With The New Rivo, Green Mountain Hopes To Prove Einhorn Wrong

by Trefis Team
-38.98%
Downside
133
Market
81.35
Trefis
GMCR
Green Mountain Coffee Roasters
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Green Mountain Coffee Roasters‘ (NASDAQ:GMCR) latest announcement to launch a new single-cup espresso brewer called the Rivo in collaboration with Italy’s Luigi Lavazza SpA might help it get some reprieve from the market’s criticisms driven by investors like fund manager David Einhorn. [1] Unlike its previous brewers, this one will only be compatible with Lavazza’s coffee pods. The Rivo will help Green Mountain compete directly against Starbucks‘ (NASDAQ:SBUX) Verismo and Nestle’s Nespresso. The Verismo is a high-pressure brewer launched by Starbucks last month and is seen as a big threat to the GMCR’s future profitability.

See our full analysis of GMCR here

So What’s In Store ?

The Rivo is priced at $229, which is higher than the basic version of the Verismo ($199) but lower than the larger version ($399). Since most of the sales are generally skewed towards the lower priced option, Starbucks has a slight price advantage here. The Rivo brewers possess one significant advantage though. While the Verismo or the Nespresso use milk pods or powdered milk, the Rivo uses fresh milk (or even soy milk) to make the espressos. This could really help attract a niche segment of espresso lovers, the people who pride on using fresh ingredients instead of using packaged products.

Specialty Drinks

The traditional Keurig K-cup brewers were low-pressure systems and therefore making specialty drinks such as espressos and lattes was not possible using them. With Vue launched earlier in the year and now the Rivo, Green Mountain has stepped up its presence in the specialty drink segment.

Two of Green Mountain’s patents expired in September which opened the door for private players to offer their own K-cups without having any sort of an obligation to pay royalty to GMCR. Besides impacting the sales of its Green Mountain’s K-cups, intense competition is also driving down the K-cup prices and putting a downward pressure on its gross margins.

Green Mountain has recognized the need to to generate higher profits through the sale of its brewers and has therefore launched two new brewers this year at much higher prices by positioning them as a more premium product. Earlier, it used to sell the brewers near cost price in order to encourage consumers to buy the product and profits were generated mostly through the recurring sales of K-cups. Green Mountain’s average revenue per brewer is likely to show healthy growth as the percentage contribution of the more expensive brewers to the total sales rises.

We have a $29 price estimate for Green Mountain Coffee Roasters, which is about 25% above the current market price.

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Notes:
  1. Green Mountain unveils Keurig Rivo cappuccino maker, November 8, 2012, reuters.com []
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