A Bitter Start to 2015 for This Beverage Innovator

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A Bitter Start to 2015 for This Beverage Innovator

By Chris Worthington, Editor-in-Chief of Income

As of the market close on May 26, the worst-performing stock in the S&P 500 was none other than Keurig Green Mountain (GMCR).

This probably comes as a surprise to many of you . . .  after all, Keurig’s instant coffee machines are nearly ubiquitous in kitchens and offices across the country.

Plus, Keurig’s stock had been on an epic run since mid-2012, gaining almost 800% by the time it peaked in November 2014.

Since then, though, things have gone south for the Vermont-based beverage company. In just six short months, the stock has cratered over 41%.

What happened?

First, there was the Keurig 2.0 debacle. You could say Keurig got greedy – or was afraid of the competition. Either way, the company decided that its new machine should only accept K-Cups licensed by Keurig itself.

A light sensor, installed in the Keurig 2.0 machines, would read a proprietary ink stamp on all Keurig K-Cups, thus ensuring that no outside brands could be brewed. Unfortunately, this change also rendered old K-Cups and refillable K-Cups useless.

Both consumers and competitors alike were displeased. Rival Treehouse Foods (THS) even sought legal recourse, citing anti-competitive practices.

Worse yet, Treehouse reverse engineered the ink stamps in just a few months, and it created its own coffee pod that would work with the Keurig 2.0. More recently, consumers discovered that a simple piece of tape, placed on top of the light sensor, could defeat Keurig’s licensing scheme.

A few weeks ago, Keurig CEO Brian Kelley offered something of an apology. He admitted that the company was wrong to incorporate licensed K-Cup technology into its 2.0 machine, but the damage has already been done.

Meanwhile, investors are also nervous about Keurig’s plan to expand into the cold beverage market. The Keurig Kold, a joint venture between Keurig and Coca-Cola (KO), will make soft drinks in addition to cold coffee and tea.

Unfortunately, the rollout is taking much longer than anticipated, and the Kold won’t be fully available until late 2016. That alone has damaged Keurig’s stock, but it’s hardly the worst news.

That would be the declining demand for soda, of which most people outside of Keurig management seem to be aware. Even SodaStream (SODA), the originator of the homemade soda machine, has been busy re-branding itself in light of the thin demand for soft drinks. According to Beverage Digest, the U.S. carbonated soft drink market contracted again last year, which marks the 10^th straight year of declining sales volume.

In light of this trend, it’s odd that Keurig is only now moving into the cold beverage market. And then there’s the price point for the Keurig Kold, which starts at a whopping $300. In contrast, a SodaStream starter kit sells for just $80.

Given the recent missteps, it’s not hard to see why Keurig is one of the worst-performing stocks this year. And unless the Kold debuts to better-than-expected sales, there may still be plenty of downside left.

Good investing,

Chris Worthington

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By Chris Worthington