The Vermont based K-Cups maker, Keurig Green Mountain (NASDAQ:GMCR), is scheduled to release its first quarter earnings report for the fiscal 2015 year on February 4.  2014 proved to be an important year for the company, as it remained busy in adding several coffee and retail brands to its list of licensed brands. Moreover, the company released its next generation brewer system in the U.S.: Keurig 2.0, in August. Keurig 2.0 is the first brewer that can brew a single cup, as well as a four-cup carafe from a Keurig brand pack. With improved design, extra convenient features, and with a wide variety of beverage brand options and other numerous advantages over its previous version, the new brewer might just be the next big thing in the hot beverage brewing industry.
In the September-ended quarter, the company delivered a 14% year-over-year (y-o-y) growth in net revenues. Net portion pack sales grew 22% y-o-y to $950 million in the fourth quarter, primarily driven by a 28% increase in the portion pack volumes, but on the other hand, brewer sales declined 5% y-o-y in the fourth quarter, due to a decline in brewer volumes by 8% and brewer pricing by 11%. 
We have a $108 price estimate for Keurig Green Mountain, which is roughly 14% below the current market price.
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- Scenario: Is This The Stagnation Stage For Keurig Brewers?
- Dull Keurig 2.0 Launch & Brewer Recalls Hamper Keurig’s Revenue Growth In Q1
- Dr Pepper Snapple- New Addition To Keurig Green Mountain’s Arsenal
- The Year 2014 In Review: Keurig Green Mountain
- Keurig Green Mountain- Bevyz Deal: More Than Just An Acquisition
Keurig 2.0 Sales To Remain The Key Driver
In the fourth quarter, the brewer and other accessory sales declined by 5% to $180 million, as the brewer volumes declined 8% and brewer pricing declined 11%. As a result, the brewer and accessories net sales for the fiscal 2014 declined by 1% y-o-y. However, Keurig released its new brewer: Keurig 2.0 in the fourth quarter, whose impact will be visible in the Q1 report.
Keurig customers who were using Keurig’s previous brewer technology might upgrade to this more convenient alternative. According to the data provided by Keurig, nearly 60% of the non-Keurig owners and 72% of the current Keurig owners, want a technology that can brew more than one single cup in one go. Keurig 2.0 is one such brewer, which is ready to serve the customers’ growing needs, as it can brew up to 4 packs at a time, with the help of its new larger K-carafe pack. Moreover, Keurig has a further advantage of serving its huge customer base with different coffee tastes, as now it serves more than 50 top coffee brands. The company expects that the sales of coffee brewers in the holiday season might have shot up due to the onset of winter, as well as an increase in demand in festive seasons. Increase in brewer sales might seal the company’s dominance in the single-serve market.
Keurig Readies Itself For Keurig Cold Launch
Keurig believes that the cold beverage market has the potential to become bigger than the single-serve hot beverage market. As a result, the company decided on introducing a cold beverage platform in partnership with Coca-Cola (NYSE:KO), and it will be launched by the fall of 2015. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas. Beverage giants, such as Coca-Cola and PepsiCo, have been struggling with sales of carbonated soft drinks (CSD) in developed markets due to increasing health concerns. Consumers are shifting towards alternatives such as iced coffee, juices, and sports drinks. However, according to our estimates, CSDs still constitute about 43% of the 30 billion gallon liquid refreshment beverage (LRB) industry in the U.S., forming the largest segment. 
With Coca-Cola already a brand partner, Keurig has been keen on adding more options to its list of beverage varieties. In December, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014.  Furthermore, on January 7, Keurig signed a multi-year agreement with Dr Pepper Snapple (NYSE:DPS), where the two companies will be joining hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Adding Dr Pepper Snapple’s brands to its arsenal gives Keurig an additional option. In 2013, Dr. Pepper partnered with Keurig Green Mountain to sell Snapple premium iced teas in K-Cups and Vue packs compatible with Keurig single cup brewing systems. The extended partnership between the two companies will now provide an additional consumption platform for select Dr Pepper brands and could possibly raise sales. The domestic CSD market is mature, with Coca-Cola, PepsiCo, and Dr Pepper accounting for almost 90% of the industry-wide volumes. Two of these brands have joined hands with Keurig, giving them an edge during the initial phase after Keurig Cold’s launch. According to our estimates, Dr Pepper’s market share has risen in each of the last four years, reaching 17.5% last year. More beverage options might translate to more consumers opting for the cold beverage machine.
Moroever, with Bevyz under its product line, Keurig might dominate the segment. The Bevyz Fresh machine has a completely different technology, as it is compatible with both hot and cold beverages such as carbonated soft drinks (CSD), frappes, juices, teas, energy drinks, and coffee. An all-in-one machine replaces the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization. Looking at the company’s strategy of adding partners to its list of licensed brands, we can expect Keurig to join together with more beverage companies in the coming months.
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