by Marc Bastow | November 21, 2012 8:30 am
We’ve certainly come a long way from the discovery that coffee beans and hot water make for a delightful treat. Indeed, the coffee war heating up among Green Mountain Coffee Roasters (NASDAQ:GMCR), Starbucks (NASDAQ:SBUX) and Nestle (PINK:NSRGY) isn’t about just coffee anymore.
For Starbucks, it’s about the coffee experience within its stores. For Nestle, it’s about candy and chocolate and Europe. But for Green Mountain, it’s as much about technology as it is coffee, and GMCR is getting really good at coffee tech.
Green Mountain was founded in 1981 to sell coffee. But it really took off when it bought into Keurig, which designed, produced and marketed a fairly unique product: a single-serve coffeemaker, using a portion-controlled product — the K Cup — designed specifically for Keurig machines.
Great idea, great technology. Keurig grew over 250% from 1993 to 1998, and when GMCR was granted a license to put its own coffee into K-Cups for the machines in 1998, business exploded. Indeed, GMCR revenues went from just over $55 million in 1998 to over $100 million in 2002.
In 2006, GMCR decided that the Keurig model was important enough to own, so it paid $104 million for the company (and its technology). Sales growth has continued virtually unabated since that point, now exceeding $1 billion per year.
However, a slew of problems, including some shaky accounting, a devastating attack by short-seller David Einhorn and a recent cutback in forward revenue and earnings estimates have taken down the stock price, which once soared over $110 per share, to around $30 per share today.
Still, GMCR has hiked revenues. Why? Beyond the popularity of coffee, it was Keurig’s evolving technology that fueled the growth. GMCR was never about 15,000 coffee shops around the world. It’s about making a cup of coffee anytime you want in your home or office. Now, more than 90% of GMCR revenue comes from the Keurig ecosystem.
And that’s also part of GMCR’s problem. By the time the Keurig patent expired earlier this year both Starbucks and Nestle had come to market with more updated versions of the concept with their Verismo and Nespresso machines, respectively. Both are aimed at more than just a simple cup of coffee. They target more refined tastes and offer more choices, including lattes, espresso and cappuccino.
Enter technology once again for Green Mountain, which launched its new Vue system in February 2012. It’s essentially an upgraded Keurig system, but with the ability to customize the temperature, size and strength of the coffee. The Vue is clearly aimed at a more affluent market, evidenced by its $249 price tag and more costly (by about 11%) individual cups, rather than traditional K-Cups.
Keurig’s recent announcement of the new Rivo system is another step on the technology ladder. It features an espresso machine that steams fresh milk to make those lattes and cappuccinos, while rival products from Starbucks (Verismo) and Kraft (NASDAQ:KRFT) (Tassimo) use powdered or concentrated milk pods. The Rivo effort took two years to complete and included working with private Italian coffee maker Luigi Lavazza.
Like the Vue, the Rivo system aims at a more upscale audience, one willing to shell out $230 to enjoy Lavazza coffee and espresso blends. Like the Vue machine, Rivo doesn’t use Keurig’s traditional K-Cup.
What’s next for GMCR? I’m not sure, but you can bet technology will be leading the way. After all, GMCR isn’t opening up any stores or selling chocolate in Europe. It’ll continue seeking new customers willing to pay a few extra dollars for a better coffee, tea, espresso or latte.
Of course, if all it can hope for is a better brew from a better system, GMCR’s technology better keep up with consumer needs, a fickle target if there ever was one. In the end, GMCR’s future might just be about technology more than beans, and in my mind that’s still a bit of a risky proposition.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2012/11/the-next-great-tech-stock-is-green-mountain-coffee-sbux-gmrc-nsrgf-krft/
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