While Keurig is the king of the single-serve beverage industry, Amazon is the king of online retail. While Amazon has a prominent presence throughout the world, Keurig is primarily an American enterprise. Even the stock prices of the companies have fared differently in 2014. Year to date, Keurig shares are up nearly 62%, while Amazon shares are down close to 20%.
Believe it not, however, these two companies possess a key similarity that sets them apart from many others in their respective industries.
In addition to being the largest online retailer in the world, Amazon has also produced consumer electronics in recent years. Amazon at first only offered e-readers; however, it has since expanded its offerings to include tablets. While these electronics went through several stages of refinement and, as a result, drifted considerably from the originals, they all possessed one key thing in common: they were being sold by Amazon at break-even.
That's right, Amazon was making no money on the actual sale of millions of tablets and e-readers. CEO Jeff Bezos believed that Amazon could make its money when the people using those devices bought e-books, movies, music, TV shows, and apps from the company.
That's where Keurig comes in. In addition to selling K-cups, Keurig also sells coffee makers that can be used with those cups. Just like Amazon, Keurig sells its initial units (at-home coffee makers) at "attractive price points which are approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales."
Get a coffee machine onto millions of counter tops by offering the unit at an attractive low price, and in turn, fuel the sale of Keurig's portion packs, on which the company is highly profitable.
Amazon is bailing, but should Keurig?
For Amazon, this strategy hasn't worked out that well. Big picture, Amazon is making pennies on the dollar when compared to the likes of competitors such as Apple (NASDAQ:AAPL). Apple not only makes money via its app store, but also makes a healthy profit on the sale of the actual devices, something that would certainly help Amazon's razor-thin 0.38% trailing-12-month profit margin.
Therefore, when Amazon unveiled its new Fire phone in June, the company also unveiled a hefty price tag. A 32 GB Fire phone with no contract will cost $649, which is only $100 less than a comparable iPhone 5s.
Even though Amazon is bailing on this break-even strategy, Keurig should hold firm. Not only is Keurig profitable, the company sports an impressive trailing-12-month profit margin of 12.07%.
Just think about the dynamics of each situation. An active Keurig brewer owner needs at least one portion pack a day. Meanwhile, an active Kindle owner buys,maybe a book a month.
Consider this: in 2013, Keurig sold $3.18 billion worth of portion packs, yet only sold $827 million worth of brewers. That's nearly a 4 to 1 ratio of high margin sales to breakeven sales. Amazon doesn't break out its own device sales in its annual report, yet just by observing the pricing of their latest device, we know its ratio was nowhere near as profitable.
The Foolish takeaway
Sure, Keurig Green Mountain and Amazon have their differences, but they do share a key similarity in terms of strategy, or at least they used to. Nevertheless, Keurig shouldn't abandon this strategy just because Amazon is. Keurig has proven that it can sell initial units at breakeven and still make a healthy profit, and it should continue to do so into the future.