the Verismo system. That brand has failed to take a meaningful bite out of Green Mountain's sales. In 2013, Starbucks and Green Mountain extended their agreement for the production of Starbucks-branded Keurig pods. 

Step 2: Expand your offerings
With brands in hand, Green Mountain now has to think about how it can keep its business growing. It's proved itself to be a master of the razor-blade model, selling a base unit at a relatively low margin in order to make bank off the sale of its coffee pods. Even with that system in place, though, there's a point of saturation. Only so many Americans are going to brew their own coffee, with a subset using the Kuerig system.

Enter the Keurig Cold brew system, which Coke has signed up for. By offering consumers an alternative to SodaStream that touts real Coke -- not just "cola" -- Green Mountain can hopefully reproduce its coffee success with a whole new group of consumers.

Step 3: Roll it forward
Even with all these strengths in place, Green Mountain still has a major weakness -- knock-offs. While we can talk about the value of having the good brands all day, cheap alternatives will eventually start to cut into the bottom line. The patent on the Keruig K-Cup design expired in late 2012, giving others a chance to swoop in and make a relatively easy buck.

While that strong portfolio of brands certainly helps to stem the flow, Green Mountain has been trying to find a new way to lock the market down. Its most recent offering in that arena is the Keurig 2.0 system. It tries to fix the competition problem by only brewing Green Mountain-made K-Cups. The product has yet to launch, but management says that the new brewers will offer "game-changing performance." 

While we sit around wondering what that could possibly mean -- maybe the coffee will be so good that the percolator finally dies -- Green Mountain is working toward the ultimate goal of stable, brand-driven K-Cup sales growth. Everything looks good up to this point, but the Keurig 2.0 system is going to take some selling. I can't imagine customers flocking to machines that limit their coffee pod choices unless there's something significant in it for them.

2014 is going to be a very interesting year for Green Mountain. It looks like the first two months of intense action have set the pace for a year's worth of announcements and launches. Now all that remains is to see if anything works as planned.

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