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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 9.9 billion in 2013. We expect the K-Cup business to witness a moderate growth rate in the coming years, touching 26 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 10% 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 20 billion mark by the end of the forecast period, there could be a 20% downside to the Trefis price estimate for the stock.
- Average Price of A Single Serve Pack: The average price of the K-Cup Portion Pack has increased from $0.22 in 2008 to $0.33 in 2013. In 2011, GMCR increased prices of K-Cup Packs to offset higher green coffee and other input costs. Going forward, we expect the average price of K-Cup Portion Packs to increase moderately.
In case, the average price increases at a faster rate due to cost pressures and reaches $0.50 by the end of the forecast period, there could be an upside of more than 20% to our estimate for GMCR's stock. On the other hand, if the average price growth falls due to intense competition in the single serve coffee segment and stays at $0.35 by the end of the forecast period, there could be a downside of around 10% 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.
Green Mountain Coffee Roasters (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 2013, more than 90% 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 My KCup reusable cartridge, and brewer carrying cases.
Driving single cup brewer adoption rates
GMCR's growth strategy involves developing and managing marketing programs to drive Keurig single-cup brewer adoption in North American households and offices in order to generate ongoing demand for K-Cup portion packs. It sells its AH 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. Overtime, 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 two years, it did two strategic acquisitions wherein it acquired Diedrich Coffee in May 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 November 2009 it acquired Timothy’s Coffees of the World through which it acquired the rights to the Timothy’s World Coffee brand and its wholesale business, as well as licensed brands Kahlua and Emeril’s.
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.
We believe a strong and a robust distribution channel is very essential for GMCR's long term growth.
Coffee market poised for growth
According to a recent study by the National Coffee Association of USA, approximately 40% of 18-24 year olds drink coffee daily. This is up from 31% in 2010. There is still growing thirst for specialty coffee beverages. The growth in single-serve coffee packet formats has also been phenomenal. In the US, coffee is the second largest beverage segment following soft drinks.
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 Euromonitor, global coffee sales, including fresh and instant, reached $70.86 billion in 2011, witnessing a rise of 17.5%. Sales of single-serve packets accounted for $5.75 billion of the amount and witnessed a robust growth of about 31% during that period.
According to a recent study by the National Coffee Association of 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 Green Mountain Coffee Roasters with its proprietary Keurig K-Cup brewing system. In the past year, 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 has announced its plans to enter this segment with the launch of its new coffee maker Verismo. This development is clearly a huge threat for GMCR.
Sara Lee’s Executive Chairman, Jan Bennink, has also expressed interest in reinvesting in the single-serve coffee market. Sara Lee discontinued Senseo brewers in North America since March 31, 2012 except on select websites.
Retail giant Wal-Mart has plans to introduce the Esio Beverage System, a more reasonable line of brewers at its stores.
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 the 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.
Trefis Forecast Rationale for Single Serve Cup Packs Sold
GMCR sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup portion packs. These are sold to supermarkets, club stores and convenience stores, restaurants, office coffee distributors and also
directly to consumers in the United States.
GMCR has witnessed a substantial increase in K-Cup pocks sold since 2006. In absolute numbers, they have increased from 1.1 billion in 2008 to 5.9 billion in 2011. In 2012, the figure rose more than 35% to 8.1 billion K-Cups. Th growth continued in 2013 as the volume surged to 9.9 billion K-Cups.
Going forward, we expect them to increase at a moderate rate, exceeding 26 billion annually by the end of the forecast period.
Trefis considered the following factors for its forecast
- Robust K-Cup Portion Pack brands portfolio
- GMCR offers its consumers the ability to choose from over 200 varieties of K-Cup portion packs. It K-Cup portion pack brands include some of the prominent brands including Caribou Coffee, Dunkin' Donuts, Kahlua, Starbucks, Diedrich Coffee, Millstone, Gloria Jean’s, Café Escapes and Coffee People.
- Keen on developing partnership opportunities
- GMCR has been really keen to develop good partnership opportunities with other firms. These partnerships help in creating additional K-Cup products that would eventually
help in augmenting consumer demand for the Keurig single cup brewing system.
- In February 2011, the firm entered into a multi-year manufacturing and distribution agreement under which it manufactures K-Cup portion packs for Dunkin’ Brands. Dunkin’ K-Cup portion packs became available at participating Dunkin’ Donuts restaurants in August 2011.
- In March 2011, GMCR entered into a multi-year relationship for the manufacture, marketing, distribution and sale of Starbucks and Tazo tea branded K-Cup portion packs. GMCR and Starbucks also expects to further expand Starbucks K-Cup portion packs and Keurig single-cup brewing systems to Starbucks stores in the latter part of 2012. If this materializes it could give a wider reach to GMCR's distribution capabilities.
- Growth opportunities within the 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 Euromonitor, global coffee sales, including fresh and instant, reached $70.86 billion in 2011, witnessing a rise of 17.5%. Sales of single-serve packets accounted for $5.75 billion of that, or 8%, however witnessed a robust growth of about 31%.
- The single cup market in the U.S. is dominated by Green Mountain Coffee Roasters with its proprietary Keurig K-Cup brewing system. In the past year, Dunkin' Donuts and Starbucks also launched single cup coffee formats.
- Focus on innovation and R&D
- GMCR is focused on continued innovation both in single serve brewing systems and beverage development. It is presently working with Lavazza to co-develop a new single serve espresso machine for North American consumers that would complement its Keurig single cup brewers.
- It also has a new Keurig filtered coffee brewing platform in development and is currently in consumer testing. It expects to produce portion packs for this new single serve brewing platform in 2012.
- Volatile economic conditions
- GMCR could benefit from volatile economic conditions as customers would prefer home and office coffee brewers over other expensive options like McDonald's and Starbucks. These home brewers result in significant savings for customers.
Back to Company Overview
- Highly fluctuating coffee prices
- Coffee prices are dependent on various factors including weather, economic and political issues in coffee-producing nations. Increasing coffee prices could have an adverse impact on GMCR's margins since coffee is its key raw material.
- Increasing competition
- The competition in the single-serve coffee segment is intensifying with many companies interested in grabbing a share of the growing market. Starbucks has announced its plans to enter this segment with the launch of its new coffee maker, Verismo. This development is clearly a huge threat for GMCR.
- Sara Lee’s executive chairman, Jan Bennink, has also expressed interest in reinvesting in the single-serve coffee market. Sara Lee discontinued Senseo brewers in North America since March 31, 2012 except on select websites.
- Retail giant Wal-Mart has plans to introduce Esio Beverage System, a more reasonable line of brewers at its stores.
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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