Stepping outside the comfort zone is an often required behavior to the path of professional development. Yet businesses too often leap beyond the range of their brand identity. And Keurig Green Mountain (GMCR) is making the same old mistakes.
For every Apple (AAPL) — which reinstated fire-breathing Steve Jobs to a resounding success — there is a Volkswagen (VLKAY). Cumbersome name aside, few people accepted the notion of a $60,000 Volkswagen-branded Phaeton, a car that was more expensive than some of the offerings from the high-end Audi fleet.
It would appear, then, that Keurig’s management team isn’t big on history.
With the introduction of the Keurig Kold — what the New York Times referred to somewhat dismissively as a “home soda fountain” — GMCR hopes to bank on a much broader market.
The 800-pound neon-pink gorilla in the room, however, is the price tag. Retailing in a range between $299 and $369, the Keurig Kold is the most expensive product sold by GMCR — a sort of Phaeton for coffee lovers.
Except the problem is that the Keurig Kold has nothing to do with GMCR’s core business of coffee-making machinery. Keurig’s chief executive officer, Brian Kelley, attempted to assuage doubters by articulating the sophisticated technology of their freshly-minted soda fountain, which incorporates gadgetry found in the aerospace and defense industries.
Perhaps if there was a practical correlation between coffee and laser-guided missiles, GMCR stock investors would be impressed with the granularity involved. Unfortunately for Keurig and the poor sap(s) that thought the Kold would be a good idea, GMCR stock has barely budged from the doldrums ever since suffering a sharp correction in early August of this year.
At the heart of the matter for GMCR stock’s faithful following is cost: Estimates place the coffee maker’s distribution expenditures for the Keurig Kold at more than $200 million over the next two years. To put this number into perspective, the fancy soda fountain alone is responsible for 17% of total corporate liabilities, as per its third quarter of fiscal year 2015 earnings report. As if that wasn’t bad enough, the figure is not inclusive of actually building the Keurig Kold, a fact that isn’t sitting well with GMCR stock holders.
While the company still has plenty of strength in its balance sheet, the reality is that top-line sales growth is no longer commensurate with its capital risk — hence, the rapid collapse of GMCR stock in the markets for much of this year. Based on Keurig’s revenue trend over the past four quarters, there is a very real danger that this year’s sales will fall short of the previous year.
Nor does the underlying coffee market provide any reason for optimism. Year-to-date, the iPath Bloomberg Coffee Subindex Total Return (JO) is down nearly 28%, and its technical pattern largely resembles that of GMCR stock — strong in 2014, panic-inducing in 2015. Although the JO fund has risen about 15% since Sept. 22, the otherwise robust swing doesn’t even begin to approach the lofty heights seen just a year ago.
That might be the final straw for many GMCR stock investors. Although shares are up nearly 5% for October, year-over-year, Keurig is down a sickening 61%. For the day traders, they can’t help but notice that GMCR stock is yet again struggling to beat its 50-day moving average — a nagging resistance barrier that has stymied Keurig’s progress throughout 2015.
Perhaps the naysayers will be proven wrong and that the Keurig Kold will one day be dug up in a time capsule as one of the greatest products ever invented. But so far, neither GMCR’s fundamental nor technical performance indicate that this will be likely.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.