Green Mountain Coffee And Keurig Brewers Perfect For Today's Economy

Vermont Coffee Company's Keurig Machine Heats Up The Single-serve Market

Originally Submitted By Katy Marquardt
November 7, 2008

Although its headquarters today include a vast, 90,000-square-foot roasting and distribution facility, the feel is somehow homey. Employees, typically with coffee in hand, seem relaxed and engrossed in their work (perhaps the on-site meditation room has something to do with it). "It's a very strong culture, but now with the dominance of Keurig Brewers, there appears to be a constant push and pull," Cox says. "It's a little bit of an identity issue: 'Who are we? Are we a coffee company, are we a beverage company, or are we going to be a consumer product company?' "

Growth. Unquestionably, Keurig, in which Green Mountain Coffee first invested in 1996 when it was a start-up and which it acquired 10 years later, has been the engine behind the company's rapid growth over the past two years. But Green Mountain's aggressive strategy of pushing its coffee through multiple channels—grocers, convenience stores, gourmet markets, restaurants, and direct mail—got the ball rolling. Since 1993, the company's annual sales have nearly tripled, from $117 million to $342 million last year. Although Green Mountain is best known in the Northeast—and "most would argue that it's still an East Coast brand," according to Piper Jaffray analyst Nicole Miller Reagan—its pending acquisition of West Coast coffee wholesaler Tully's and a new manufacturing facility in Knoxville, Tenn., are helping it establish a nationwide presence.

The Keurig machine handily fits the razor-razor blade model, since most of its K-Cup cartridges are filled with Green Mountain coffee and sold separately. Perhaps not coincidentally, the company recently tapped Michelle Stacy, a former senior executive at Procter & Gamble and Gillette, to take over as president of the Keurig unit. "That recurring revenue stream produces exactly the kind of high-multiple revenues and long-term growth rate we look for," says Jack Robinson, comanager of the Winslow Green Growth fund, a longtime investor in the company. Green Mountain's sales have been growing at an average of 20 percent annually over the past five years, and the company is projecting another 44 to 46 percent jump in its fiscal 2008 year, along with an earnings increase of 52 to 56 percent (full-year earnings are to be posted November 12).

Challenges. Like most stocks, Green Mountain's has taken a big hit over the past year, dropping from $40 to as low as $25. But the stock is in much better shape than that of Starbucks and its rival Peet's Coffee & Tea. Then again, Green Mountain plays in a slightly different ballpark. "They're not burdened with the financial aspects of having a lot of real estate or operating in a saturated market," Robinson says. "Not to mention the fact that it costs a minimum of $1.60 for a small cup at Starbucks, while a K-Cup costs a third of that."

On the home-brewing front, Green Mountain's goal is to claim a chunk of the 20 million coffee brewers sold each year and tackle the lofty feat of converting half of the 90 million American homes with coffee brewers to the Keurig. Blanford, who became CEO in 2007, also hopes to replace traditional coffee pots in offices and tackle upscale hotels. So far, of the 12 percent of single-cup brewers in offices today, Keurig accounts for half, according to the company.

Even in this weak retail environment, the machine's cost hasn't hurt Keurig sales so far. But whether consumers will continue to fork over between $80 for a mini version and $300 for the sleekest brewer remains to be seen. Over the past year, commercial sales have doubled and home sales are up more than 50 percent. Thanks to those brisk increases, Blanford says Green Mountain is in a much stronger position today than in the last economic downturn. "At this stage in our growth, we're not fundamentally concerned," he says. "Certainly, we're watching, but the reality is that even in tough economies, people need their coffee, and it's going to be one of the last things that they compromise on."