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Investment Overview for Green Mountain Coffee Roasters (NYSE:GMCR)
Below are key drivers of Green Mountain's (GMCR) value that present opportunities for upside or downside to the current Trefis price estimate for GMCR:
K-Cup Portion Packs
- Single Serve Portion Packs Sold: GMCR has witnessed a substantial increase in its K-Cup sales since 2006, it increased from 1.1 billion in 2008 to 11.5 billion in 2014. We expect the K-Cup business to witness a moderate growth rate in the coming years, crossing 22 billion by the end of the forecast period. In case K-Cup penetration increases at a faster pace through partnerships with leading coffee companies and crosses the 30 billion mark by the end of the Trefis forecast period, there could be an upside of 20% to our estimate for GMCR's stock. On the other hand, if the K-Cup Portion Packs sold witness a modest growth and reach only the 16 billion mark by the end of the forecast period, there could be a 20% downside to the Trefis price estimate for the stock.
Brewers and Accessories
- Total Brewers Sold: Total Brewers Sold has increased from 1.37 million in 2008 to 10.3 million in 2013. The volume growth slowed in 2014's transition period, when the company launched the new hot brewer platform: Keurig 2.0 in August 2014. Going forward, we expect the total brewers sold to increase moderately and cross the 17 million mark by the end of our forecast period.
In case, the total brewers volume increases at a faster rate due to high demand and reaches 25 million by the end of the forecast period, there could be an upside of more than 5% to our estimate for GMCR's stock. On the other hand, if the brewer volume falls due to intense competition in the market and manages to reach just 14 million by the end of the forecast period, there could be a downside of around 4% to the Trefis price estimate for GMCR's stock.
For additional details, select a driver above or select a division from the interactive Trefis split for GMCR at the top of the page.
Keurig Green Mountain (GMCR) is engaged in the specialty coffee and coffee maker businesses. It sells more than 200 varieties of K-Cup portion packs. Apart from offering a variety of brands of coffee and tea, it also produces and sells hot apple cider, iced teas, hot cocoa, and other dairy-based beverages.
The firm manufactures and sells the Keurig single-cup brewing system for use with K-Cup portion packs. Under the Keurig brand name, it offers a variety of commercial and home use brewers based on features and size for the Away From Home (“AFH”) channel and for the At Home (“AH”) channel.
K-Cup portion pack brands include Barista Prima, Caribou Coffee, Celestial Seasonings, Dunkin’ Donuts, Kahlua, Coffee People, Gloria Jean’s, Donut House Collection, Starbucks, and Millstone, among others.
In 2014, around 94% of its consolidated net sales were attributed to the combination of K-Cup portion packs and Keurig single-cup brewers as well as related accessories which include K-Cup portion pack storage racks and baskets, a K-Cup reusable cartridge, and brewer carrying cases.
In 2014, the company changed its name to Keurig Green Mountain and the beverage giant Coca-Cola acquired a 16% stake in the company. Later in 2014, the company released its more advanced brewer system, Keurig 2.0, and in the fall of 2015, the company plans to launch its cold beverage brewer system, Keurig Kold. The introduction of additional brewer platforms could provide a stable revenue source for Keurig Green Mountain.
Driving single cup brewer adoption rates
GMCR's growth strategy involves developing and managing marketing programs to drive Keurig brewers adoption in North American households and offices in order to generate ongoing demand for K-Cup portion packs. It sells its hot brewers at prices which are approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales. This is done in order to drive the sales of profitable K-Cup portion packs. Over time, GMCR expects brewers to contribute a smaller percentage of total revenues relative to K-Cup portion packs. This is expected to positively affect operating margins.
Strengthening of distribution channels
GMCR has been involved in a series of initiatives to strengthen its distribution channels. In the last four years, it did many strategic acquisitions wherein it acquired Diedrich Coffee in May 2010, and Quebec-based coffee services company Van Houtte in September 2010. This helped GMCR to effectively reach consumers in the southern California region and to take advantage of manufacturing and distribution synergies in that region.
In February 2011, GMCR entered into a manufacturing and distribution agreement with Dunkin Brands. In March 2011, it entered into a strategic partnership with Starbucks for the manufacturing, marketing, distribution, and sale of Starbucks and Tazo tea branded K-Cup portion packs.
In February 2014, Coca-Cola acquired a 16% stake in the company, and entered into a joint venture to develop a new brewer system for cold beverages, Keurig Kold. With this initiative, the company will be entering into a much bigger cold beverages market. Keurig added Dr Pepper Snapple as another beverage partner, when the two companies joined hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Kold Platform. In December 2014, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd. We believe a strong and a robust distribution channel is very essential for GMCR's long-term growth.
Growth opportunities within single serve segment
Single serve coffee formats, a category that was in the nascent stage approximately 5 years ago, has witnessed impressive growth rates in recent years. The single-serve market has been a major growth driver of the overall coffee industry in the U.S. According to International Coffee Organization, global coffee consumption reached 141.6 million bags in 2014.
According to a recent study by the National Coffee Association of the USA, penetration is growing in the single serve arena at an average of 1% per year. The single cup market in the U.S. is dominated by Keurig Green Mountain with its proprietary Keurig K-Cup brewing system. In the past years, Dunkin' Donuts and Starbucks also launched the single cup coffee formats.
Competition intensifying within coffee industry
The competition in the single-serve coffee segment is intensifying with many companies interested in grabbing a share of the growing market.
Starbucks and the retail giant, WalMart, have entered this segment with the launch of their respective coffee and beverage makers. This development has been posing a huge threat for GMCR.
Keurig Green Mountain is frequently joining hands with its small competitors to reduce its viable threats and come out as a bigger brand. Recently, in March 2014, Keurig Green Mountain and Peet's Coffee & Tea entered into a multi-year manufacturing and distribution agreement to launch Keurig licensed Peet’s varieties in K-Cup packs for Keurig brewers. Apart from this, the company has been joining hands with various other brands for the manufacturing and distribution of K-Cups.
Highly fluctuating coffee prices
Coffee prices are dependent on various factors including weather, economic and political issues in coffee-producing nations. For the past one year, coffee prices have exhibited volatility. Increasing coffee prices could have an adverse impact on GMCR's margins since coffee is its key raw material. We believe that in the coming years, due to inflationary pressures and volatile prices of Arabica coffee, GMCR might have to resort to increasing prices of K-Cup Portion Packs.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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