It's clear the single-serve coffee market has reached a saturation point. Fiscal third-quarter earnings for Keurig Green Mountain (UNKNOWN:GMCR.DL) showed that sales of the new 2.0 coffee brewing appliance were way down and even pods sales have run their course.
That sent Keurig's stock careening 30% lower as investors hammered the coffee maker for its dour outlook. But now with shares sitting 60% below where they started 2015, some might be wondering if this was overkill and if the deeply discounted stock represents a buying opportunity.
Like day-old coffee
Keurig said brewer sales plunged 26% in the quarter, undoubtedly part of the backlash it faced from the DRM-like lockout features its new coffee appliance sported that was only functional if Keurig-branded K-cups were used. While Keurig eventually relented and jiggered the machine to allow third-party pods to to be compatible, this is a big problem for the coffee maker because the appliance's exclusivity was what was going to give Keurig its competitive moat once again.
Following the expiration of K-cup patents in 2012, sales dipped and profits were narrowed. It blunted the worst impact of a flood of rival pods advertising themselves as K-cup compatible by entering into partnerships with companies that were both customer and competitor. Starbucks and Dunkin' Donuts, for example, agreed to have Keurig distribute their coffee in K-cup pods, even as Starbucks sold its own single-serve brewing system.
But the 2.0 machine was supposed to return profits and margins to their prior levels. What Keurig didn't count on was consumers' intransigence in giving up their discounted third-party pods for premium-priced K-cups. Keurig's fall has been nothing short of stunning.
And it's not just the appliances, either, as K-cup pod sales -- the one thing in Keurig's razor-and-blade business model that had kept the company afloat -- also fell in the third quarter. While Keurig blamed both product mix and currency effects as the prime culprits in the 1% decline in pod sales, they were weak enough that it also represents the first time ever pod sales have fallen from one year to the next.
Competitive pressure from pod makers such as Treehouse Foods, Jarden, and Mondelez International resulted in a 5% drop in total revenues in the quarter to $970 million, below Wall Street's forecast of more than $1 billion and even below management's internal guidance.
Keurig maintains that its own brands and licensed brands still command a 40% share of the pod market, indicating the coffee maker still retains a loyal following, but the coming introduction of the new cold-beverage system provides plenty for investors to worry about.
A chilly reception
The coffeemaker's partnership with Coca-Cola (NYSE:KO) to launch a branded at-home cold system was seen as an opportunity to recapture the halo Keurig wore when its coffee appliance first hit the market. That the soda giant took a $2 billion, 16% stake in Keurig was also seen as a huge vote of confidence for it.
But Keurig squandered the goodwill it built up with that deal through a failed soft rollout of the Kold appliance. Not only did it limit sales to online channels, but it also priced the system well beyond the reach of the masses. CEO Brian Kelley might be awestruck by the new technology designed into the Kold, but pricing the appliance around $300 and selling the pods for $1 is setting the appliance up to fail.
The beauty of the original K-cup coffee brewer was that Keurig subsidized the manufacturing cost of the machine and made the difference up by selling consumable pods. Whatever subsidy Keurig is giving the Kold, the price is still a huge premium compared with competing systems such as SodaStream International's (NASDAQ:SODA), which retail for between $80 and $200.
Moreover, there's only a select few customers who will pay $1 for the privilege of making a glass of Coke at home when they can go to the local grocery store and grab a 12-pack of Big Red for just a few dollars more. And it's a 12-pack that's also guaranteed to taste consistent across every can consumed, not like the variability the do-it-yourself way introduces.
But wait! There's more!
It's true the Keurig Kold will do more than just make Cokes at home. Bottled water is becoming huge, which is why SodaStream has repositioned itself as a sparkling-water company instead of a soda maker, but $300 is a hefty price to pay for making your own water. Adult beverages may be its last, best hope.
Considering the foregoing, there's little to recommend Keurig Green Mountain's stock even at these dramatically reduced levels. At least not until there's some indication that management's plan is the right one.
So far they've proved incapable of correctly gauging consumer sentiment, and diving in to Keurig's stock now would amount to an overly risky bet that the company will suddenly wake up and smell the coffee.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and Starbucks. The Motley Fool owns shares of SodaStream and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola, long January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. 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.