The Story Repeats In Keurig’s Q2 Earnings Report, As Brewer Sales Disappoint

Keurig Green Mountain (NASDAQ:GMCR) reported a dull result in its Q2 earnings report for the fiscal 2015 reported on May 6. Lower brewer and accessory sales partially offset the growth in the sales of portion packs and pods, resulting in just a 2% year-over-year (y-o-y) increase in the company’s net sales to $1.127 billion. Sales of pods (portion packs) grew 7% y-o-y to $956 million, driven by 14% y-o-y increase in the volumes and 1% increase in the pricing, whereas sales of brewers and accessories declined a massive 23% y-o-y to $106 million, driven by a 22% y-o-y decline in sales volume. Apart from this, lower demand for traditional packaged coffee led to a further 5% y-o-y drop in the sales of other products. ^[1]

The company finds itself in a tough place during the Keurig 2.0 transition period, as the lower brewer demand has significantly affected the company’s top-line performance. Keurig’s GAAP net operating income declined 6% y-o-y, as the GAAP operating margins dropped 200 basis points to 21.6% for the quarter.

We have a $103 price estimate for Keurig Green Mountain, which is roughly 2% above the current market price.

See our full analysis of GMCR here

Pods Segment Grows, As Keurig Adds More Brands To Its List

Despite the slow growth in some of the channels such as specialty channels, digital stream, and Dunkin’ Donuts retail stores in the second quarter, the sales of pods and portion packs rose roughly 7% y-o-y, driven by a 14% y-o-y increase in the serving volumes and partially due to a 1% increase in the pricing. Keurig added several brands in its list of licensed partners, including some of the popular coffee and retail brands. Recently, Keurig expanded its partnership with Dunkin’ Brands and J.M. Smucker Company, after signing agreements for manufacturing, marketing, and distribution, as well as the sale of Dunkin’ K-Cups at retail chains in North America. ^[2] Keurig signed a multi-year transition plan for manufacturing with Kraft Foods Group (NASDAQ:KRFT). However, Keurig still manufactures a small portion of Kraft’s pods, which doesn’t include the recently launched McCafe, inclusion of which might have boosted the volumes by 100 basis points, according to the company.

According to Trefis estimates, the Portion packs (pods) segment accounts for more than 70% of the company’s valuation. However, the company should focus more on the growth of its other significant segment: Hot Brewers. Over the last few years, contribution of pods and portion packs to the company’s revenue growth has increased more than that of the brewers.

Declining Brewer Sales Must Be The Topic of Concern

Keurig Green Mountain has been witnessing y-o-y declines in the brewer sales volume for three consecutive quarters now. The weak brewer sales in the holiday season also included the negative impact of a recall on certain MINI plus brewers, and greater than expected retailer portion pack inventory reductions. The company was expecting a decline in the brewer sales year-over-year (y-o-y) due to the low promotional price points last year. However, the decline was more than the expectations due to the voluntary product recall. Replacing the product on retail shelves led to unexpected expenditure by the company in the Q1, and it is expected to hamper the revenue growth in the second quarter as well. To add to the misery, the brewer sales continued to slump in the second quarter, with a 23% y-o-y decline in the sales and 22% y-o-y decline in the volume.

Keurig 2.0’s launch has been fairly unimpressive till now because of a few major reasons – firstly, the company’s inability to decide entry level price points for the new brewers; secondly, the consumer perception about Keurig 2.0, and lastly, the customer’s demand to add some additional features in the brewers. Most of the customers were unclear whether the new version of Keurig brewer would brew all their favorite brands. This confusion added to the decline of the brewer sales in the holiday period and the first few months of 2015.

In March 2015, Keurig announced the addition of Keurig 2.0 K200 series to the family of Keurig 2.0 hot brewer systems, at a retail price of $120-$130. K200 brewers can brew both a single cup and four-cup carafe. ^[3] This series of brewers is available online, and will be out on the retail shelves in the summer. To clear up any misperception regarding the brewer, the company is improving the Keurig 2.0 brewer packaging, which will clearly indicate the brands and other minor details of the product. Moreover, Keurig plans to bring back the My K-Cup accessory in the upcoming holiday season, allowing all the customers to brew any coffee of their choice in the Keurig Brewer. Apart from this, additional features will be added to the current hot brewers to provide ease of brewing to the consumers. This might improve the brewer volume and sales in the latter half of the year.

Keurig’s top priority should be improving the brewer sales to get that extra boost to the revenues, rather than focusing on the already strong portion packs segment.

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More Trefis Research

1. Keurig Green Mountain Q2 2015, earnings call transcript [↩]
2. Dunkin’ Brands, The J.M. Smucker Company and Keurig Expand Partnership [↩]
3. The Keurig 2.0 brewing system lineup expands with the addition of the new K200 series [↩]