Dull Keurig 2.0 Launch & Brewer Recalls Hamper Keurig’s Revenue Growth In Q1

by Trefis Team
51.24
Trefis
GMCR
Green Mountain Coffee Roasters
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The Vermont based K-Cups maker, Keurig Green Mountain (NASDAQ:GMCR), reported its first quarter earnings report on February 4. The company delivered non-GAAP EPS of $0.88 in Q1, which is in-line with the guidance. However, the company’s revenue figures came in below  expectations, due to a weak holiday period for brewers and other accessories in terms of sales. Keurig reported net Q1 revenue of $1.38 billion, which is in-line with the net revenues last year. 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 mentioned that it 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.

In the first quarter, portion pack net sales rose 9% y-o-y to $1.012 billion, whereas the brewer and accessory sales declined 18% y-o-y to $307 million. The increase in portion pack sales was primarily due to the 13% y-o-y increase in volume sales of portion packs. For the quarter, the company sold nearly 4.5 million brewers, down 12% (600,000 brewers)  y-o-y. [1]

We have a $108 price estimate for Keurig Green Mountain, which is roughly 9% below the current market price.

See our full analysis of GMCR here

Keurig 2.0 Off To A Dull Start

Keurig released its new brewer: Keurig 2.0 in the fourth quarter of fiscal 2014, and was anticipating a great response from its customers in the initial phases. According to the data reported by the company, Keurig 1.0 and Keurig 2.0 U.S. reservoir shipments  grew nearly 6% y-o-y, which was lower than the company’s expectations. Keurig 2.0’s launch was fairly unimpressive because of the two major reasons — firstly, the delay in putting the new packs on the retail shelves, and secondly, consumer perception about Keurig 2.0. Most of the customers were unclear whether the new version of Keurig brewer would brew all their favorite brands. This confusion led to lower brewer sales in the key holiday period. Keurig witnessed a 2% revenue growth in the U.S., whereas its Canadian business declined 12%, due to weaker brewer sales coming as a result of slower adoption of the Keurig 2.0.

However, the company mentioned that most of the consumers who have bought the new brewer version are satisfied with their purchase, with a small percentage of them unhappy with the non-compatibility of portion packs. Keurig has already started taking steps to solve the issues of compatibility and to boost the brewer sales. In April, the company will start the shipment of the new K200 brewer, which is a slimmer version of Keurig 2.0 in both the design and the footprint, and also is slightly lower priced.

Keurig Cold: The Highlight Of 2015

Keurig’s most important objective of 2015 is the successful launch of Keurig Cold in North America. 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. [2]

Keurig recently added Dr Pepper Snapple (NYSE:DPS) as another beverage partner, as 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 (NYSE:KO, 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.

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. [3] 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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Notes:
  1. Keurig Green Mountain earnings call transcript []
  2. U.S LRB Market, www.beveragemarketing.com []
  3. Keurig Green Mountain to acquire Bevyz Global Ltd. []
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