Coffee Roasts, Explosive Growth

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In a saturated coffee market filled with heavyweights such as Starbucks (NASDAQ: SBUX) and Dunkin' Donuts (NASDAQ: DNKN), Green Mountain Coffee Roasters (NASDAQ: GMCR) continues to carve out a niche for itself, posting stratospheric growth in the process.

In the past three years, Green Mountain's annual earnings have grown an average of 77% and most recently, for its second fiscal quarter of 2013, it reported EPS of $0.93, handily beating analyst expectations by $0.20.

The company's main source of revenue is its single-serve coffee business: Green Mountain sells single-serve coffee packs, coffee brewers and complementary accessories. The company dominates the single-serve market with about 60% of the market share. This market is the fastest growing segment of the coffee industry, with sales of single-serve machines growing 523% from 2006 to 2011. 

One of Green Mountain's major advantages over other single-serve competitors is its ability to leverage its market-leading status to create partnerships with companies, in turn offering its customers an unrivaled array of beverage choices. Green Mountain already has partnered up with Dunkin' Donuts, Unilever, Conagra, and J.M. Smucker (NYSE: SJM) and now offers over 200 varieties of coffee, tea, hot cocoa, and iced beverages through its K-cups.

Recently, Green Mountain and Starbucks significantly expanded their strategic partnership. In March 2011, the companies partnered up to offer Starbucks Coffee K-Cup packs for the Keurig. With more than 850 million of these packs sold, Starbucks and Green Mountain have now signed a minimum five-year agreement that will triple the number of Starbucks products and affiliated brands offered on the Keurig platform. This also cements the Keurig's status as the exclusive low-pressure single-cup brewing system serving Starbucks products. 

Moreover, Green Mountain's close relationship with Starbucks effectively rules out Starbucks as a near-term threat to Green Mountain. After Starbucks came out with its high-pressure single-cup brewing system, Verismo, many expected it to significantly chip away at Green Mountain's bottom line. They predicted that Starbucks will brazenly position itself as a direct competitor to Green Mountain and, in turn, push its way into the single-serve market. Yet, after the expansion of the Starbucks-Green Mountain partnership and a recent dual appearance by the CEOs of both companies on CNBC, it is obvious that Green Mountain and Starbucks see cooperation as more valuable than competition with each other. 

Similarly, Green Mountain has a strong relationship with Dunkin' Donuts, which started selling Dunkin' Donuts K-Cups in 2011 after noticing widespread customer demand. The distribution deal it signed with Green Mountain is expected to generate significant revenue for the company as it taps into Green Mountain's existing single-cup infrastructure; moreover, Dunkin' Donuts K-Cups are only sold in Dunkin' Donuts stores, providing customers with an added incentive to go to the store and buy other Dunkin' Donuts products. Considering the strong sales of Dunkin' Donuts K-Cups, Green Mountain and Dunkin' Donuts will most likely continue their profitable relationship well into the future.

There is huge opportunity for Green Mountain Coffee Roasters to grow. For 2013, the company expects the Keurig U.S. household base to grow between 25% to 30%, which also results in increased demand for Green Mountain's coffee packs. Green Mountain has been aggressively expanding its presence in the market through the Vue single-cup custom brewing system and, recently, the Rivo, a single-serve espresso machine. Now, it has plans for a new line of brewing systems, expected to be rolled out in 2014, that are capable of brewing both K-Cup packs and Vue packs. 

It's also worth noting that when Green Mountain's Keurig machine patent expired in September 2012, many investors wondered about Green Mountain's ability to continue to lead the market. Although in the long-term Green Mountain may face increased competition from generic single-serve entrants such as Kroger and Safeway, analysts such as KeyBanc's Akshay S. Jagdale believe that the huge growth opportunities of the single-serve market will largely neutralize any negative effects from increased competitors. The U.S. household penetration for Keurig systems is only 13% and Keurig systems are estimated to be in only 10% of U.S. workplaces, 5% of travel, leisure and hospitality locations, and 1% of food service locations.

There is tremendous potential in the single-serve coffee market, and Green Mountain Coffee Roasters, with its extensive partnerships and aggressive expansion, is in a prime position to profit.

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George Liu has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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