Green Mountain Coffee's (GMCR) Partners Are Stealing from the K-Cup Trough

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Green Mountain Coffee Roasters (Nasdaq: GMCR) is a stock that has defied gravity due to the strength of its Keurig single-cup coffee brewing systems and unique razor-razor blade model that has users of the system buying new K-Cups week after week. However, one analyst thinks the popularity of its partners' K-Cups could be the stocks downfall.

In a note to clients today, Stifel Nicolaus analyst Mark S. Astrachan warned investors that FDM scanner data and recent results from J. M. Smucker (NYSE: SJM) suggests Green Mountain's wholly-owned brands are losing share of system-wide K-Cups to partner brands.

The analyst noted that this happened following the September 2010 launch of Folgers and Millstone K-Cups. The problem could accelerate with the rollout of Dunkin' Donuts (Nasdaq: DNKN) and Starbucks (Nasdaq: SBUX) K-Cups in Summer 2011 and Fall 2011.

Astrachan notes that the share losses are important as they believe Green Mountain's K-Cup operating profit is lower for partner brands. Hence the more partner brand K-Cups that are bought, the lower margins go.

The firm estimates that Green Mountain's K-Cup market share, by volume, was 84% in June 2011, down from 100% in September 2010. Smucker's share increased from 0% to 16% during the same time period.

Additionally, the analyst believeS the deceleration in Keurig brewer and K-Cup shipments in F1H11 suggest the Smucker's rollout and the pending rollout of Starbucks and Dunkin' have not yet accelerated system adoption.

The firm is maintaining their Sell rating on Green Mountain shares.

For more ratings news on Green Mountain Coffee Roasters click here and for the rating history of Green Mountain Coffee Roasters click here.

Shares of Green Mountain Coffee Roasters are down 4.3 percent today.

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Comments

GMCR growth of house brands .vs licenced products

Redbeard on Jul 17, 2011 12:37 PM
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Using the articles note that GMCR was at 100% market share seems to overlook two basic elements. First, over the past two years or so GMCR went around and bought up their original K-cup licenses such as Deidrich Coffee and several others. Since that time they entered into new agreements with Dunkin Donuts and Starbucks. I was in Maine eRlier this month where the Dunkin K-cup roll-out is being test marketed. There were four type of Dunkin coffee available one of which was a decalf. I bought the Dunkin Dark, which was quite good. It appears that Dunkin K-cups will be sd at Dunkin shops only at least for the beginning of the process. As Smuckers owns the Dunkin rights for the grocery and non-coffee shop retail, the deal with Dunkin may only be through their own coffee shops. It isnot clear whether GMCR's website will be a seller once the nationwide rollout is complete. The Dunkin rollalty presumably is the same as the previously published figures of 6 cents per cup. I dobelieve that GMCR will be producing the Dunkin K-cups so most likely there is additional profit involved.

The Starbusks example is materially differ t in that Starbucks themselves will be the manufacturer under licenses so the royalty will most likely be limited to the 6 cents. Like Dunkin the K-cup will be sold at the Starbucks chains. Now that Starbucks has removed Kraft as their retail provider there would be no reSon not to sell them at the grocery something Dunkin can't do as they sold the Grocery rights to the Dunkin name to Smuckers.

The second issue is the market share question. Obviously if you have a 100% marketshare having other companies seeing K-cups with inevitably lesson the GMCR brands market share. This both unavoidable and desire le as it is hopefully selling to a new market Starbucks and Dunkin Customers. The true metric to wTchout for is not the percentage of GMCR's marketshare as much as it would be the growth rate ( or decline) of GMCR's house brands on a quarter over quarter basis.

In short, there is a simplistic understand of growth based on marketshare as growth has been near 70% Year over Year in GMCR brands. If the Dunkin and Starbucks deals are successful by definition marketshare will decline some, but the true measure is whether their housebrands have reduced growth rate with all the additional choices available. I do expect some softening of GMCR's house brand growth rates as prior aquisitions have turned the prevously licensed sales into "house sales".

I will appogize her for any obvious spelling errors as tapping this put on my cell phone it is not allowing me to scroll back to edit my.text.

From my prior researc

Green Mountain K Cups

Ben on Jul 13, 2011 12:19 PM
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Yes, Green Mountian has a patent on the K-cup and owns the technology of the K-cup. GM makes profit from other companies selling their coffees and teas in the K-cups. Getting other brands into K-cups grows the GM sales an profits.

K-cups

Andrew Hutsell on Jul 13, 2011 12:53 AM
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I am slightly confused. Does GMCR have patents on the K-cups? I would assume that they do and all other companies making K-cups would have to pay some portion of profits to GMCR. If this is not the case, then the sell rating is warranted and GMCR will take a huge hit in the profit column

Green Mountain K Cups

Greg on Jul 12, 2011 11:51 PM
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I do not agree with the logic of this argue that Green Mountain's partners are stealing from the K-Cup trough and that this will negatively impact the stock. It is important to remember that Green Mountain Coffee Roasters (GMCR) is manufacturing the K-Cups and packing the "partners" coffee cups. In other words, GMCR is benefiting from the pakcing and selling of brands like Starbucks and Dunkin Donuts coffee in their K-cups. This means that although the market share percentage for Green Mountain K-cups coffee is declining, the overall sales of K-cups is significantly growing by having other brands available in K-cups. The overall volume and sales are increasing by offering and selling well known coffee brands in K-cups.