Keurig Green Mountain's (UNKNOWN:GMCR.DL) attempted reboot with a new coffee making appliance and an at-home cold beverage system is largely considered a flop. Consumers weren't buying the Keurig 2.0 system because it wouldn't work unless you used proprietary coffee pods, and the company's Keurig Kold system was criticized for being too pricey.
The stock has lost 45% of its value so far this year, and there's reason to believe it could fall further. That's because the one thing that has been making it money is also its greatest vulnerability.
In true razor-and-blade fashion, Keurig virtually gives its coffee machines away and makes up the difference on consumables: the disposable K-Cup coffee pods, which accounted for 80% of its revenue in 2014.
With the disastrous rollout of the 2.0 system, the pods have only become more important to the coffee brewer. Last quarter they amounted to 85% of net sales.
Pod sales were up 7% to $957 million, representing a 14% increase in equivalent servings (which converts Keurig's different pod sizes into a common serving), but were offset by a 7% decline in product mix, meaning consumers continued to choose lower-priced options.
It also sold 23% fewer coffee makers, and lowered its outlook for the full year to reflect what it called a "complex product transition." It now expects sales to grow by a low-single digit percentage at best, despite (or perhaps because of) allowing third-party pods to be used with the new machine.
Another one of the big criticisms of the pod system is the incredible waste generated. Last year, Keurig sold some 9.8 billion K-Cups, which are largely made out of plastic. That was estimated to be enough to circle the earth 12 times.
Keurig says it's working on a solution to make a recyclable K-cup -- its Vue system cup, for example, is made from recyclable plastic (though the foil top still gets thrown in the trash) -- but it won't be until 2020 that all of its K-Cups are recyclable. And that could be the final nail in the coffin of its recovery. Keurig's competitors are already solving a problem that the coffee maker says it can't get a handle on for another five years.
Coffee filter maker Melitta, which invented the first paper coffee filter, said recently that it achieved another first: a 100% recyclable Keurig-compatible coffee pod.
Melitta told a news station in Florida that demand is so high for the filters that it can't keep up, even though it's running its facility 24 hours a day and taking no days off: not even for holidays.
Melitta, of course, is not the first company to tackle Keurig's "environmental problem." Rogers Family Coffee -- the company that distributed the "Freedom Clip" to users for free to defeat Keurig 2.0's lockout system -- has been making biodegradable single-serve pods for several years now.
And even Keurig was forced to bring back the reusable My K-Cup, which allows you to put your own grounds into the machine. Keurig took that option away after it introduced the 2.0, but the massive consumer backlash forced the coffee maker to give in on that too. Keurig says it will be back in time for the coming holidays.
This puts Keurig in a no-win situation. If coffee drinkers are really that concerned about the environment, then single-serve coffee makers are an inefficient means of brewing coffee. Even when made with recyclable plastic, their manufacture is still a wasteful process, and it still requires the user to separate the paper, plastic, and foil. Keurig's My K-Cup or a fully biodegradable alternative are the preferable options.
But both mean that Keurig's key revenue generator is at risk, because coffee sales are going to someone else.
The key for investors to understand is that the bridge to Keurig's moat has been lowered and there's no raising it back up. The consumer won't accept a machine that doesn't allow for greater brewing options, and doesn't want to pay the exorbitant price of a proprietary brand.
Regaining sales and profit growth momentum from the new system's patents was the linchpin of Keurig Green Mountain's turnaround plan. The coffee maker's capitulation indicates that it won't recover its lost glory, and is yet another example of why it just can't win.
Rich Duprey 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.