The Rise of the K-Cup
Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Keurig cups – or K-cups – are all the rage right now. Personally, I am a long-time Starbucks (NASDAQ: SBUX) junkie and will gladly pay $4 for a sugar-filled latte. But for many people, K-cups are an easy way to have café-quality brewed coffee in their home or office for about $1 a cup. Plus, it only makes one cup at a time.
Green Mountain Coffee Roasters (NASDAQ: GMCR) is the company behind the expansion of the K-cup. It has claimed roughly 25% of the overall US coffee market. The patent for the individual K-cup expired last year, so other companies have been able to produce their own versions of the portable coffee cup.
Green Mountain Coffee will likely see a 28% increase in households with a Keurig machine this year. K-cup sales were up 38% in 2012 over 2011. Revenue performance has taken the company on a wild ride over the last few years.
Net income has grown to $363 million last year.
Although competition has heated up in the K-cup market, Green Mountain has still been able to maintain its market share. Most competitors attract new customers, not existing ones. The total market is growing, so Green Mountain is too.
The competition isn’t affecting the company’s bottom-line performance, and it likely won’t for a while. Next year alone the company is projected to grow its earnings 18%, and in 2014 it very well may see 14% growth.
Green Mountain's stock price is high, as it's trading with a 24.5 price-to-earnings ratio. Over the next year, the company has a lot of room to grow, and shares could rise to above $60 per share.
Starbucks has not suffered with the rising tide of home brewing. For instance, it launched its own K-cups and K-cup brewing station called the Verismo, which has helped the company’s earnings per share grow by 27% since 2008. In the next year, as more people buy in-store coffee and for-home brewing, it will see a growth of 12%. It has one of the fastest and healthiest growth rates in its industry.
The company recently bought a coffee farm in Costa Rica to test new growing techniques and flavors. This will allow Starbucks to efficiently and economically test new products for the future. Still, Starbucks hasn’t been able to curb Green Mountain's growth.
Dunkin’ Brands Group (NASDAQ: DNKN) has been increasing its market share over the last year as well. In fact, it had a campaign to target its rival called “Friends Don’t Let Friends Drink Starbucks.” Last year's sales increased by 5.6% for the Dunkin’ Donuts' U.S segment., and this was partially due to sales of Dunkin’ Donuts' K-Cup for home use.
The company is a small competitor for Green Mountain and hasn’t been able to slow its larger rival down, either. Dunkin' is too focused on the competition for drive through and cafe-style coffee to take any real power away from Green Mountain Coffee.
I am a Starbucks fanatic and will always buy an iced vanilla latte, but investors should look at Green Mountain for more than just a cup of Joe.
Austin Higgins has no position in any stocks mentioned. He is the Principal Consultant for Avant Venture Group and focuses on building businesses through innovation, growth and investment. Read his company's blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.
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