1 Coffee Maker on the Ropes

Things keep looking worse for Green Mountain – can the company turn it around?

Andrew Marder
Andrew Marder
Oct 13, 2012 at 12:00PM
Consumer Goods

It's tempting to start every article about Green Mountain Coffee (UNKNOWN:GMCR.DL) by saying, "These guys just can't catch a break." Once again, Green Mountain finds its well-manicured turf encroached upon. A press release on Thursday indicated that Kraft Foods Group (UNKNOWN:KRFT.DL) is going to start producing its own K-Cups without any oversight from Green Mountain. The move might end up being even more damaging than the recent announcements from Starbucks (NASDAQ:SBUX) and could be one more step toward the final blow for Green Mountain.

Coffee competition
Well, it's probably not that bad. After all, Green Mountain still sells a popular brand of machines, still gets a cut from most of the coffee sold for those machines and still has patents as well as plans for new models. But the announcement from Kraft is certainly not welcome. In part, it cuts deeper than the new Starbucks line because of Kraft's ubiquity at home. While Starbucks may be where you go out to get coffee, for many coffee drinkers, Maxwell House is the brand you drink at home.

Kraft said it expects to have the new cups available within a few months, which compounds the year-end headache that Green Mountain was already facing. Now, it has Maxwell House to add to its Starbucks Verismo and grocery-brand worries. The difference is that the Maxwell House cups are going to be available nationwide. Before the announcement, grocery chains such as Kroger (NYSE:KR) were the biggest non-partner concern for Green Mountain.

While Starbucks is releasing its own machine, it still had a commitment to Green Mountain, and the K-Cups it sells are licensed. The same is true of Dunkin' Brands' (NASDAQ:DNKN) K-Cups. Maxwell House, meanwhile, will be made entirely by Kraft, with no profit sharing for Green Mountain.

The future
All is not lost for Green Mountain. The company has agreements in place with both Smucker's (NYSE:SJM) Folgers brand, and with Starbucks. Those are the two largest brands in the U.S., with Maxwell House coming in third.

In its last quarter, Green Mountain missed analyst expectations and lowered guidance for its full year, although investors were buoyed by the company's announcement that it was getting a handle on sales predictions and had hopes of fixing its ongoing inventory problems. The stock jumped on the optimism and is still up from the date of the announcement, although it has pulled back since the launch of the Verismo.

Another distinct possibility is that the diversification of K-Cups acts as a sales tool for Green Mountain. It may be that with the addition of store brands and Maxwell House, consumers become more likely to purchase a machine. This isn't ideal for Green Mountain, as it reportedly sells its machines near or below cost to help drive the adoption of K-Cups. If off-brand cups start to eat into its sales, I wouldn't be surprised to see Green Mountain start charging more for its machines.

The bottom line
I've never been a big Green Mountain advocate, and I'm not starting now. I do, however, think the brand is taking a harder hit in the press than it will in the pocketbook. Right now the road ahead is being obscured by lots of quick changes in a relatively new market. In six months, everything will have fallen out and investors will have a much better view of where Green Mountain stands for the long run. I think the stock is now depressed enough that, if you still have it, you might as well hold on. I wouldn't jump in just yet, though.

Green Mountain has been one of the most interesting stories from the past year. From David Einhorn's vilification last year, through the inventory issues, the new competition, and the company's new products, something has been happening at all times. To keep up to date on everything, the Fool has a special report on Green Mountain. It covers the strengths and challenges that the company is facing and gives a detailed insight into operations. We'll be updating the report as news come out, so readers will always have the best information to work from. Click here to get your Green Mountain report today.

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