Success brews in Waterbury
Green Mountain Coffee Roasters bucking many trends
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Patrick Nelson of Middlesex operates a high-density forklift that can reach 60 feet in the air at Green mountain Coffee roasters' new $9 million distribution center in Waterbury on Wednesday. Jeb Wallace-Brodeur/Times Argus |
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By Peter Hirschfeld Vermont Press Bureau - Published: June 28, 2009
WATERBURY – On Dec. 1, 2007, a day the National Bureau of Economic Research would later pinpoint as the beginning of the current recession, publicly held stock in Green Mountain Coffee Roasters sold for $21.59.
Earlier this month, days before announcing a three-for-two stock split, the coffee company was trading at $91.42. Now valued at more than $2 billion, this Waterbury-based firm has seen its most pronounced growth during a period defined by economists as the most severe downturn since the Great Depression.
Whether because of, or in spite of, the economic woes trouncing much of the private sector, Green Mountain Coffee Roasters – GMCR to its NASDAQ followers – has quietly transformed into a major industry player whose good fortunes, state officials say, have buoyed a central Vermont region otherwise beset by downward pressures.
"If you take IBM out of the equation, it's the largest manufacturer in Vermont," says Secretary of Commerce Kevin Dorn. "Its employment and economic impact has been enormous, principally in central Vermont, and that's continuing to grow."
With about 1,400 employees, including more than 1,000 in Vermont, Green Mountain Coffee Roasters is among the state's largest employers. The meteoric growth sustained by the company since it went public in July of 2006, Green Mountain officials say, will continue as the "single-cup" movement continues to scoop market share in the lucrative home-based brewing sector.
"In terms of where we see the company and it's potential, it's huge," says Frances Rathke, chief tinancial officer for Green Mountain Coffee Roasters. "We're in the early innings of a transformation in at-home brewing."
Investment analysts cite Green Mountain's dominance in the single-cup brewing market as the catalyst for its recent fortunes. In 2006, GMCR acquired the Keurig brand, the leading manufacturer of single-cup coffee brewers. The tiny "K-cups," sold by Green Mountain for the Keurig brewers, fly like hotcakes out of distribution centers in Waterbury, Essex and Knox County, Tenn.
The razor/razor-blade model has generated enormous sales growth as a growing number of American households dispense with their drip-brew machines and join the single-cup evolution.
"People see it as a way to make life much more convenient, more fun," Rathke says. "It's really more about changing the way people brew their coffee at home, and that's why we're growing so much."
Green Mountain, whose market share has been aided by a recent distribution deal with Wal-Mart, controls about 85 percent of the single-cup brewer market – a sector now responsible for 5 percent of all coffee makers sold in the United States.
The impact of Green Mountain's single-cup operation is evident in its most recent SEC filings. For the first half of this fiscal year, net sales hit $390 million – up by nearly 60 percent over the same period last year.
Sales of single-cup brewers, and the K-cups needed to fill them, were responsible for much of that growth. In the first two quarters of fiscal year 2009, Green Mountain shipped nearly 1.2 million brewers – more than double the amount in the first six months of the year prior. Almost 800 million individual K-cups left warehouse shelves during the same period, a 58 percent jump over 2008.
"We're experiencing very strong sales growth, driven essentially by the Keurig brewing system and the K-cup stream," Rathke says.
Green Mountain's patents on Keurig and the K-cup delivery mechanism have also proven profitable. The company receives a royalty of 6.4 cents for every K-cup sold by a coffee or tea manufacturer looking to sell its product to owners of Keurig brewers.
"There's a lot of patents surrounding the system – patents on the cartridge, patents on the brewer," Rathke says. "So if you want to participate and make coffee in a K-cup, you have to work with Green Mountain, and its subsidiary Keurig, and become a licensed roaster."
Founded by Bob Stiller, Green Mountain sprouted from modest roots in a tiny Waitsfield coffee shop in 1981. With a focus on the "specialty" coffee market – premium brews with unique flavor characteristics – Green Mountain began largely as a wholesale dealer in New England. Its use of Fair Trade coffee – beans for which farmers in developing countries are paid above-commodity-market prices – combined with an emphasis on socially responsible business practices, helped cement a brand image that Green Mountain has managed to retain.
By infiltrating office, restaurant and foodservice markets early on, analysts say, the company hopped the leading crest of the specialty-coffee wave.
"Green Mountain recognized the trend early and began selling coffees of higher quality and with more socially responsible practices than had previously been seen in the much larger previously commoditized markets," says Andrew Hetzel, a Hawaii-based industry consultant.
In 2004, GMCR, then a $131 million company, opened up a $9 million, 52,000-square-foot warehouse and distribution center in Waterbury. Since its acquisition of Keurig (Green Mountain held a minority share in the manufacturer since 2004), GMCR has opened facilities in Essex and Tennessee. Last September, it purchased the Seattle-based Tully's Coffee Corporation for $40.3 million.
Green Mountain now sells its Keurig makers in more than 3,000 Wal-Mart locations. And it sells K-cups from other well-known brands including Gloria Jean's, Timothy's, Tully's and Newman's Own Organics.
"Now they're focused on retail expansion," said Matt Spitznagle, equity anaylst for the Montpelier-based Sentinel Investments.
Plans to get enter 16,000 retail locations and 15,000 supermarkets nationwide, he says, could further propel the company's growth.
"As this company is selling in all these mass channels now of Wal-Mart, Costco and grocery stores, the single-cup innovation is kind of compelling to people," said Spitznagle.
Rathke says the single-cup's 5-percent market share in the at-home brewing sector is only the tip of the iceberg. The single-cup innovation, according to Rathke, is still in its infancy, and she says Americans generally take awhile to convert to new brewing technologies.
"It took 15 years for people to convert from percolators to drip-brewing," she says.
She won't provide internal estimates for how many more Keurig brewers Green Mountain plans to sell over the next five to 10 years, but it's clear the company anticipates continued growth.
"There are 90 million households in North America, and half of them are our target demographic," Rathke says. "Five percent of households now have a single-cup brewer, and most of those are Keurig. We believe that 5 percent can be much higher over the next five years."
The company has its detractors. The influential publication "Barron's" recently ran an article questioning Green Mountain's revenue stability – the company's net profits rose 7 percent in the first two quarters of fiscal year 2009. And with the stock trading at about 60 times earnings, many Wall Street bears have singled out GMCR as an attractive short option.
The stock has dipped since the three-for-two split, though its market cap remains well above $2 billion.
Rathke, who says the company won't comment on stock prices, says continued growth will eventually drown out the din of naysayers.
"We don't see danger," she says. "… We believe the best way to combat the against some of the short positions … is to just continue to perform, the hit the ball out of the park."
Dorn says the rising tide at Green Mountain will continue to lift Vermont.
"What's good for Green Mountain Coffee Roasters," Dorn says, "is good for Vermont."
peter.hirschfeld@timesargus.com
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