coca cola

I attended the Green Mountain Coffee Roasters (GMCR) Annual Meeting of stockholders today held at the Sheraton Hotel in South Burlington, Vermont. Green Mountain Coffee Roasters is one of the very few of my investments where I can actually participate in an annual meeting.

First, company business was conducted which included the name change to Keurig Green Mountain Inc. I do not agree that this was the best option. I would have preferred just Keurig which happens to own a coffee business called Green Mountain Coffee or Green Mountain Keurig if they must maintain both names which seems to flow better to me than Keurig Green Mountain, but it’s not a big deal. They are keeping the stock ticker as GMCR.

There was generally quite positive news from the company. A couple major new developments include the new Keurig 2.0 and Keurig Cold systems as well as news on the deal with Coca Cola, discussion on their competitiveness, concerns for the company and some financial highlights…

Keurig 2.0 Highlights

• Keurig 2.0 will be a major replacement for all current systems and will be able to brew all current 50+ Keurig brands.
• Keurig 2.0 has the ability to brew single cups AND full carafes (4-5 cups or 20-32 ounces) at a time, in about 2 minutes I believe. This is something that the current Keurig machines has been lacking and has been a common complaint of those avoiding getting the system.
• It’s estimated that 80% of US households don’t use a Keurig system and 60% said it’s because it won’t brew a pot of coffee. 75% of current users still maintain a separate common coffee maker for when company comes over. This new system is said to resolve this issue as it will be able to handle different size pods and it uses special software to determine the size and brand of what is being brewed to make sure that each cup/pot is perfectly brewed.
• The problem is that if you are using a private brand/unlicensed pod that it won’t work with the new machines which could possible upset some users that are currently able to use them with current machines.
• The new machines are expected to be out in fall 2014 and will replace the current line of machines in most retail stores, so there could be some really good revenue potential there.

Keurig Cold Highlights

• Keurig Cold is a technological breakthrough for the company.
• Unlike SodaStream’s machines the Keurig Cold will not use CO2 cartridges for carbonation which is said to be a great improvement.
• Keurig Cold will also will make drinks to the exact specifications brands want unlike SodaStream machines which allow users to tweak the formula. Brands like Coke desire this, but it seems like a missed opportunity that some consumers would desire. Some might prefer the idea to at least be able to make their Coke stronger or weaker. I would like to see at least the option to deviate from the formula.
• Keurig Cold will be able to make most cold drinks from soda to sports drinks.
• Partnership with Coca Cola will allow the system to be able to make Coca Cola’s vast portfolio of drink brands in the new machine.
• Keurig Cold is expected to launch in 2015

Coca Cola Partnership

• 10 year strategic global partnership
• Both companies will collaborate on the introduction of Coca Cola brands into Keurig Cold system and they will work together to introduce the system to consumers.
• Coca Cola purchased a 10% stake in the company with the ability to buy more at reduced share price. (I believe a 16% additional share of the company).

Network Effect

GMCR has a great network effect in that the more Keurig machines that are in homes and offices, the more brands that want to have their product in the machines. This then causes more people to want the machines in their homes/offices. Demand continues to build.

Competitive Edge 

GMCR has a competitive edge that is unique in that they make both the machine and products used in the machine. The example cited was a laundry machine may be made by GE but the laundry detergent may be made by Proctor and Gamble, so the innovations may not be in sync whereas they are with GMCR.

Some Stats Cited

• Sales growth – 55% over 5 years.
• Operating Margin Growth – 10% to 19% in over 5 years.
• Revenue Growth – 12%
• ROIC – 19%
• Dividend – 1%
• GMCR represents 30% of US coffee business
• Repeat Rates – 60% (meaning once a customer buys coffee they are 60% likely to buy again… most beverages are around 20%).

Some Concerns/ Threats

• Ongoing SEC investigation – Nothing much new and is most likely without merit, not really an issue.
• The recyclability of the pods. A few people brought this up a concern that has been ongoing for a long time now. Still working on a way to make them recyclable. However, it’s been said that you can simply take the top off and recycle most of the cup. The problem is the peel top.
• International expansion – Hard with coffee as it’s brewed differently in other countries. However, this should be much easier with the Cold system. May use that to enter markets and then follow up with the warm-based systems. Introducing the Cold system internationally should be easier with the Coca Cola partnership.
• Treehouse Foods lawsuit – They are suing GMCR over locking their generic/unlicensed pods our of the new Keurig 2 machine. The company feels the lawsuit is without merit and will defend the company.
• Concern of copycat devices/cups? – The company believes in competition, as well as innovation. They have every right to continue, and we have right to innovate.
• Coffee prices have been on the rise… will this mean that GMCR will need to increase it’s prices or will it’s margins take a hit? The company will try to keep prices affordable for consumers.

Presentation Slides Below