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Keurig Green Mountain, Inc. Message Board

  • financescience financescience Mar 29, 2013 7:24 PM Flag

    unstoppable rise of the kcup

    Corporate Intelligence
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    March 29, 2013, 1:43 PM
    The Unstoppable Rise of the K-Cup
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    By Tom Gara

    American coffee drinking has gone through plenty of innovations, from freeze dried to the Starbucks SBUX +0.07%-driven espresso renaissance, but another shift has quietly taken place in the last few years: from almost nowhere, single-serve pods known as K-Cups, popularised by Green Mountain Coffee Roasters GMCR +1.57% and their Keurig brewing machines, have grown to take up more than a quarter of the U.S. market for ground coffee.

    Here’s a graph of that growth, via a note from SunTrust:

    SunTrust
    The K-Cup patent ran out last September, meaning generic makers can now produce their own pods and machines, opening the door to lower-cost offerings. Starbucks, which produced its own K-Cups in a deal with Green Mountain, launched its own single-serve machine late last year.

    There’s still plenty of growth left in the single-serve business: There are currently around 12.5 million households with one of Green Mountain’s Keurig brewing machines, and in its most recent analyst call the company said it expects that to hit 16-17 million by the end of 2013. Last September, it then-CEO Larry Blanford said eventually, Keurig machines will make their way into 35 million U.S. homes.

    The more machines, the more single-serve pods get sold, and sales of those are still booming. In the 12 weeks up to March 16, sales in dollar terms of Green Mountain’s own brands rose by 34% over the previous year, and sales of K-Cups as a whole were up 38%, according to data from Nielsen.

    And it also looks like the new generic brands that have entered the market since last year’s patent expiry have mainly sold to new customers rather than taken share from established players. “Green Mountain-owned brands actually outpaced the category for the first time in recent memory,” SunTrust wrote. “We believe that, along with relatively stable pricing, this demonstrates that new lower-priced entrants are having a minimal impact on Green Mountain’s core business”

    Green Mountain stock was trading at around $82.50 in October 2011, when hedge fund manager David Einhorn gave a detailed and well-publicized presentation on why he was betting against the company. The stock took a big dive then, and again in early 2012, but has since been picking up and is now at $56.76, a 1-year high. Some of Mr Einhorn’s positions took a hit last year — he was betting that Green Mountain would go down and Apple would go up, and got both wrong. “Our coffee was too hot, our apple was bruised,” he wrote in an investor letter this January.

    As we wrote last year, Green Mountain has said it is fairly comfortable with its position as new players enter the market. Its new CEO Brian Kelley, who took over last November after the retirement of Mr Blanford, said the company “fundamentally changed consumer behavior in the coffee business” in an analyst call in February.

    “Over the years, my experience has taught me this: The company that best understands the demand signal in the home, that is the detailed dynamics of how consumers consume at home, has an advantage and usually wins,” the former Coca-Cola KO +0.55% executive said. “And I believe we are in the very early days of a powerful evolution in how consumers purchase, prepare and customize beverages in their home.”

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