Here’s How We Value Green Mountains And Coca-Cola’s Partnership

by Trefis Team
Green Mountain Coffee Roasters
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In February, Keurig Green Mountain (NASDAQ:GMCR) announced its partnership with The Coca-Cola Company (NYSE:KO), as part of which the beverage giant would acquire a 10% stake in Green Mountain for $1.25 billion. Following the news, Green Mountain’s shares jumped more than 40% to reach $105. The shares went as high as $123, before retreating to a current level of ~$98 per share. To incorporate the value creation as a result of the deal between Green Mountain and Coca-Cola, we have added a new division called the ‘Keurig Cold’. This division includes the royalty income generated through the sale of single serve packs compatible with the upcoming ‘Cold’ brewers.

We have updated our price for Green Mountain to $81, which is about 20% below the current market price.

We have estimated the potential for the ‘Keurig Cold’ business using the following methodology.

a) Number of ‘Cold’ Brewers Sold:

Since the trend of at-home carbonation is on an uptick, it is logical to assume that Green Mountain will be one of the major beneficiaries due to its strong brand name, expertise in this domain and a strong marketing muscle. Keurig Green Mountain’s partnership with Coca-Cola has already generated a significant hype about the upcoming product. This has acted as a marketing boost and is likely to help the company post strong sales during the initial period.

The leader in at-home carbonation market, SodaStream, sold close to 1.5 million machines in 2013. Moreover, sales could top 1.8 million units in 2014. [1] The company’s revenues have almost quadrupled in the last four years, suggesting that people are comfortable with the concept of preparing cold beverages at home. Since Green Mountain has a wider distribution network and a greater marketing muscle than SodaStream, the former could soon catch up to or even exceed SodaStream’s unit sales in the long run.

Keurig Green Mountain will launch the ‘Cold’ brewers in Green Mountain’s Fiscal Year 2015, beginning in October. Going forward, Trefis assumes that the annualized rate of brewers sold could touch 1.4 million by 2015, after which it could exceed 3.5 million annual units by 2020.

b) Single Serve Packs Sold per Brewer

If the ‘Cold’ brewer is successful, more companies are likely to partner with Keurig Green Mountain. This will also fuel the usage of machines and boost the overall single cup sales. To calculate the number of single serve packs sold in a year, we estimate the single serve packs per sold metric.

For Keurig’s traditional brewers (i.e. coffee brewers), the figure stood at 978 in 2013, up from 620 in 2009. [2] For sodas, we estimate the figure will be lower since consumers are likely to be cautious about the cola intake, due to health concerns. Going forward, Trefis assumes the figure to start slowly but rise exponentially, as the popularity of the ‘Cold’ brewers grows, and as more third-party companies partner with Green Mountain.

c) Price per Pack

SodaStream’s cola packs are generally in the range of 15-20 cents per 8-oz pack (for example $5.49 for a 33 can pack). However, these are unbranded colas. Since Green Mountain has partnered with Coca-Cola, it can command higher prices. Moreover, the effective cost of preparing soda in SodaStream machines is higher since they also use carbonation cartridges. In Keurig Cold machines, there is no carbonation separately. Thus, the price of carbonation will be built in the single pack serves. For Keurig, Trefis expects the average price per pack to be around 22 cents. This figure should rise gradually, keeping pace with the inflation rate.

At the same time, the price per pack can’t be too high; otherwise consumers will be less keen to embrace the concept of at-home carbonation. A 12-pack of ready made cola costs around $12, while a 2.5 liter bottle costs around $1.5. Customers are unlikely to buy the machines in case the cost of preparing a soda comes out to be significantly higher than that of a ready made product.

See our full analysis of GMCR here

d) Royalty Rate ~10

Green Mountain will be manufacturing the single serve packs on behalf of Coca-Cola and will have to pay certain royalty to Green Mountain since the products will be compatible with the latter’s brewers. Historically, Green Mountain has charged a royalty rate of ~15% with third party companies. However, the company is likely to have a lower royalty rate with Coca-Cola. This is because the latter’s huge brand name will give it a greater negotiating power. As a result, we have assumed a royalty rate of 10%.

Coca-Cola’s annual revenues in the U.S. are approximately $20 billion. [3] We estimate Coca-Cola’s single cup serves will be able to garner ~0.6% of its American sales by 2015, which could rise to more than 3% by 2020. This implies net sales worth more than $700 million by 2020. Since we assume Green Mountain to command a royalty rate of 10%, there could be more than $70 million of annual revenue addition by 2020. These are all gross profits though, since royalty business shouldn’t have any cost of sales.

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  1. SODA 20F []
  2. GMCR 10-k []
  3. KO 10-k []
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