Who's Going to Cash in on Green Mountain Coffee?
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For some time now, several investors and Wall St. analysts have been predicting the downfall of Green Mountain Coffee Roasters (NASDAQ: GMCR) with the expiration of the Keuring K-Cup patent coming up in September. It’s not too much of a stretch to see how this is going to hit the margins of the company…and hard. Without the luxury of holding all the cards on these single serve coffee machines, they will be faced with stiff competition as several companies start to go in on their own and build the single serve devices to be compatible with the Keuring machine. What I’m surprised at, though, is the lack of coverage on the companies that will be able to take advantage of this patent expiring. So, let’s set our caffeine intake to high and see who the new winners in this space will be.
What makes this market so lucrative for the competition is the precedent set by Keuring with the razor-and-blade model it used to sell its machines. With the machines being sold at cost, the company was reaping in high margins on the K-Cups themselves. Keuring had set itself up with a nice, continuous revenue stream.
Here is the hitch; the K-Cup is not a technological marvel. The mass production of these little plastic cups will be pretty easy to replicate. So once these patents expire, anybody will be able to ride the coattails of the Keuring machine straight to the bank. So what we should look for is companies that will be able to create demand for their K-Cups without the backing of Keuring producing them.
The two markets which will be the most lucrative will be on the high and low end of the price scale. The high end producers will still be able to command a high price point for their products and benefit from the incredibly high resulting margins. Conversely, several generic and store brands will be able to take a hit on those margins for the K-Cup and push volume simply because they are not burdened by the production of the machine. Here are my predictions for the winners in these respective spaces in the near future.
Tier I, Beating the Competition with Brand: Starbucks (NASDAQ: SBUX) and Dunkin’ Brands (NASDAQ: DNKN)
The first place to look for the higher end would be to look at those who already have a built-in demand for their products. With that in mind, look no further than coffee retail giants like Starbucks and Dunkin’ Brands to make a bigger splash in this market. With their respective brand powers, they will be able to command those high price points. Plus, with the royalties and agreements from Keuring out of the way, every cup brings in that much more profit. Cha-ching!
Tier II, Appealing to the Wallet: Safeway (NYSE: SWY) and Kroger (NYSE: KR)
There are more than a fair share of Keuring brewing machine owners that have a bit of buyer’s remorse. With K-Cup coffee equating to about $50 per pound, it is sometimes hard to justify those single serving cups. Well, budget conscious shoppers will most likely praise the expiration of these K-Cup patents as food retailers start producing store brand K-Cups. This kind of product is a food retailer's dream come true. They will be able to produce a low cost option that will still be a high margin product. In fact, Safeway is already advertising a single serve cup on their website. Look for your local grocery store to start stacking the shelves with generic and store brand K-Cups very soon.
Stuck in the Middle with You, Green Mountain
This does not look like it is going to play out well for the Keuring owners over at Green Mountain. With so much of their profit banking on the sales of these K-Cups, they will more than likely need to take a stance on where they want to take their Green Mountain Coffee brand in the K-Cup space. Do they think they have the brand power to walk with the big guns like Starbucks or Dunkin’? Or are they going to have to take the margin hit to try to compete with potential low cost producers. Nothing stinks more than being stuck between these two forces. So look for Green Mountain to try to do something, anything to avoid this pricing purgatory.
TylerCrowe has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and 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.If you have questions about this post or the Fool’s blog network, click here for information.
