Green Mountain Coffee Roasters Inc GMCR.O is in talks with pharmaceutical companies about developing drinks for its Keurig brewers that it hopes could aid the health of consumers and company margins, a senior executive said.
Drinks fortified with healthy-sounding vitamins or minerals could carry higher price tags than existing drinks. That would be a much-needed shot in the arm for Green Mountain as its profit margins are poised to come under pressure in coming months once a patent expiration sets the stage for more competition among the Keurig-compatible K-Cups.
Analysts have said competition could come from other coffee manufacturers as well as retailers' private-label brands.
Yet amid the more than two dozen drink choices now available on Keurig -- from coffee and tea to cocoa and apple cider -- Green Mountain Chief Executive Larry Blanford sees "a tremendous opportunity to carry functional additives to the consumer" and blunt some of the potential hit to margins.
"If private label might be a bit of a margin drag, to the extent that we bring them in, on the other side we have opportunities to create some additional margin with some of those types of premium products," Blanford said on Wednesday at an investor conference hosted by Piper Jaffray.
Many food and drink makers are adding ingredients like green tea extract, ginseng, vitamins, caffeine and antioxidants to their products in an effort to do more than just quench a thirst or satisfy a hunger.
"We have been working for some time in that space. We have some partners," Blanford said. He declined to name the partners, but said they were large players in the pharmaceutical space.
"We're looking forward to begin test marketing those products," Blanford said.
Asked if these products would cost the company additional capital, Blanford said it would be "very marginal" and likely only for packaging, which Green Mountain is already working on.
But Blanford mentioned that the company might have to spend more to develop very sophisticated technology for blending.
"Depending on what it is, if it was a daily aspirin or something like that, you have to make sure to get the dose right," Blanford said.
PRIVATE LABEL DRAG
Blanford said his company may possibly partner with a few store brands on K-Cups, which provide a single-serving of coffee or other drink. He said that could hurt margins.
"Certainly I would expect that as we would negotiate those situations, that those might not generate for us the same degree of margin that we might enjoy on other products," Blanford said. "However, we won't do them unless we think they're profitable."
Once a high-flyer on Wall Street, Green Mountain's shares have come under pressure by short-sellers who question the company's growth strategy, accounting practices and management. Its troubles were exacerbated recently when its founder and chairman was stripped of his title after a margin-call forced the sale of company stock that violated company policy.
Also on Wednesday, a short-seller raised the idea of the former chairman leaving the board completely.
Green Mountain sells the Keurig brewers, but makes the bulk of its profit from the 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.
Aside from creating higher-priced products, Blanford said Green Mountain could also generate additional profit by raising prices on the brewers. Right now, he said the company is intent on keeping Keurig prices low enough to entice a large number of consumers to buy them, but that if the competitive landscape changes significantly, so could the company's stance.
Green Mountain shares closed up 6.9 percent, or $1.58, at $24.52 on the Nasdaq.
(Reporting By Martinne Geller in New York; Editing by Leslie Gevirtz and M.D. Golan)