Does Keurig Green Mountain Play Fair?

Keurig Green Mountain had a marvelous March: the company revamped its name, joined the S&P 500, and broke the shackles of an exclusive licensing deal with Starbucks. However, in the wake of a lawsuit over unfair competition, investors must decide if Keurig plays fair.

Apr 17, 2014 at 5:00AM

Keurig Green Mountain (NASDAQ:GMCR), the maker of Keurig homebrew coffee machines, has been on a roll lately. A February investment from Coca-Cola, as the company took a 10% stake in Green Mountain and announced a home soda machine partnership with it, helped the stock pop 33% this year.

However, Keurig's rival TreeHouse Foods killed Keurig's buzz in February by announcing that it had filed a lawsuit over unfair competition against Keurig. By which strategy does Keurig play: fair or dirty?

The accusation 
TreeHouse Foods claims that Keurig seeks a monopoly on the self-serve coffee industry. Given Keurig Green Mountain's moves to render unlicensed K-Cup coffee pods incompatible with Keurig machines in the wake of a 2012 patent expiration, perhaps TreeHouse has a point.

Then again, TreeHouse retains a self-interested stake in the outcome of this lawsuit. Since TreeHouse sold private label K-Cups before Keurig decided to block unlicensed K-Cups, TreeHouse may be feeling bitter about lost profits.

How should investors assess the allegation? If TreeHouse's allegations of unfair competition stand, then Keurig could be headed down a rocky legal road. Visions of regulations, financial reparations, and a forcibly foregone technological advantage come to mind.

On the other hand, if Keurig is gracefully treading the line between unfair competition and an enduring competitive advantage, investors could be looking at a long-term winner. Companies with patented technology like Keurig tend to enjoy high profit margins.

Malevolent monopoly?
Here's the evidence in favor of TreeHouse. Keurig Green Mountain will launch Keurig 2.0 later this year, which by design will be incompatible with unlicensed K-Cup pods. At the same time, Keurig plans to phase out its current machines that are compatible with unlicensed pods.

This is a one-two punch by Keurig toward competitors like TreeHouse. First, it has ensured licensing profits for all future K-Cups via the license-requiring Keurig 2.0 machine; then, it has guaranteed further market share by eliminating previous machines that still work with unlicensed K-Cups.

Do Keurig's moves constitute anticompetitive behavior or smart business thinking? Since Keurig pioneered an innovative homebrew concept, it deserves to reap the rewards of that. U.S. patent laws prevent companies from exploiting their market power for too long.

Besides, the next generation Keurig 2.0 will not enjoy a monopoly position. Nestle's Nespresso machine will compete with Keurig 2.0 for coffee pod profits and licensing partnerships. Such competition should eliminate the unfair competition allegations against Keurig.

Strategic partnerships
In the wake of expired patents, Keurig has strengthened profitable strategic partnerships. By securing K-Cup licensing deals with coffee brands like Caribou Coffee and Bigelow Tea Company, Keurig allows these brands an additional revenue stream for a cut of the sales.

Perhaps the most successful K-Cup partnership has been between Keurig and Starbucks (NASDAQ:SBUX) -- with 2 billion licensed Starbucks K-Cups shipped since March 2011. Starbucks benefits because it capitalizes on cannibalized cafe sales which it would have lost to Keurig's homebrew machine anyway. Keurig wins because Starbucks sells its K-Cups in its stores while they carry the label of the global cafe chain's premium brand (and its prices).

In March, the Starbucks partnership became even sweeter for Keurig. The companies relaxed their agreement which had named Starbucks as the exclusive premium-brand K-Cup supplier. Now Starbucks can expand its K-Cup product line while Keurig licenses additional premium brands -- most recently, Peet's Coffee & Tea. Both companies stand to benefit.

Foolish bottom line
Despite TreeHouse's accusations, Keurig's coordinated technology differentiation and strategic partnerships strike this Fool not as foul play, but as smart long-term plays. Investors should decide for themselves whether Keurig's strategy will prove enduring and profitable.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Glenn Singewald owns shares of Starbucks. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and Starbucks. The Motley Fool owns shares of Coca-Cola and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information