Is trouble brewing for Keurig Green Mountain?

by Keith Nunes
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Brian Kelley, president and c.e.o. of Keurig Green Mountain, said the company will have entry-level priced brewers available this summer.

WATERBURY, VT. — Keurig Green Mountain’s performance during the second quarter of fiscal 2015 may be summed up simply as too much too fast. As a result, the company has revised its sales guidance down for the rest of the year as it works its way through the challenges it currently faces.

Brian Kelley, president and chief executive officer of Keurig Green Mountain, pointed to three reasons for the company’s current difficulties — The complexity of the 2.0 launch, the inability to have an entry-level brewer in the $79 to $119 price range available, and strong customer feedback to the discontinuation of the My K-Cup accessory for the 2.0 system.

All of the issues led brewer and accessory dollar sales of $106.4 million during the quarter, a 23% decline compared with the second quarter of fiscal 2014. Pod sales for the quarter increased 7% to $956.6 million.

To address the issues, Mr. Kelley said the company will have entry-level priced brewers available this summer, is in the process of restocking its Mini system with retailers following a recall during the holiday season, will be changing 2.0 packaging in June to better communicate the brewer’s versatility, and will bring back the My K-Cup accessory for the holiday season.

“While the initiatives I described above on pods and brewers will address the current transition, they will require a few quarters to take hold,” Mr. Kelley said. “Therefore, we are revising our guidance to better reflect brewer sell-through trends and their associated impact on the installed base.”

For the quarter ended March 28, net income for Keurig Green Mountain totaled $151,479,000, equal to 98c per share on the common stock, and a 4% decline compared with the same period of the previous year when net income totaled $162,084,000, or $1.05 per share.

Sales for the quarter rose slightly to $1,127,184,000 compared with $1,103,072,000 the previous year.

“Although we are lowering our guidance to reflect the impact of near-term challenges related to this complex product transition, we remain highly confident in our long-term strategy for the Keurig hot system and continue to believe there is a significant runway of opportunity,” Mr. Kelley said. “Combined with the upcoming launch of our Keurig Kold system, we expect the Keurig brand to further expand and globalize while continuing to transform the premium home beverage experience for consumers.”

During a May 6 conference call with financial analysts to discuss the company’s results, several pressed Mr. Kelley to further explain the current difficulties facing the company.

“With any new product introduction, there are always challenges that are front-end loaded,” he said. “And our transition to 2.0 was particularly complex. Point of sales results were not as strong as anticipated, which led to higher levels of brewer inventory at retail and on our balance sheet. Some of this was due to consumer confusion around pod compatibility, which we’ve mentioned in the past. Although we’re seeing improvement as we transition more formally unlicensed brands into our manufacturing system.”

Later in the call Mr. Kelley discussed the complexity of the 2.0 transition and noted it is not a simple process. Yet the complexity facing the company is only going to grow later in the year as it begins the roll-out of its new Kold system. The Kold launch was only briefly discussed during the earnings call as the company has scheduled a special event May 14 to preview the new product for market analysts. But it is clear Mr. Kelley understands the significant challenges facing Keurig Green Mountain and he announced an organization review during the call.

“As we move from a coffee company to a multi-category beverage company, it’s critical that our organization become more efficient and effective,” he said. “To that end, we’re reviewing all aspects of our operations over the next 60 to 90 days and believe we can make meaningful changes that will yield a better structure for a multi-system company. This should improve performance, and allow us to fund important growth priorities. Although we’re not in a position today to discuss the plan, we will lay it out in greater detail on our third-quarter earnings call.”
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