Green Mountain Coffee Roasters Inc. (GMCR)’s Keurig 2.0 Irks TreeHouse

Green Mountain Coffee Roasters Inc.’s (GMCR) attempt to maintain dominance in the single-serve coffee sector has landed the company in trouble. Share price plummeted after TreeHouse Foods Inc. (THS) charged the Vermont-based brewer of attempting to lock out competition in the single-serve brewing business with its new Keurig 2.0 brewing system.

After the expiry of the K-cup patents in Sep 2012, competition intensified for Green Mountain.The patent-protected technology involves simple technology to brew a cup of coffee using a precise amount of coffee in each pod. Therefore, the technology is very easy to copy.

To counter the situation, Green Mountain came up with the latest Keurig 2.0 brewing machine with an interactive readability technology that will work only with licensed pods.

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TreeHouse Foods issued a complaint against Green Mountain in the United States District Court for the Southern District of New York asserting that the Keurig owner used its dominance in the brewer market to bar rivals from competing with its “K-Cup” packages of coffee and other hot beverages. With its new Keurig 2.0 machine and anti competitive lock-out technology, which prevents use of K-cups not designed by Green Mountain, the company is trying to drive out other players from the market. TreeHouse also claimed post patent expiration, Green Mountain is pursuing exclusive deals with suppliers and distributors in an attempt to crowd out competition and amount to an exertion of monopoly power in the K-cup market.

Green Mountain has been finding ways to gain back its lost share after several private-label brands imitated K-cups post 2012. Per market research firm, Neilsen and OTR Global, Green Mountain’s K-cup sales growth, which forms a major part of its revenues, is losing share to private labels. Pods from competing manufacturers and generic brands gained about 7% of the market within nine months of the expiry of the patents.

In the recently concluded fourth-quarter fiscal 2013, net sales of Brewers and Accessories segment slipped 1.0% from the comparable prior-year quarter to $375.1 million mainly due to unfavorable product mix and price realization and decline in accessory net sales.

Due to intense competition in the single-serve coffee business, Green Mountain, which currently carries a Zacks Rank #4 (Sell) decided to enter the cold beverage category and signed a 10-year partnership with beverage giant The Coca Cola Company (KO). Under the deal, Green Mountain will exclusively make Coca-Cola branded pods for the upcoming Keurig Cold at-home beverage system to allow consumers to make their favorite sodas and other drinks at home. Coca-Cola will also work with Green Mountain to develop and launch the latest version of Keurig single-cup brewer. Additionally, under the deal, Coca-Cola will take a 10% stake in Green Mountain for about $1.25 billion.

Green Mountain will also enjoy the sole right to sell and distribute Coca-Cola-branded single-serve, pod-based cold beverages. For Green Mountain, the deal is a major way to leverage Coca-Cola’s branding and global presence. The deal has given an edge to the coffee maker over its peer Sodastream International (SODA), which, despite being a dominant player in the cold beverage industry, lacks a powerful partner.

GREEN MTN COFFE (GMCR): Free Stock Analysis Report

COCA COLA CO (KO): Free Stock Analysis Report

SODASTREAM INTL (SODA): Free Stock Analysis Report

TREEHOUSE FOODS (THS): Free Stock Analysis Report

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