I've been a jeans and T-shirt guy for a long time. When I dress up, I wear a dark suit with a white shirt. I like brick houses, combustion engines, and things made out of wood. In short, I'm not a fan of gimmicks. So Keurig Green Mountain (NASDAQ: GMCR ) has always been the kind of company I want to dislike. It makes a complicated product that does a simple thing and it seems to limit your options for the privilege.
As an investor, I've only recently been able to put my prejudices aside and get on the bandwagon. After a while, the evidence in Keurig's favor was just undeniable. Just as lots of people like other things that I dislike, lots of people like Keurig's brewers.
That success was on show last week as Keurig Green Mountain once again bested Wall Street's expectations, pushing the stock up over 10% in trading. With success in the short term, Coca-Cola (NYSE: KO ) in the future, and every major brand of coffee in its portfolio, Keurig clearly has what it takes to go the distance.
The competitive coffee moat
One of the biggest factors that makes Keurig's model work is the sheer volume of coffee that Americans consume. According to the National Coffee Association, 83% of Americans drink coffee. In addition, more and more are drinking coffee made in a single-cup brewer. That segment is nowhere near dominance, but it's on a steady incline -- 13% of the U.S. population in 2013, versus 4% in 2010, according to the NCA.
Keurig has tried to lock that segment down through one straightforward avenue. It's hunted down every major coffee brand and partnered with them. Starbucks (NASDAQ: SBUX ) , Dunkin' Donuts, Folgers, Cinnabon -- you get the idea. That helped the company put up a 10% increase in revenue last quarter, with coffee pack sales increasing 13%.
Keurig's moat comes down to its incredible range. There simply aren't enough big brands for another competitor to make a meaningful move. Starbucks tried when it introduced the Verismo in 2012. So far, that brewer has failed to make any significant dent in Keurig Green Mountain's hold over the market. Starbucks probably isn't losing money on the Verismo -- though it rarely mentions it in earnings calls -- but it's not breaking down the Keurig door as some analysts had envisioned.
Adding Coke to the lineup
Having looked at the value of a competitive moat in single-brew coffee, it's fair to wonder how it will play out for Keurig and Coke as they battle SodaStream (NASDAQ: SODA ) . On one hand, SodaStream has a huge number of installed bases and a distribution model for CO2 containers that's hard to top. The distribution system, in particular, is a very big deal.
SodaStream says it has over 60,000 locations where customers can exchange their CO2 cartridges. Even a massive company like Coke would have to spend substantial time and money to get up to that number. On the other hand, Coke is a seemingly unassailable brand name. Keurig's deal with Coke might give people a reason to go out of their way to refill their systems.
The bottom line
Even though I don't like the product, I do like what Keurig Green Mountain has done with its business. I think the Coca-Cola brand is going to pose a serious issue for SodaStream, but even if it doesn't, Keurig's coffee business is more than enough to get by on. The resurgence of this brand from death's door has been fun to watch, even if I still have no desire to buy its product.
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