Shares of Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) are getting hit today following an announcement by Kroger Inc. (NYSE: KR) that the grocery retailer will begin this fall selling its own coffee pods for Green Mountain’s Keurig coffee brewing systems. Several of Green Mountain’s key patents on its Keurig system are set to expire this fall, and a spate of private label pods are expected to hit the market shortly thereafter.
Kroger also said that it would not manufacture the pods itself, and a possible manufacturer is Green Mountain itself, which has said that it might “consider selectively” making up to four private-label brands itself in an effort to maintain its sales. Coffee giant The J.M. Smucker Co. (NYSE: SJM), for example, already makes private-label products for Dunkin’ Brands Group Inc. (NASDAQ: DNKN) and its own Millstone branded coffees as well as Folgers.
Private-label branding can save consumers who switch to store brands up to 36% on grocery bills, according to recent research from a private-label industry group. And Consumer Reports magazine recently concluded that buying store brands can save $1,500 a year for a family that spends $100 a week on groceries. That’s a savings of about 29%.
Premium brands, of course, fight the store brands with appeals to taste, quality of ingredients, and exclusivity. And Green Mountain coffee recently topped a poll as the brand leader among US coffee drinkers. Starbucks Corp. (NASDAQ: SBUX) did not even make the list, nor did Peet’s Coffee and Tea Inc. (NASDAQ: PEET).
Green Mountain starts out with a good lead, but keeping that lead in K-cups against competitors selling the same product for 30% less will be a real struggle. Margins will be very difficult to sustain, and without some private-labelling of its own, Green Mountain could be in very big trouble.
Shares are down about -7.3% in the late afternoon, at $21.45 after posting a new 52-week low of $21.06 earlier today. The previous range for Green Mountain was $21.77-$115.98.