Keurig Green Mountain, Inc. to Get Java Jolt From Kraft Coffee Deal

The deal putting Maxwell House coffee into Keurig Green Mountain (NASDAQ: GMCR  ) pods means the single serve coffee maker specialist now represents all the major best-selling brands in the country, while the expansiveness of the deal overshadows the announcement earlier this month by Treehouse Foods (NYSE: THS  ) that it had cracked the code for Keurig's new 2.0 system suggesting we should see sales percolate higher.

New, proprietary technology in the Keurig 2.0 system ought to lock out white label pod makers. Photo: Keurig Green Mountain

Its K-cup runneth over
Keurig jointly announced with Kraft Foods (NASDAQ: KRFT  ) last week the two had reached a multiyear licensing, manufacturing, and distribution agreement that would see the coffee system maker eventually take over from Kraft the production of pods for its popular brands including Gevalia, Yuban, and of course, Maxwell House.

Yet it also gives Keurig the rights to McDonald's (NYSE: MCD  ) line of McCafe coffee, which Kraft and the burger joint teamed up last year to distribute. Coffee has long been McDonald's strong suit, but last year the fast food chain attributed the introduction of its McCafe line of beverages as the reason behind a 70% surge in coffee sales.

Although coffee chains like Starbucks and Dunkin' Brands Dunkin' Donuts have been selling packaged coffee and K-cups through their stores and at supermarkets for several years now, it was just the other day that Kraft agreed to use its nationwide distribution network to ship the McCafe line to grocery stores and other food outlets.

An enigma wrapped in a riddle
Now Keurig will be taking over Kraft's pod production and distribution, and it ought to be enough to offset whatever fears investors may have had that Treehouse Foods had figured out a way to trick Keurig's newest brew system into using private label pods.

Keurig suffered a crisis of confidence and sales when the patents on its original K-cups expired in 2012. Operating on a razors-and-blades business model, Keurig sold the machines at a loss while realizing the greatest revenues and profits on the sale of its pods. But when white-label manufacturers like Treehouse were able to start producing knockoff pods the financial situation at Keurig took a dramatic turn for the worse.

Revenues that had jumped 72% in 2009 and then doubled in 2010, rose only 12.5% last year, while net income, which rose 46% and 150%, respectively, was 33% higher last year. Notably, pod pack sales that jumped 59% in 2012 rose just 18% in 2013.

If generic pod makers can tap into the new design already, one which Keurig has kept close to the vest, that could pressure sales and profits once again. Following Treehouse's announcement earlier this month that it developed a workaround to the technology -- in February it sued Keurig over the technology -- Keurig's stock pulled back 4%, though the Kraft deal has allowed the stock to more than make up for those concerns.

The Maxwell House brand gives Keurig a complete lineup of the most popular coffee brands.

Good to the last drop
Generic competition notwithstanding, and as important as the McDonald's nexus is to the agreement with Kraft, having Maxwell House in its portfolio of pods gives Keurig all the major coffee brands. In May it signed a similar distribution agreement with J.M. Smucker for its Folger's coffee, the number one selling coffee brand by volume with around 15% of the market. Maxwell House is second at 10%, and because of the brand's popularity, could do more than just result in an incremental increase in revenues for Keurig.

After a planned transition period, Keurig will exclusively take over from Kraft the manufacturer of its branded Keurig packs, though the coffee that will be used will continue to be sourced, roasted, and blended by Kraft, which started making its own K-cup compatible pods after Keurig's patents expired. 

Coffee, the great equalizer
But it calls into question what the deal means for Kraft's Tassimo brewing system, which it manufactures in partnership with Bosch, though it could become the primary device Mondelez International sells to international markets.

Mondelez, which was spun off from Kraft in 2012. announced earlier this year it would be combining its coffee business with that of D.E. Master Blenders to create a new global pure-play coffee giant housing brands that include Gevalia, Tassimo, Senseo, and the international business of Maxwell House. The joint venture, which will be called Jacobs Douwe Egberts, will be the second-largest packaged coffee company in the world. Kraft may be deciding the Tassimo system would be better off marketed internationally. 

The Foolish bottom line
With a new four-cup unit coming to market, its half-gallon Bolt system introduced late last year, and the full range of major coffee producers lining up for the chance to have their coffees in the new Keurig machine, this coffee maker looks like it will have little trouble brewing up some hot sales growth.

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.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3082873, ~/Articles/ArticleHandler.aspx, 8/31/2015 3:58:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated Moments ago Sponsored by:
DOW 16,552.15 -90.86 -0.55%
S&P 500 1,975.14 -13.73 -0.69%
NASD 4,780.80 -47.52 -0.98%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:42 PM
GMCR $56.62 Up +2.51 +4.64%
Keurig Green Mount… CAPS Rating: **
KRFT $0.00 Down +0.00 +0.00%
Kraft Foods, Inc. CAPS Rating: ****
MCD $95.20 Down -1.05 -1.09%
McDonald's CAPS Rating: ***
THS $79.37 Down -0.09 -0.11%
TreeHouse Foods, I… CAPS Rating: ****