I attended the Keurig Green Mountain (GMCR) 2015 Annual Meeting of Stockholders on January 29, 2015. It was held at The Essex Resort & Spa in Essex, Vermont.
Green Mountain Coffee Roasters is one of the very few of my investments where I can actually participate in an annual meeting.
Below are some notes taken from the shareholder presentation…
Keurig Green Mountain’s Vision
Keurig Green Mountain’s vision is to become the world’s leading personal beverage system company (instead of coffee company).
- We partner for mutual success – Our boundaryless approach to collaboration creates benefits for all. Partnering is very important to the company. Partnering with competitors as well as suppliers. It’s important to the company to be inclusive of all the brands that customers want to use. “Not many companies welcome competitors and partner with them. Our business is to win across all aspects of business”
- We innovate with passion – With courage and curiosity, we are shaping the future by redefining the customer experience.
- We play to win – Our team sets ambitious goals and meets each challenge with unified purpose and character.
- We brew a better world – We use the power of business to make the world a better place.
- 5 Principles of Keurig 2
- Ultra convenient
- Intuitive simplicity
- Less waste
- Freshest taste every time
- Vast brand selection
- Currently have 400 variety and 60 brands. Will be up to 500 varieties and 70 brands in 2 months.
- 20 new brand relationships in last year.
- Most coffee brands now included.
- Keurig Green Mountain benefits from network effect. Started with selling households on Green Mountain Coffee. Then, sold them on the Keurig system which then allows them to introduce other brands into those households. Those new brands also add more households to using the Keurig system, which expands usage of other brands.
- Still only in 16% of households, which means there is more growth potential.
- Designing system is key – the whole process from bean to cup designed in house. Innovation to solve problems in plain sight. With Keurig, consumer didn’t realize there was a problem, but when they see the Keurig system they run to it.
- 2 years ago it wasn’t normal for consumer to buy coffee at Macy’s
- The biggest problems the customer saw before Keurig 2.0 was the user couldn’t brew more than 1 cup. Keurig 2.0 solved the problem by allowing more sizes.
- Beverage delivered cold
- Carbonation with no CO2 canister
- Perfect dosing & one touch simplicity
- Vast brand selection
- Keurig Cold attempts to solve problems in plain site that the customer may not realize are there such as temperature, choice, in home storage, freshness, shoppability, and formula influence.
- Keurig Cold will launch this fall 2015
- Vast brand selection, including Cola Cola and Dr Pepper Snapple brands.
2020 Sustainability Targets
- Goal is to have a 100% recyclable kcup by 2020. Starting and pursuing well before that
- Each part of kcup is recyclable, but not recyclable in entirety. A kcup has 4 parts that are each recyclable, but no process to split up. (aluminum lid, plastic cup, paper filter and compostable grounds.)
- Kcups that are about to launch are also recyclable, working with large firms across country to ensure recyclability.
- Water stewardship – hosted a world water summit in Stowe, and will hold a 2nd one also in Stowe.
Objectives Going Forward
- Execute current hot system strategy in North America
- Launch new brewer technologies
- Enter new beverage and adjacent categories
- Offer new brands
- Enter geographies – 2015 plans to expand in Korea
- What percent of jobs in Vermont? What can Vermont do to promote more jobs in Vermont.
30% in Vermont, 1 facility in Tennessee, 1 in Seattle and 3 here in Vermont. Most manufacturing is in Vermont. First Keurig Cold product facility is in Williston Vermont. Keep being a great place to work.
- Martin Post (shareholder for many yrs.) RFID tech with manufacturer?
If partnership works with both parties, currently working with Conair, Cuisinart and Jarden.
- What about a portable system to bring to beach or on the road in a backpack?
Power is the problem, but love the idea of carrying in a backpack
- Has zero sort recycling in Killington, but kcup doesn’t have symbol on bottom?
To avoid confusion from customers who may think all of kcup is recycleable, it is 1-7 recycleable compatible.
- International expansion?
Selective and focused handful of countries over next few years where it will be loved, such as instant markets, small kitchen = smaller system, ie Korea and Japan. Identified 30 countries to expand slowly but surely for hot system. Internationally, Keurig Cold could do well as beverages are standardized around the world, so it may globalize at faster pace. Hot beverages are more difficult as they are not standardized around the globe.
- Daniel Cox – Bean procurement moved to Switzerland?
Switzerland is the hub of where global procurement happens.
- How come non-licensed 3rd parties can produce pods that work with Keurig 2.0?
It wasn’t the intent to lock others out. We don’t focus on what others are doing. It was to deliver the benefits it stated it would – the best coffee for each brand, every time.
- Brian McKay NH – GE partnership in a fridge for Keurig Cold beverages?
Yes, Keurig in fridge door and love it. Access to both cold and hot, on high end of the fridge line.
- Tom Brewhan of NH A more convenient way to deliver 5 gal water to machines? Partnering with water companies?
Yes good idea, especially with water delivery for offices.
- Partner with Jim Beam?
🙂 you will be the 1st to know!
- Editing sweetness?
Not as first, but maybe over long term. We want consumer to have options. We think beverages are going towards custom crafted drinks. It wont be just the large brands, there will be healthy versions with cane sugar, organic, etc
- Matrin Perry – Downfalls of system, if power is gone the system’s clock resets?
Perhaps a backup battery – liked the idea!
FALLING KNIFE DEFINITION: A slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless. A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment. Source: Investopedia
I do like the falling knives! I usually find the best opportunities in the companies who’s stocks fall hard, some deserve it, but sometimes is unwarranted panic selling. I got many of my current holdings this way. I bought the bulk of my Merchant’s during the last economic crash when all banks were being sold no matter how safe/dull their business practice was. Cisco (CSCO), Keurig Green Mountain (GMCR), GE (GE) Google (GOOG), eBay (EBAY), Apple (AAPL)… I bought my stakes in all of these when people were overly pessimistic on them.
Why Catch Falling Knives?
Often, you will have companies have some bad news, maybe an earning or sales miss, an unexpected one time expense… temporary problems even though the company’s business is sound, the stock will drop hard. This makes for a great opportunity.
Some of the ones I’m looking to buy now are Staples (SPLS), Merchant’s Bank (MBVT), 3D Systems (DDD), Stratasys (SSYS), Amazon (AMZN), AT&T (T), Verizon (VZ), Sierra Wireless (SWIR) – either for the fact that they have fallen a bit, but still have sound fundamentals based on the current price or have decent dividends which help keep a floor on further downward pressure with great potential for upside.
But generally right now I’m putting together a nice list of potential ideas while keeping a wait and see attitude, waiting for the right time to strike.
MBVT is one that I’ve consistently held a core position while trading around it. I like it at $28.50 or less usually. At the last stockholder’s meeting (which I still need to post my write up on) they mentioned they are in the process of completely upgrading their computer system which will increase efficiency, customer service and lower overall cost. However, the whole cost of this upgrade is expensed this year so it could scare people (which it looks like is already happening) that just look at the numbers… could create a nice opportunity there.
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).
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.
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
Due to recent heavy drop in the share price Green Mountain Coffee Roasters Inc. (GMCR) we decided to reinitiate a position at the price of $25.67, which we believe to be quite fair.
Last year we bought and sold our position within a relative short time frame as the share price was quite volatile and fluctuated between our buy price and sell price range very quickly. We have kept our eye on the stock price looking for a good entry point once again.
Our feelings on the company have not really changed since last year. We think the business is relatively stable even though the share price may not be.
The biggest issues have been the expiring patents and the accounting irregularities which seem to be quite overblown. It seems that when there is bad news people are very quick to sell without regard to how much the news really impacts the business and likewise with the good news.
We will watch the price and there is a significant increase will most likely sell once again as it doesn’t usually take long for this stock to become overvalued.