Motley Fool Flickr by Nathaniel Munson.
The best businesses come from the simplest ideas, and Keurig Green Mountain (GMCR.DL) became one of the market's best stocks in the past decade by giving millions of customers exactly what they want: an easy-to-make cup of the coffee of their choice. With the success of its home brewer, Keurig Green Mountain has pushed into an extremely competitive industry; it also attracted the attention of a high-profile strategic partner that made an immense investment in the company's future earlier this year. Let's look more closely at Keurig Green Mountain to see whether it has what it takes to post solid returns in the future as well.
GMCR Total Return Price data by YCharts.
Strong strategic moves give Keurig a jolt
Keurig Green Mountain's success in 2014 came from a number of different avenues. The company has continued to draw interest from licensing partners, inking a multiyear deal with Kraft Foods (KRFT.DL) that will give Keurig extensive distribution rights for pods filled with the well-known Maxwell House brand in exchange for licensing revenue and other compensation. In addition to Kraft's own brands, Keurig will also be able to market McCafe products, which Kraft obtained from McDonald's (MCD -0.05%) in 2013. With Keurig already having extended its partnership with Starbucks (SBUX 1.00%), the K-Cup manufacturer has covered most of its bases to keep competition at bay.
Keurig Cold. Source: Keurig Green Mountain.
Yet the biggest partnership Keurig announced in 2014 was the massive investment that Coca-Cola (KO 1.50%) made in the coffee-machine maker. In February, Coca-Cola took a 10% stake in Keurig Green Mountain, and that increased to 16% later in the year as the beverage giant exercised options to acquire more shares. With Coca-Cola having taken big hits to its growth as demand for sugary carbonated drinks has fallen, the move represents an effort to latch on to potential new avenues to customers through Keurig's cold-beverage home system. Yet simply as an investment, Coca-Cola has already shown a huge profit on its share purchase, participating in nearly all of its partner's upward movement in 2014.
Keurig's challenges for 2015
Going forward, though, Keurig Green Mountain is dealing with a few issues that have worried some investors. Just a few weeks ago, Keurig had to recall more than 7 million of its MINI Plus brewing systems after reports of hot-water leaks and burn-related injuries. Although Keurig rapidly made a free repair kit available, the concern is that any negative implications of the quality of the company's products could hurt future sales.
Source: Keurig Green Mountain.
In addition, Keurig's intellectual property that protects its new Keurig 2.0 brewing system from generic K-Cups has come under fire from competitors that have found ways around the efforts Keurig has made to force owners to buy licensed K-Cups. With its original system having lost patent protection, the company had hoped Keurig 2.0 would provide another lasting boost to its proprietary pod sales. In its most recent quarter, Keurig saw a big increase in sales of K-Cups tied to the 2.0 release, but unless the company can successfully fight back against the workaround, those gains could prove short-lived.
Finally, Keurig itself isn't sure how much steam it has left in its growth engines. In its most recent quarterly report, the company gave weaker guidance than investors had expected, suggesting sales could rise at less than a 10% pace in the current quarter. For growth-hungry shareholders who have driven Keurig higher, the loss of growth momentum could bring about stagnant share prices for at least a while.
Still, the big focus for 2015 appears to be on the Keurig Cold machine. Earlier in December, Keurig Green Mountain announced that it had bought the parent company of Bevyz, which produces a single-drink machine that produces both hot and cold beverages. It is uncertain whether Keurig will retain the Bevyz machine or simply use its technology as part of its Keurig Cold initiative; regardless, the move shows just how serious Keurig is at tapping the full potential of home-soft-drink production.
Even with its challenges, Keurig Green Mountain has come a long way in 2014, and its partnership with Coca-Cola holds a lot of promise as both companies have every incentive to work together for their common good. Investors should not count on another year with a 78% return, but if the company's cold-beverage system proves as popular as many hope, then 2015 could easily be another winning year for Keurig Green Mountain shareholders.
