Green Mountain's new price estimate: $62
The company's growth strategy involves driving Keurig single-cup brewer adoption in North America.
Under the Keurig brand name, it offers a variety of commercial and home-use brewers for the Away From Home (AFH) channel and for the At Home (AH) channel. It sells more than 200 varieties of K-Cup portion packs, including brands of coffee, tea, hot apple cider, iced teas, hot cocoa and other dairy beverages.
K-Cup portion packs and Keurig single-cup brewers and related accessories contribute a significant proportion to GMCR's revenues, approximately 84% share in 2011. In coffee makers, GMCR competes with Robert Bosch, Nestle, Mars, Bunn-O-Matic and Phillips Electronics, among others. In specialty coffee, it competes with Dunkin' Brands (DNKN), Starbucks (SBUX) and Peet's Coffee & Tea.
We recently launched our analysis of Green Mountain Coffee Roasters stock with a $62 Trefis price estimate, which is around 35% ahead of the market price.
GMCR's growth strategy
GMCR's growth strategy involves driving Keurig single-cup brewer adoption in North America to generate ongoing demand for K-Cup portion packs. It sells its AH brewers at prices that are approximately at cost, or sometimes at a loss when factoring in the incremental costs, in order to drive the sales of profitable K-Cup portion packs. Overtime, GMCR expects brewers to contribute a smaller percentage of total revenues relative to K-Cup portion packs. This is expected to positively affect operating margins.
Growth opportunities within single serve segment
Single-serve coffee formats, a category that was small approximately five years ago, now accounts for 7.5% of U.S. retail coffee sales, according to Packaged Facts. The single-serve market has been a major growth driver of the overall coffee industry in the U.S. According to Starbucks, single-serve coffee sales in the U.S. totaled approximately $2 billion last year. The National Coffee Association of USA said in a recent study that penetration is growing in the single serve arena at an average of 1% per year.
Coffee market poised for growth
Approximately 40% of 18-24 year olds drink coffee daily, up from 31% in 2010, according to the same study. In the U.S., coffee is the second largest beverage segment following soft drinks. This is driving demand for specialty coffee beverages and the growth in single-serve coffee packet formats has been phenomenal.
Highly fluctuating coffee prices
Coffee prices are dependent on various factors including weather, economic and political issues in coffee-producing nations. For the past year, coffee prices have exhibited tremendous volatility. Increasing coffee prices could have an adverse impact on GMCR's margins since this is a large portion of the input costs.
We believe in the coming years, due to inflationary pressures and volatile prices of Arabica coffee, GMCR might have to resort to increasing prices of K-Cup Portion Packs.
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