Green Mountain Coffee Roasters Inc (GMCR.O) shares fell as much as 10 percent on Monday to their lowest level in 2-1/2 years after Kroger Co (KR.N) said it was planning to launch store-branded single-serve coffee cups for Keurig brewing machines that would compete with Green Mountain-branded cups.
Late Friday, Kroger, the biggest U.S. supermarket chain, told Reuters in an interview that it would begin selling cups for the Keurig system.
Green Mountain sells the Keurig brewers, but makes the bulk of its profit from the single-serving K-Cups, which, for the most part, only it manufactures. But certain patents on the K-Cup technology are set to expire in September, raising the chance that lower-cost rivals enter the market and pressure prices overall.
"Investors are concerned about any additional competition in the single-serve marketplace. This just adds to the reality of the situation," said Marc Riddick, an analyst at The Williams Capital Group about Kroger's upcoming products.
Like many supermarket chains, Kroger sells products under its own private labels, which tend to be cheaper than national brands. Analysts fear that those private brands will sell for less than current K-Cups and steal market share from Green Mountain.
Private label brands currently account for about 10 percent of the total coffee sold in the United States overall, and experts agree that the store brands could control at least that much of the single-serve market as well. Some believe they could take even more of the market.
Retailers Target Corp (TGT.N) and Whole Foods Market Inc (WFM.O), which each have large, successful private label brands, both told Reuters they have no immediate plans to enter the market for single-serve coffee, worth $727 million at retail and growing, according to Euromonitor International.
Supervalu Inc (SVU.N), another supermarket chain, said it was aware of the expiring patents but would not comment on its plans.
"We are always looking at offering private brand products to our customers," said a Supervalu spokesman.
A Kroger spokesman said Keurig was one system for which it would sell store-branded single-serve coffee cups, but that it may not be the only one. He declined to say whether Kroger would manufacture the cups independently or through a licensing agreement with Green Mountain.
"Even if Green Mountain is doing it, the margins on any private label manufacturing are far inferior to anything that's branded or even what would be on the partner brands because it's a lower selling price," said Stifel Nicolaus analyst Mark Astrachan.
Green Mountain sells its own coffee in K-Cups but also sells K-Cups with coffee from many other brands, including Starbucks (SBUX.O), Dunkin' Donuts (DNKN.O) and Folgers (SJM.N).
Green Mountain Chief Executive Larry Blanford said last week at an investor conference that the company was open to partnering with private label brands.
When asked about competition once its patents expire, Green Mountain spokeswoman Suzanne DuLong said that the company has the benefits of being the first to make K-Cups, manufacturing scale and institutional knowledge about the complexities of manufacturing K-Cup packs.
Analysts have said competition could come from many corners, from private label retailers employing contract manufacturers, to other coffee companies, such as Kraft Foods KFT.N, which owns the Maxwell House brand.
A Kraft spokesman declined to comment on whether Kraft would ever make cups for Keurig brewers. Kraft already has its own one-cup coffee system, the Tassimo.
Stifel's Astrachan said he does not think the barriers to entry are very high and that once the patents expire, a manufacturer could produce a cup relatively quickly.
Green Mountain has already sued two companies who manufacture cups compatible with it Keurig system - Rogers Family Co and Sturm Foods, a unit of TreeHouse Foods (THS.N), for patent infringement when they started selling unlicensed cups for Keurig machines. The patents Green Mountain claimed they infringed are not the ones expiring.
Green Mountain has dozens of patents governing the design of its K-Cups, the Keurig machine and the interface between the cup and the machine.
NOT ALL NEGATIVE
Separately on Monday, investment firm Wellington Management Co reported that it has increased its ownership in Green Mountain this year to 10.8 percent of the company, from the 8.4 percent it owned at the end of 2011. On Friday, another firm, Capital Research Global Investors, reported that it had increased its stake in the company as well.
A spokeswoman for Wellington was not immediately available to comment.
Through Friday's close Green Mountain shares have tumbled 80 percent since September amid questions about its management, business strategy and accounting practices.
Green Mountain shares closed down 7.8 percent at $21.32 on Nasdaq on Monday, after falling as low as $21.06 earlier in the session.
Overall option volume on Green Mountain was 2.1 times the average daily level with 29,000 puts and 28,000 calls traded on Monday, according to options analytics firm Trade Alert.
"There is put buying in the stock as some traders position for further downside in the shares in the near term," said Interactive Brokers Group options analyst Caitlin Duffy. "However, not all of the option activity is bearish. Some call buying suggests traders are positioning to benefit from a rebound in share price."