Stumptown in a K-Cup? Keurig deal brings margin opportunity

Tue Dec 8, 2015 10:31pm EST
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By Anjali Athavaley

NEW YORK (Reuters) - Taking coffee maker Keurig Green Mountain Inc GMCR.O private will give JAB Holding Co an opportunity to press for higher margins and even increase prices for the single-serve K-Cups used in about 21 million U.S. homes, analysts and industry bankers said.

JAB said on Monday it would buy Keurig for $13.9 billion, its biggest acquisition in a quest to build a global coffee powerhouse to better compete with Switzerland’s Nestle SA NESN.VX. The announcement prompted comparisons on Wall Street between JAB’s strategy and that of brewer Anheuser-Busch InBev ABR.BI, though some industry watchers were sobered by the high price paid for Keurig, which is struggling with competition in single-serve pods and a failed product launch.

While some of the more immediate benefits of a deal would come from JAB’s heightened leverage in sourcing coffee beans, the bigger opportunity lies in the greater profit of distributing JAB’s expanding portfolio of brands, including higher-end “craft” names like Peet’s Coffee & Tea, Caribou and Stumptown Coffee Roasters, analysts and bankers said.

Some of those brands already produce K-Cups for Keurig machines under licensing agreements, but as company-owned brands those arrangements would provide higher margins.

Overall, Keurig's dominance of the U.S. single-serve market is a clear competitive advantage, said Jonathan Feeney, an analyst at Athlos Research. "They (JAB) can handle the brand strategy, the partner strategy, any way they want."

JAB could also raise prices on pods, especially since Keurig will be privately held and face far fewer requirements to disclose how it runs its business, Feeney said. As a result, partners who have licensing agreements with Keurig to make the pods, such as Starbucks Corp (SBUX.O: Quote) and Dunkin’ Brands Group (DNKN.O: Quote), would not know how much Keurig is making from those deals and could find it harder to demand a greater cut.

FILTER OR ESPRESSO?   Continued...

A single-serve Keurig Green Mountain brewing machine is seen in New York February 6, 2015. REUTERS/Shannon Stapleton