What happens when the largest entity in the beverage industry buys a 10% stake in your company?
In the case of Green Mountain Coffee Roasters (Nasdaq: GMCR), shares of the specialty coffee company jumped 47% in just four trading days, landing on an all-time above $119. Coca-Cola (NYSE: KO) bought a minority stake in GMCR for $1.2 billion last week. The deal has major benefits for both sides, and could have long-lasting implications for shareholders of the two companies.
The benefits for Green Mountain Coffee – the Vermont-based single-serve brewer headquartered a mere 15 miles from our offices here at Wyatt Investment Research – are obvious. The 10-year agreement with Coca-Cola gives GMCR a decade’s worth of increased branding and distribution potential. Everybody knows what Coke is. Not everybody knows the name Green Mountain Coffee Roasters. Being in business with Coca-Cola for the next 10 years will probably change that.
For Coca-Cola, buying a stake in Green Mountain Coffee has the potential to create an entirely new revenue stream. It allows Coca-Cola to tap into the burgeoning at-home soda-making sector that SodaStream (Nasdaq: SODA) currently dominates.
Green Mountain Coffee made its name through its signature Keurig brewing machines and K-Cups, which allow users to brew coffee with ease from a disposable, single-serve plastic container. Now Coke and GMCR are collaborating on the “Keurig Cold,” a similar system to the K-Cups except using cold Coke beverages.
The Deal’s Impact on the Beverage Industry
The deal with Green Mountain comes at a time when sales in the soda industry are flat-lining. Coca-Cola’s revenue slipped in the first three quarters of 2013, and earnings have actually fallen on a per-share basis since 2010. PepsiCo (NYSE: PEP), Coca-Cola’s main rival, has experienced similar declines.
Meanwhile, sales at SodaStream have quintupled in the last three years, while net income has more than tripled. The maker of do-it-yourself soft drink systems has become mainstream enough to warrant its own Super Bowl commercial – starring Scarlett Johansson, no less – a couple weeks ago. SodaStream’s sales grew by 51% last year, though the pace is expected to slow to 29% this year.
Now Coca-Cola wants a piece of the make-it-yourself market in the beverage industry. And it doesn’t have to risk much to tap into that market. The $1.2 billion spent in the Green Mountain Coffee deal is a lot to GMCR, a $17 billion company. But it’s little more than a drop in the bucket for Coca-Cola, which despite its recent sales plateau reported $6.8 billion in profits in the first three quarter of 2013 alone.
Coca-Cola will always make boatloads of money. But the number of Coke drinkers around the world remains fairly steady. By teaming with Green Mountain Coffee, Coca-Cola can now sell “Keurig Cold” home brewers to those same people. The average retail price for a regular Keurig brewer is $120, and Green Mountain sold a record 5.1 million Keurig machines over the holidays. That’s $612 million in basically one month.
It’s doubtful Keurig Cold sales will ever reach that level. After all, the Keurig brewer is designed to simplify the coffee-making process for people. You can just buy a can or bottle of Coke. You don’t have to change a filter or pour grounds or wait a few minutes for it to brew. You simply crack open a can or twist a bottle cap and drink.
People don’t buy do-it-yourself soda brewing systems for the simplicity, however. They do it for the novelty. Now that the most recognizable soda brand in the world has entered the do-it-yourself space, Coca-Cola should be able to steal some of that novelty away from SodaStream, which only offers generic brands.
Opening up a new avenue of business could help move Coca-Cola sales out of their current rut. If so, that should give a nice boost to a stock that has risen less than 3% in the last year.
As for Green Mountain Coffee Roasters, the Coca-Cola deal could completely change the way we think of the company. Heretofore, GMCR has been almost strictly a brewer of hot beverages. Breaking into the cold-beverage industry opens up countless possibilities.
And that means its recent 47% bump may be just the beginning of a much larger run.
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