Keurig Green Mountain Is About to Drastically Alter the Single-Serve Beverage Industry

Keurig Green Mountain’s latest generation of brewing technology promises to have major industry-wide implications.

Jul 15, 2014 at 3:48PM

The last real major change in the single-serve beverage industry came back in September 2012. That's when Keurig Green Mountain's (NASDAQ:GMCR) patent on its revolutionary K-Cup technology expired, and, as a result, unlicensed competitors were, for the first time, allowed to infiltrate the market.

This period of relative stagnation is about to come to an abrupt end, however, as Keurig is slated to release the next generation of its brewing technology this fall. While there is still a good deal of uncertainty regarding the specifications of Keurig 2.0, one thing is certain: its release is going to have major industry-wide consequences.

Filesshareholdercom Downloads Gmcr

Source: Keurig Green Mountain

Keurig is about to completely change the game
Up until this point, Keurig brewers have only been able to make single servings of the desired beverage, something that Keurig has identified as being a common customer complaint. Keurig 2.0 solves this problem by not only being capable of pumping out single servings but by being equally capable of making entire carafes of the beverage.

The real importance of Keurig 2.0, however, comes in the proprietary technology that will be embedded in new brewers. This technology will allow Keurig 2.0 brewers to identify and brew only Keurig packs.

In September 2013 79% of K-Cup sales in the U.S. were credited to Keurig-licensed brands. The remaining 21% was comprised of a collection of unlicensed brands, most notably Kraft Foods(NASDAQ:KRFT) Maxwell House, Peet's Coffee and Tea, and TreeHouse Foods (NYSE:THS). In Keurig 2.0 brewers none of these companies' pods will work, which effectively restores the monopoly Keurig held over the industry before its patent on the original K-Cups expired in September 2012.

Not so fast, says TreeHouse
Understandably, these "unlicensed brands" are none too happy that they are going to be shut out from Keurig 2.0 machines. TreeHouse has even taken it so far as to sue Keurig for "anti-competitive practices."

The suit was brought against Keurig in February, yet at this point there is no definite indication of which way the judge will rule. Therefore, both scenarios have to be given equal consideration.

If TreeHouse's claims are dismissed, Keurig effectively will hit the refresh button on its expired patent. As Keurig plans to eventually faze out its existing models of original Keurig brewers as time progresses, with time unlicensed brands will dwindle in market share until eventually they become irrelevant.

If TreeHouse wins, however, a much gloomier situation arises for Keurig. While Keurig would likely appeal and stretch the court case out longer, and thus allow for a successful launch this fall, eventually these unlicensed brands would be allowed to continue making pods for Keurig brewers, which would place the industry, in essence, where it is today. Keurig would still control the lion's share of the K-Cup market yet would have to continue to deal with these unlicensed brands.

In this scenario Keurig would also have to rely more on its strategic partnerships with key players like Starbucks, Dunkin' Donuts, and Snapple. There is a remote possibility that some time down the road these partners could jump ship in order to evade having to pay Keurig's licensing fees. For Keurig this would be catastrophic. Starbucks alone accounted for 14.2% of overall U.S. K-Cup sales in September 2013. Without these key partnerships, Keurig's market share would dramatically decrease, while its licensing pricing power would also be crippled.

Again, however, it is important to recognize that this possibility is remote. Any one of these partner companies could theoretically, depending on their contracts with Keurig, jump ship today. Despite its lack of an exclusive patent since 2012, Keurig has only expanded its partner base during this time and likely will continue to do so.

For Treehouse, Kraft, and the other companies that currently produce unlicensed pods for Keurig machines being allowed access into Keurig 2.0 brewers would effectively put them where they are today, while being shut out would be bad, but not catastrophic. For Kraft and Treehouse especially, these pods only account for a small portion of overall company sales. Worst case scenario, these companies would have to make licensing agreements with Keurig, trimming their margins. A small margin haircut, however, is something both of these companies would happily receive to keep their hands in the rapidly growing, Keurig-driven beverage industry.

The Foolish takeaway
Keurig still hasn't released any detailed information on Keurig 2.0, but already we know it will be a game changer. Standing in the way of Keurig 2.0 reaching its full potential, however, is TreeHouse's legal action, which may eventually open the 2.0 market to the unlicensed brands that have proven relatively successful in capturing market share from Keurig.

On Aug. 7 we will get more information on the progress of Keurig 2.0 when the company reports third-quarter earnings.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

 

Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers