Competition, expansion squeeze Keurig Green Mountain

by Keith Nunes
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Keurig Green Mountain attributed the sales slowdown to high levels of inventory at retail and the timing of restocking the Mini Plus brewer, which was the subject of a recall at the end of calendar 2014.

WATERBURY, VT. — A slowdown in brewer sales combined with an expansion in pod production hindered Keurig Green Mountain’s performance during the third quarter of fiscal 2015, ended June 27. As a result, the company plans to combine its U.S. and Canadian businesses in an effort to reduce costs and announced a $1 billion share buyback plan.

Net income for the quarter fell 27% to $113.6 million, equal to 73c per share on the common stock, which compared with the same period of the previous year. Sales for the quarter fell 5% to 969.6 million.

For the quarter, sales of brewers and accessories fell 26%. The company attributed the sales slowdown to high levels of inventory at retail and the timing of restocking the Mini Plus brewer, which was the subject of a recall at the end of calendar 2014.

Brian Kelley, the chief executive officer of Keurig Green Mountain, said the company’s slowdown in brewer sales isn’t really a slowdown at all. He noted that in past years brewer sales have increased 20% or even 30%, but through the third quarter of fiscal 2014 brewer sales rose 10%.

Brian Kelley, c.e.o. of Keurig Green Mountain.

“That kind of growth slowdown, while still healthy for most categories, is not what we’ve historically experienced,” Mr. Kelley said in an Aug. 6 conference call with financial analysts. “And so we’ve added a number of brands to the system at a time when the growth rate is slowing and everybody who’s in the system wants to get a bigger and bigger share of that growth. And so you’ve got a lot of competition going on in the system because of that. And that’s healthy and that’s good competition.”

The addition of coffee brands to the Keurig system also has proven problematic for the company. While the number of brands that have signed licensing agreements has increased, retail shelf space and the number of brewers sold, have both hindered pod sales. The crunch has created excess pod capacity in the market and prompted some to discount in an effort to gain share.

“As we bring in more previously unlicensed brands to our system, we believe other pod manufacturers have excess capacity, which has led them to respond with more aggressive pricing,” Mr. Kelley said. “Additionally, some branded partners have remained promotional. During the third quarter, these challenges were greater than anticipated and impacted pod volumes.”

To offset the current market challenges, Mr. Kelley detailed plans to reduce costs.

“As the competitive environment has become more challenging, we also need to lower our structural cost to compete efficiently, while freeing up dollars to invest in our innovation pipeline and fund incremental investment in our brands,” Mr. Kelley said. “We believe this program will make us stronger and faster and position the company well for the long term.

“As part of this program, we will take this opportunity to streamline our organizational structure. We will be combining our U.S. and Canadian businesses into one North American organization, to be led by a head of North America. We’ve begun a search for the new leader in this role, who will report directly to me.”

The addition of coffee brands to the Keurig system has proven problematic for the company.

By combining its Canadian and U.S. business units, the company expects to generate savings of approximately $300 million over the next three years and reduce the company’s workforce by approximately 5%.

Looking ahead to the fourth quarter, the company expects the difficulties will continue. Fran Rathke, chief financial officer, said Keurig Green Mountain expects a sales decline “in the low teens” during the quarter. Shipments of brewers during the quarter are expected to fall 20% and pod sales are expected to remain challenged due to the sale of fewer brewers and competition. The company does not expect any meaningful sales contribution will come from its new Keurig Kold platform during the quarter.

Mr. Kelley called the company’s current situation a “transitional period” and said the initiatives being put in place will make it more competitive.

“ … We’re going to get through this and the hot system will continue to grow,” he said.
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