Is The Green Mountain-Snapple Deal A Harbinger Of Better Things To Come?

Very soon, you’ll be able to make more drinks with your Keurig brewers. Green Mountain Coffee Roasters Inc (NASDAQ:GMCR) has formed an agreement with Dr Pepper Snapple (NYSE:DPS) which will soon make the Snapple iced teas available in K-cups and V-packs. ^[1] V-packs are compatible with Vue brewers, launched by Keurig earlier in the year.

The deal will benefit Green Mountain in a couple of ways. First, it will receive royalty from Dr Pepper Snapple which will add to its bottom-line. Second, it gives all the more reason for customers to buy a Keurig brewer (either K-cup brewers or Vue brewers). Vue brewers especially will benefit since, so far, only Green Mountain’s Vue packs were compatible with the brewer. The success of this agreement could also pave the way for other deals targeting some of the lesser focused beverages such as ciders, iced teas and hot cocoa within the K-cup segment.

See our full analysis of GMCR here

More Deals to Follow?

It is true that Green Mountain’s K-cup sales will be affected as the company lost its K-cup patent last month and because of which private labels have entered the segment. Recent reports suggest that some of the private labels are being sold at a discount as much as 50% to Green Mountain’s K-cup. ^[2] And, although you might see fewer Green Mountain K-cups per brewer sold, strong brewer demand will ensure that the total number of K-cups sold by Green Mountain (and its affiliates through which the company receives royalties) will continue to grow.

Furthermore, brewers are likely to contribute more to its overall profits. You can see the average revenue per brewer has climbed in the last couple of years for GMCR. With the help of Vue brewers (which has a much higher price tag than K-cup brewers) and another espresso machine that Green Mountain plans to launch in late 2012 or early 2013, that figure could get a further boost.

This is good news for Dr Pepper Snapple as well since this is another outlet through which the beverage company can grow its volumes. DPS might look to introduce some of its other products in the portfolio since its non-carbonated drinks have shown some volume weakness lately. For beverage companies, forming an agreement with Green Mountain provides them with a sufficiently large customer base, so it wouldn’t surprise us to see more such deals in the future.

We have a $29 price estimate for Green Mountain Coffee Roasters, which is about 30% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Green Mountain’s Keurig to serve Snapple ice teas, October 9, 2012, reuters.com [↩]
2. Green Mountain (GMCR) Losing K-Cup War; Private-Label Brands Selling for 50% Less, October 9, 2012, streetinsider.com [↩]