New Keurig Machine Unlikely to Stop Competitors, OTR Global Reports

Green Mountain Coffee Roasters GMCR revolutionized the coffee industry with its highly successful Keurig machine. The machine brews a single cup of coffee by using a single serving unit called a “K-Cup.” The machine has seen tremendous success with both home and commercial uses.

Green Mountain holds agreements with 35 coffee companies including Starbucks, SBUX and Dunkin' Donuts DNKN to market and sell their coffee under the K-Cup brand.

Until 2012 Green Mountain held a patent on K-Cups, which prevented unlicensed generic brand makers from selling their own single serving unit which would be compatible with a Keurig machine.

But now that the patent on K-Cups has expired, many generic brands have entered the market with their own unlicensed versions. The generic brands continue to take away market share from Green Mountain. In August the company estimated that the generic K-Cups represented 11 percent of the total category sales.

On Nov. 13 OTR Global singled out TreeHouse Foods THS as gaining momentum and market share in the K-Cup segment. Kroger Co KR also manufactures and sells its own K-Cup line under its brand name. Both private labels sell their K-Cups at cheaper prices compared to brand names such as Starbucks.

Management at Green Mountain are fully aware the company continues to lose market share to generic brands. In response, the company is currently developing a new system that uses an “interactive readability” technology element. The machine, named Keurig 2.0, will be incompatible with generic brands.

“We are actively engaged in discussions with a large number of unlicensed players to welcome them into the system,” Green Mountain president and CEO Brian Kelley said during the company's fourth quarter conference call. Generic brands that do not accept the company's offer to be part of its ecosystem will be sidelined.

The Keurig 2.0 will be released over fiscal 2014 and early 2015. Many investors viewed the product transition as a necessary step to avoid a further erosion of its market share.

On Tuesday OTR Global released another bearish note. Its analysts believe the Keurig 2.0 machine is “unlikely to dent competition from private-label, unlicensed pods” -- and that consumers will be annoyed if they are stuck being able to only use licensed K-Cups.

The firm also believes there is little barrier to entry for a generic brand to offer a similar brewing that would be compatible with generic K-Cups.