Keurig Green Mountain (GMCR, Financial), a leader in specialty coffee, coffee makers, teas and other beverages, recently released its financial report for the third quarter. The results were good but not very impressive. As a result, the company‘s shares dropped after it posted a disappointing guidance. However, the company saw an improvement in the revenue as well as in the earnings, but failed to meet analysts’ expectations. Keurig is looking for growth opportunities, and it is also undertaking various initiatives to achieve success. With the future looking bright and many acquisition plans and new products in the pipeline, Keurig is expecting to post better results in the future.
Improving prospects
Keurig is seeing good growth in the midst of growing competition and a challenging environment. The company is pleased its growth rate over the prior period, and it expects to sustain this momentum in the future as well. There are a couple of strategic moves that Keurig is counting on to improve its profitability in the future. Keurig has entered into many agreements with a couple of unlicensed brands, and it is expecting to add others in the upcoming fourth quarter. Keurig is expecting that its shipments will increase right from the first quarter of the new fiscal year after the new addition.
To strengthen its position in the market, Keurig has already announced partnerships with Nestlé’s Coffee-mate, Harris Teeter Supermarkets (HTSI, Financial) and Peet's Coffee & Tea. Keurig’s motive behind this initiative is to have an exposure to the faster-growing portions of beverage across the segment. However, Keurig already has K-Cup license deals with Starbucks, Dunkin' Brands, and others, which will help it tap the market in the future. Management, on the other hand, is expecting more Keurig deals in the future. Moreover, an important thing to note is that Keurig’s K-Cup patent has expired in 2012, so there is a challenging situation in front of Keurig as it has to compete with unlicensed portion-pack makers.
Expanding its offerings
Keurig plans to expand its offerings with the launch of a new Keurig machine that brews carafes of coffee in addition to single serve cups. The company is seeing growth potential from markets in the U.S. and Canada as it has been seeing a solid year-over-year brewer shipment growth of the portion packs. Seeing this growth, Keurig is excited about the launch of its new Keurig 2.0 hot platform. In addition, Coca-Cola, which has already bought about 16% of Keurig, is developing a cold beverage brewer which is expected to be launched in fiscal 2015.
For fiscal 2015, Keurig is anticipating higher input costs for coffee in the first three quarters as compared to the prior year. So, Keurig has secured the coffee prices for 75 cents. The company was forced to take such a step due to the volatile coffee prices due to a drought in Brazil, a major grower of coffee. This is expected to affect the whole industry, also causing Arabica coffee future prices to double within three months. This will favor the competition in pricing among different players in the market. For example, Starbucks (SBUX, Financial) locked its prices for 60% of its fiscal 2015 needs. Starbucks is anticipating that coffee prices will remain more or less close to the prices in 2014.
Final words
Over the holiday season, the company is focusing on shipping both Keurig 2.0 and Keurig 1.0 platforms, but the main focus of Keurig would be on the shipment of Keurig 2.0. With this move, the company expects growth in the traction as it will lead customers to purchase a brewer that brews larger volumes with Keurig's simplicity. Further, Keurig is investing in R&D as it is seeing strong attraction from newer brands, which will enhance incremental growth opportunities for Keurig in the future.
Hence, Keurig is making good moves that will help it get better in the future. So, investors should ignore the company's recent weakness and look at its long-term prospects.
