5 things investors need to know about keurig green mountain’s future
TRANSCRIPT
5 Things Investors Need to Know About Keurig Green Mountain’s Future
By Sean O’Reilly
#1: A Highly Profitable Pod-Based Business
• Coffee “pod” sales made up a whopping 84% of total revenues in the quarter ended June 27, 2015
• Pods are used once and then thrown away, which makes GMCR’s main revenue source the ideal “repeat business” model
• Pod sales are supported by an over 20 million installed brewer base in the U.S.
• GMCR generated over $380 million in free cash flow in fiscal year 2014, almost exclusively thanks to pod sales
#1: A Highly Profitable Pod-Based Business
#2: Pod Business Is Experiencing Fierce Competition
• In its latest quarter, pod sales fell 1%, even after factoring in volume growth of 5%
• The reason for this is price competition from imitation K-cups
• The company tried to eliminate this competition by making the Keurig 2.0 incompatible with off-brand pods, but this was met with huge backlash from consumers
• Bottom line: K-cup pod competition is here to stay
#3: Growth and Profitability Are Slowing
In the quarter ended June 27, 2015:• GMCR’s gross margin fell from 43.5% to 36% year-
over-year• Net sales fell 5%• Diluted earnings per share slipped 22% to $0.73• Keurig brewers and accessories net sales fell 26%
#4: GMCR Focused on The Kold
• Coca-Cola owns 16.8% of GMCR• As a part of this partnership, the two companies are
developing “The Kold” beverage system which will be released in the next year
Source: Keurig Green Mountain Investor Presentation
#5: The Kold’s Potential Market Is Huge
• The Kold will allow consumers to make beverages in the home including Coca-Cola brand products and eventually cocktails
• Will seek to address issues GMCR is currently experiencing with the Keurig -- specifically third-party lower priced pods
• The Kold also has a much larger potential market than the hot beverage focused Keurig
#5: The Kold’s Potential Market Is Huge
Source: Keurig Green Mountain Investor Presentation
#5: The Kold’s Potential Market Is Huge
• The Kold is not without risk• Sodastream International (NASDAQ: SODA) has
failed in its attempts to engender an in-home cold beverage market in the U.S.
• Priced at $299, far above competing Sodastream models
• A single Coca-Cola pod for in-home use will cost approximately $0.99, will consumers pay these prices for convenience?
Summary
• Keurig Green Mountain has two businesses:• Hot-beverage line based on selling pods for its Keurig
machines• Cold-beverage line that is being developed at the time
of this writing• The Keurig business is a profitable one but is suffering from
market saturation and price competition• The Kold offers a large potential market but faces a steep
uphill climb against consumer preferences and high price tag
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