Array of K-Cups
Competition in the market for pods has increased, posing a challenge for Keurig.

WATERBURY, VT. — Fiscal 2015 was a challenging year for Keurig Green Mountain. As its installed base of brewers in homes has slowed and competition in the market for pods has increased, company management is focused on attracting new consumers and improving operational efficiencies.

Bringing new users to the market for single-serve beverages has required a rethinking of brewer price point. For example, the company now is selling its Mini Brewer for $79 to drive adoption with consumers.

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

“Looking to F.Y.16, we expect that the actions we are taking will lead to some recovery in the percentage of our U.S. at home shipments that contribute to an increased brewer installed base,” said Brian Kelley, chief executive officer, in a conference call with financial analysts on Nov. 18. “While strong unit volume growth in the past three to four years will continue to impact the number of deactivations, we also expect to see lower price points in both the Mini and the K200 to bring new consumers into the single-serve category.”

Slower brewer adoption by consumers also means pod sales are starting to slow. Adding to the challenges in pod sales is increased competition from unlicensed pod manufacturers.

“Pod pricing remains competitive as other pod manufactures have excess capacity,” Mr. Kelley said. “We have also seen downward price pressure on the part of other brands in the marketplace, which may be due in part to coffee prices, where the seed price has fallen by about 40% in the past year.”

The macro trends affected Keurig Green Mountain’s fiscal 2015 results. For the year ended Sept. 26, net income fell 16% to $498,638,000, equal to $3.17 per share on the common stock. Sales for the year fell 4% to $4,520,031,000.

“Our priorities for 2016 are to reinvigorate our hot system and continue the disciplined roll-out of our Kold system,” Mr. Kelley said. “We remain confident that our investments in the business and our multi-year productivity program will deliver long-term value to shareholders.”

Pete Leemputte, chief financial officer, said Keurig Green Mountain plans to have a heavier mix of promotional support for brewers during the 2015 holiday season. As a result, the lower brewer pricing is expected to be more pronounced in the first quarter of 2016 when compared with 2015.

He added that in 2016 the company expects pod volume to be in the mid- to high-single digits.

Pete Leemputte, Keurig
Pete Leemputte, c.f.o. of Keurig Green Mountain

“The pod marketplace remains competitive, which affects pricing, particularly as we have significant coffee inflation relative to current spot price in the first half of the fiscal year,” he said. “We continue to expect negative pod mix, especially in the first half, as we do not lap the Dunkin’ Donuts expansion of pods to retail until the second half. On a full-year basis we expect to see a lower unfavorable impact from mix on our pods sales growth than what we experienced in 2015.”

The introduction of the Keurig Kold system is expected to positively impact sales growth by less than 1% during the year, Mr. Leemputte said.

“Remember that this is a long-term roll-out that will likely see sales volatility from period to period,” he said.

Mr. Kelley called the early days of the Kold introduction a period of “launch and learn.”

“This is the exciting new technology and we intend to test different methods of marketing both retail and digital, as well as pricing during the upcoming year to guide us as we build this new category and this new technology,” he said. “We believe that experiencing the excitement of the system and the fresh cold taste of the beverages is critical to driving consumer acceptance. As a result, you’ll see us staff for live demos in retail stores and malls as well as build awareness with mobile vans and pop-up destinations with our Keurig Kold Kube.

Keurig Kold machine
The introduction of the Keurig Kold system is expected to positively impact sales growth by less than 1% during the year.

“What that means in terms of numbers, sales for the first 12 months of the launch will likely be in the range of 60,000 to 100,000 units based on what we see today. Our early read from consumers is positive on the taste profile of the beverage, for both our partner brands and our new owned brands.”

For the fourth quarter of fiscal 2015, Keurig Green Mountain recorded net income of $94,596,000, equal to 61c per share, and a decline compared with the same period of the previous year when the company earned $141,056,000, or 87c per share.

Sales for the quarter were $1,036,964,000 compared with $1,195,567,000 during the previous year.