Keurig Green Mountain (UNKNOWN:GMCR.DL) reinvented the home-brewing market with its single-serve K-Cup brewers.
Before the company's machines became popular, people generally had to brew an entire pot of coffee. Besides that sometimes leading to waste or someone forced to drink the dregs of the pot, it meant that whether at home or in the office customization was not possible.
If I brewed up a pot of french vanilla and my wife preferred hazelnut decaf, she was out of luck. Yes, there were other single-cup machines including ones that were just smaller loose grounds brewers and some which used pods, but none were common until Keurig's K-Cup brewers became the standard.
The Vermont-based company changed how America made coffee, putting brewers into a shocking amount of U.S. homes. In 2015 over 25% of all Americans owned single-cup brewers, according to a National Coffee Association (NCA) survey from March, and the vast majority of those were Keurig K-Cup machines.
That success however may also have reached its peak and the company which shifted the nation's coffee drinking habits may be starting to seek some cracks.
Keurig is starting to slip
After posting steady growth in both portion pack (mostly K-Cups) and brewer sales in 2014, Keurig only had a 1% increase in pod sales in 2015 and saw a 23% decrease in brewer sales. More importantly perhaps the company saw a marked decrease in pod sales during the fourth quarter of 2015, which suggests that the impact of slowing brewer sales may be starting to hurt K-Cup sales.
The company had $861.2 million in pod sales in the fourth quarter of 2015 down from $948.7 million in Q4, 2014. During the same period brewer sales fell from $181.6 million to $123.6 million.
Slowing brewer sales have been a problem for two years, but in 2015 the trend accelerated. In 2014 the company saw only a 1% decline but that decline exacerbating to 23% in 2015 is a major sign for concern.
Trouble is brewing
Keurig is facing three problems in revitalizing its sales. First, it angered customers when it launched its Keurig 2.0 brewers. These machines have digital rights management technology which makes it so they can only brew coffee from licensed K-Cups. Even though the security is easy to thwart some consumers resented the move to make it harder to use third-party, unlicensed K-Cups, which are generally cheaper.
Adding DRM software to its brewers not only angered customers but it also led to the company being sued by TreeHouse Foods (NYSE:THS). The company, which makes unlicensed K-Cups, accused Keurig of "anticompetitive acts to unlawfully maintain a monopoly over the cups used in single-serve brewers," according to a TreeHouse press release.
In its complaint TreeHouse asserted claims against Keurig for violation of federal antitrust laws, and state antitrust and unfair competition statutes and common law of the states of New York, Wisconsin, and Illinois.
Rogers Family Co. filed a similar lawsuit against Keurig.
Legal issues are not the only ones facing the company. The second problem is that the waste created by single-serve coffee pods has caused a backlash from environmentalists. Most K-Cups sold are not recyclable and end up in landfills. Keurig has addressed this and has a plan in place to make all K-Cups recyclable by 2020, but that has not stopped people from considering whether the convenience of using them is worth the damage done.
Environmental concerns also feed into the third problem Keurig is facing. People have realized that brewing a cup for yourself is expensive compared to how we used to do things.
"People used to make a pot of coffee, now they make a cup," Pedro Gavina, owner of Vernon, California-based roaster Gavina & Sons told Reuters. "Right there we're losing the sink as a consumer."
The company has time, but not much
It took a while for slowing brewer sales to impact pod sales because the brewers have a multi-year lifespan. To reverse the trend Keurig needs to convince people to buy new machines. In order to do that it should eliminate the largely ineffective DRM technology on its 2.0 line. It should also market around the idea that those brewers can also make a full pot.
In addition the company needs to accelerate its efforts to make K-Cups recyclable or at least come up with a plan to address how wasteful using them is.
There is relatively little the company can do to address the price issue. Cutting the cost may lead to more sales at a lower margin or it might lead to the same sales generating less revenue. K-Cups and single-serve coffee is a convenient luxury and the company needs to market time and choice as the value -- not price.
But, of all the changes it needs to make, Keurig needs to make sure people start buying brewers again. That's a major challenge given that the company has failed with its Vue line (which is no longer sold) and its Rio line of pod-based espresso machines. It's trying again with its Kold cold-beverage brewers, but it seems unlikely those $300-plus machines will be a hit, at least in the short term.
There's no easy way to ignite brewer sales or make single-cup machines the hot new thing which they were until fairly recently. But, it's very clear that if Keurig does not sell more brewers then its revenue will steadily decline as people buy less K-Cups. That seems like the most likely course for its future leaving Keurig as a single-product company with little hope for a revenue turnaround.
Daniel Kline has no position in any stocks mentioned. He makes coffee with a Keurig most days and does not feel guilty at all. 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.