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Another challenge for K-Cup maker

Green Mountain patents set to expire

Patents Green Mountain Coffee holds on the single-serve K-Cups for Keurig machines will expire in the fall. Patents Green Mountain Coffee holds on the single-serve K-Cups for Keurig machines will expire in the fall. (brendan mcdermid/reuters)
By Katie Johnston
Globe Staff / June 12, 2012
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Share prices of Green Mountain Coffee Roasters Inc., which soared to new heights last year, have tumbled more than 80 percent since September as investors worry about expiring patents on the popular K-Cup single-serving pod and other issues clouding the Vermont company’s future.

K-Cups, which produce one cup of coffee at a time in Green Mountain’s Keurig brewers, are the most profitable segment of the company’s business, accounting for about three-quarters of its net sales. But when the K-Cup patents expire this fall, a stream of grocery and retail stores are expected to produce lower-priced, store-brand coffee pods that can be used in Keurig machines and cut into Green Mountain’s earnings.

On Monday, Kroger Co., of Cincinnati, one of the largest US grocery store operators, announced that it would sell its own private-label version of the K-Cup later this year, driving Green Mountain’s stock price down almost 8 percent. Green Mountain stock closed at $21.32 Monday, down from $23.13 on Friday and from $111.62 on Sept. 19.

“You’re going to have any company that wants to . . . make K-Cups and put them on store shelves and not have to pay Green Mountain anything,” said Mark Astrachan, a managing director at Stifel, Nicolaus & Co., a financial services firm based in St. Louis.

Questions about Green Mountain’s financial practices are also undermining investor confidence in the Waterbury, Vt., firm, analysts said. The Securities and Exchange Commission is conducting an inquiry into Green Mountain’s accounting practices, and in May, company founder Robert Stiller was stripped of his position as chairman for violating the company’s stock trading policies.

In addition, analysts said, investors have grown skittish about big swings in the company’s sales, which have come in significantly higher or lower than the company and analysts expected for the past few quarters. Green Mountain’s revenues have continued to climb, however, with net sales more than doubling from the previous year in two of the last four quarters.

Most fast-growing companies experience problems as they try to keep up with booming sales, said Scott Van Winkle, managing director in Boston at the investment bank Canaccord Genuity Inc., but Green Mountain is experiencing more than usual. Among the uncertainties is the future of the still-emerging single-serve coffee market.

“When you’re on the front end of a very significant yet still relatively new consumer trend, it’s hard to forecast,” Van Winkle said.

Green Mountain declined to comment on its stock price.

Green Mountain has been at the forefront of the single-serve coffee since it bought Keurig, based in Wakefield, in 2006. Keurig makes or licenses the technology for many single-cup coffee makers, including Cuisinart and Mr. Coffee. The K-Cups used in Keurig and other machines feature more than 30 brands of coffee, including Starbucks and Dunkin’ Donuts.

But with the single-serve market sizzling — sales rose nearly 113 percent over the past year — more companies are looking to market their own products. Starbucks is introducing a single-cup brewer in the fall that will make espresso drinks as well as brewed coffee.

Green Mountain could partner with stores to manufacture off-brand pods for the Keurig, some analysts said, but that would cut into Green Mountain’s own sales of K-Cups. These knockoff brands could force Green Mountain to cut its K-Cup prices.

But other analysts said these private label brands might not pose a big threat to Green Mountain. The best selling K-Cups are the most expensive ones, selling for as much as $1 per K-Cup, said Mitchell Pinheiro, a food analyst with the Philadelphia financial services firm Janney Montgomery Scott LLC.

“Clearly the consumer isn’t hankering for a low-priced K-Cup,” Pinheiro said. “Who is it that’s going to take significant share? Maxwell House, really? Who’s hankering for Maxwell House?”

But there is still plenty of skepticism. David Einhorn, president of the New York investment management firm Greenlight Capital Inc., hammered Green Mountain in a presentation to investors last fall, focusing on patent expiration, limits to the single-serve market, and what he called the company’s “questionable business practices,” including reduced transparency and unexplained capital spending.

Einhorn declined to comment further. Green Mountain spokeswoman Suzanne DuLong would say only that the company had responded to Einhorn’s claims with “facts that support our position.”

Even as the stock continues to slide, Green Mountain is moving ahead. Earlier this year, the company introduced a brewer called the Vue that allows consumers to make brewed cups of coffee that are stronger, hotter, and larger than those from the Keurig machine. Green Mountain is also partnering with the Italian espresso company Lavazza to create a system that makes espresso drinks, expected to be for sale in limited quantities by the Christmas holidays.

Katie Johnston can be reached at kjohnston@globe.com. Follow her on Twitter @ktkjohnston.

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