Keurig Green Mountain: Peaks of Profits

Keurig & Kcup

Image courtesy of Keurig Green Mountain Coffee

Keurig Green Mountain: Peaks of Profits
| published July 3, 2014 |

By Thursday Review staff

Regular followers of Thursday Review business news probably grow tired of reading about it, but once again we’d like to point out that Polar Vortex had a wide reach into the economy. This may be cold news to folks suffering under a record heat wave in some states, or those wallowing knee-deep in the waters of the Midwest. But winter’s sub-freezing effects were powerful—stunting retail activity, inhibiting home sales and construction, bringing transportation to a halt, and slamming the brakes on car sales.

But the cold weather had its benefits to a select few. Amazon, for one, scored its best holiday and its best first quarter in years. In fact, most online businesses thrived as people stayed indoors and remained parked in front of computers or smartphones. Strangely, doughnut sales spiked, as both Krispy Kreme and Dunkin Donuts saw profits increase during those months of bitter cold, ice and snow. And the doughnut-makers also sold record volumes of coffee, which brings us to the subject of hot brew.

Despite a general rise in coffee prices—both in stores and in coffee shops—Americans are guzzling coffee at a higher rate this year than last. Coffee prices will likely continue to climb somewhat this year, an increase which is the direct result of a severe drought in Brazil (the world’s biggest producer of coffee) and pests and diseases affecting coffee beans and coffee plants in Central America, where most arabica styled coffee is produced. But that hasn’t inhibited sales of popular mainstream brands like Folgers, Nescafe and Maxwell House. Nor has the price increase affected sales of the specialized store brands like Dunkin Donut Coffee, Millstone or Peet’s.

And the high-end coffee drinkers still flock to their local Starbucks café—or buy their preferred gourmet brand at the grocery store—despite Starbucks’ recent, grudging across-the-board price increase (earlier this year Starbucks had said it would not raise prices; economic forces related to coffee shortages forced it to reconsider). And other gourmet brands are doing well also, including Gevalia and Seattle’s Best.

Green Mountain, one of the nation’s most popular non-traditional brands, is also selling well. So well, it seems, that its stock has risen this year—up 65 percent since the beginning of January. This pleases Coca-Cola, Keurig Green Mountain’s parent company. Early this year Coca-Cola paid a sweet $1.25 billion for the popular coffee-maker, making it one of Coca-Cola’s biggest purchases. That 65% increase in value means that Coke’s return was a mountainous gain—Green Mountain is now worth in excess of $2 billion. That’s a fast, high-end return for gourmet cups of hot coffee.

But Coca-Cola needed that injection of positive news. After rising almost without impediment for decades, sales of soda and carbonated drinks have begun to slump in the last couple of years. Coca-Cola was looking for an avenue to bring back some vertical growth. Plus, like any company part of an Old School environment, Coke has suffered from the encroachment of new technologies. Soda Stream and other companies now offer a way for consumers to make their own carbonated beverages at home, often at a price much cheaper than canned or bottled soda bought at the store. And advocates of Soda Stream say that the homemade stuff not only tastes better, but is safer and healthier than the brands distributed by the big boys like Pepsi and Coke. Why? Because makers of soda at home can control the amount of sugar being added.

Keurig’s specialty is its single cup brewing system, called K-cup, which enables a person to make a single cup of their favorite flavor of coffee or tea by using a small cup-like packet. Keurig already offers packets for chilled drinks as well, including Snapple products like peach tea and lemon iced tea.

So the venerable American brand Coca-Cola is on the lookout for tools and ideas to diversify, and coffee may have been its next logical step. Not only will Coca-Cola find profits in all those coffee drinkers, Coke also plans to help Keurig develop and market a new technology for making carbonated sodas at home (take that, Soda Stream!). Coca-Cola will even share those long-guarded recipes with its customers so that anyone can brew up their own Sprite, Mellow Yellow, Pibb Xtra or Coke in the kitchen using gadgets similar to Keurig’s own coffee-making machines.  Coca-Cola hopes to reclaim some of the ground lost tp Soda Stream and its imitators.

So, as long as Americans—and their friends to the north in Canada—keep drinking all that hot joe, companies like Coca-Cola will continue to take notice. Does that mean Coke is rooting for another cold winter last this last one?

Besides familiar soda names like Sprite and Diet-Coke, Coca-Cola, based in Atlanta, Georgia, also owns hundreds of other well-known brands, including Dasani, Dannon, Fanta, Fuze, Gold Peak, Mello Yellow, Schweppes, Powerade, Minute Maid, Hi-C and Fresca. Keurig Green Mountain, which was founded in 1981, is based in Waterbury, Vermont.

Related Thursday Review articles:

How Much Will You Pay For Coffee?; R. Alan Clanton; Thursday Review; March 14, 2014.

Some Sweet Financial News; Thursday Review; March 13, 2014.