Green Mountain Coffee Roasters (NASDAQ:GMCR) must be anxious about the heightening competition in the single-serve industry. The company’s two key patents are set to expire in 2012, making the situation eve more precarious. Recently, Kroger Co, a US-based operator of supermarkets, announced its plan to sell its own brand of single-serve coffee pods.  This news announcement, which has the potential to threaten GMCR’s dominance in the U.S. single-serve industry, led to a near 10% fall in GMCR’s stock price since announced. The stock touched its 52-week low of $20.72 on June 12. GMCR is a dominant player controlling more than three-quarters of the U.S. single-serve coffee market and around 8% globally.
We have a price estimate of $45 for Green Mountain Coffee Roasters, implying a premium to the current market price.
Why GMCR is so susceptible to competition?
Single-serve industry attracting competition
- Competition in the single-serve coffee segment is expected to intensify further with many companies interested in grabbing a share of the growing market. Starbucks (NASDAQ:SBUX) has announced its plans to enter this segment with the launch of its new coffee maker, Verismo.
- The world’s largest retailer, Wal-Mart (NYSE:WMT), also announced its plan to introduce Esio Beverage System, a more reasonable line of brewers at its stores. These players with a loyal customer base and global presence have the potential to change the dynamics of the the single-serve industry.
Company related issues
- GMCR’s inventory built-up on the balance sheet is alarming. In Q2 2012, it reported $602 million in inventories almost double than it reported in Q1 2012. This has been majorly due to GMCR’s failure to meet its revenue projections. Since it has more inventory on hand, therefore, the inventory turnover is expected to be lower in the next quarter which will in turn put pressure on prices.
- At present, GMCR is facing an inquiry by the U.S. Securities and Exchange Commission (SEC) related to its revenue recognition practices and its relationship with one of the vendors. The ongoing inquiry has affected GMCR’s reputation among investors and has put the credibility of its financial reporting at stake.
- The expiry of GMCR’s two key patents related to K-Cups in 2012 will make it easier for competitors to replicate what Green Mountain is doing. Competitors have already expressed interest in entering the single-serve market.
- See: Green Mountain shares plunge on Kroger competition, Bloomberg Businessweek [↩]