Lawrence Blanford CEO Green Mountain Coffee
Green Mountain CEO Lawrence Blanford believes his company's experience and expertise in single-cup brewing will ultimately win consumers' favor.

Green Mountain Coffee's Growing Problem

One-time Wall Street darling tries to bounce back from major revenue misses, plummeting stock and an SEC inquiry.

Judging by the numbers alone, Green Mountain Coffee Roasters Inc. (IW 500/305) possesses all the attributes of a great American success story.

The Waterbury, Vt., company's annual revenue has soared nearly 700% since 2007 to $2.7 billion. During that same timeframe, profits climbed to $199.5 million, up from just $12.8 million four years earlier, and its stock price hit a 52-week high last September of $115.98.

The company also achieved the highest jump on this year's IW U.S. 500 ranking, moving up 122 places after making its IW 500 debut in 2011. Green Mountain CEO Lawrence Blanford attributes the company's rise from a small café established in 1981 to a multibillion-dollar coffee packaging and brewing-machine manufacturer to its focus on innovation and market strategy.

See Also: Lean Manufacturing Leadership Best Practices

But like any meteoric rise, companies always face the risk that they'll come crashing down to earth. It's a reality that Green Mountain executives must address after the company's most recent quarterly revenues fell far below analysts' expectations for the second time in three quarters. As of late June, the company's stock price was hovering around $20 a share.

Adding to Green Mountain's woes is an ongoing U.S. Securities and Exchange Commission inquiry into its accounting practices. The company disclosed in 2010 the SEC is examining “certain revenue recognition practices and the company's relationship with one of its fulfillment vendors." In the same statement, Green Mountain noted that an accounting error dating back to 2007 resulted in a net-income overstatement of $4.4 million.

In an October presentation, hedge fund manager David Einhorn of Greenlight Capital blasted the company for its business practices, including suspected “shenanigans" with primary distributor M. Block & Sons Inc. to inflate financial results. Blanford says Green Mountain is cooperating with the SEC and that he believes in the integrity and ethics of the company.

Green Mountain's situation continued to deteriorate on May 4 when company founder and board Chairman Robert Stiller and Lead Director William Davis sold company shares to meet a margin call. The sales violated an internal company trading policy. The Green Mountain board responded by stripping both members of their titles and removing them from all board committees. Combine that with some expiring patents, and the company's future gets even murkier.

Though Green Mountain's troubles mar an impressive run, a look at its growth strategies and subsequent struggles could help other emerging enterprises reap similar benefits without the pitfalls.

The K-cup Craze

Green Mountain's rise to coffee-making stardom gained steam in 2006 when it acquired the remaining assets of Keurig Inc., a company that produced single-cup brewing systems primarily for office settings. Green Mountain first invested in Keurig in 1993, the same year the company went public.

Blanford joined the company as CEO in 2007 and immediately helped develop a strategy to strengthen the Keurig offering. Part of the plan included bringing single-cup brewing to the at-home market. The company saw an opportunity to provide consumers with more product options combined with the convenience of one-cup-at-a-time brewing.

Green Mountain accomplished this by adopting a financial strategy called the “razor/razorblade model." The key characteristic of the razor/razorblade business model is the ability to sell a product at or near cost, in this case the Keurig brewer. That's complemented with another product that requires ongoing purchases at a high markup, which for Green Mountain is its individual K-Cup coffee pods.

The company further pushed the Keurig brand by expanding its manufacturing footprint throughout North America, Blanford says. When Blanford first joined Green Mountain, he says the company produced all of its coffee in Vermont. Now the company has production and distribution facilities in eight cities in North America, and in October it announced a planned manufacturing and distribution center in Windsor, Va.

“We want to produce close to the consumer, so the products are as fresh as they can be," Blanford tells IndustryWeek. “So we're building out that infrastructure to serve the North American market."

Today, the single-serve market accounts for approximately 90% of Green Mountain's overall sales.

“That's really what has driven the company's growth," Blanford says.

Green Mountain's contribution to the single-serve market transformed the way consumers think about coffee preparation, says Gary Hemphill, managing director of Beverage Marketing Corp.

“I think Green Mountain has really revolutionized in-home coffee consumption because they have successfully taken the concept of the single-cup brewer and turned it into a mass-market product," says Hemphill, whose organization provides consulting and financial services to the beverage industry. “So I think you could argue their significance to the category is on par with what was done with Mr. Coffee many years ago."


Lean Beans

Green Mountain's furious pace of expansion continued through the Great Recession. At the same time total U.S. retail sales for October through December 2008 were down mid-single digits, Green Mountain's total net sales during the same period grew 56%, Blanford noted in the company's first-quarter 2009 earnings call.

To keep pace with the increased demand, Green Mountain invested in new packaging equipment and lean manufacturing concepts to improve plant-floor efficiencies. Prior to Blanford's arrival, the packaging lines produced approximately 60 K-Cups per minute, he says. The new technology allowed the lines to produce more than 600 K-Cups a minute, Blanford says.

The company also focused on empowering its workforce to make key decisions, Blanford says. “When you have a fast-growing and dynamic business, we must have people throughout the company who are able to make decisions and move the company forward," he says.

Employee empowerment at Green Mountain plays out through daily plant-floor huddles, monthly team meetings and quarterly business meetings that are televised to all of the company's employees. Plant workers participate in “rapid-improvement events" that involve groups of employees who focus on a single process or problem over several days with the goal of identifying a significant improvement.

Patent Wars

The adjustments helped Green Mountain manage its rapid expansion, Blanford says. Now the company is under pressure to identify new revenue streams amid declining demand, increased competition and intense investor scrutiny. In September, two K-Cup patents are set to expire, which already is attracting new players in the space. In June, supermarket chain Kroger Co. joined a growing list of companies introducing their own Keurig-compatible coffee pods, Reuters news service reported.

Green Mountain has sued Rogers Family Co. and Sturm Foods Inc. for patent infringement after they started selling beverage cartridges compatible with Keurig machines. The patent issue means Green Mountain will lose its “ability to monopoly price its razor blade (the K-Cups)," according to a copy of Einhorn's presentation.

Blanford is banking on the company's strong brand recognition, K-Cup-related manufacturing experience, continued innovation and partnerships to fuel future growth.

“When we entered the market and focused on the at-home market, we were a little company in Vermont with several-hundred-million dollars in sales and up against very significant competitors," Blanford recalls. “A couple of those competitors have exited the market, and for those that are left, we enjoy a very sizable lead in terms of our share of the category."

New Products Brewing

While Blanford says he's optimistic about the company's growth and the opportunities ahead, some analysts are less bullish. The company was too dependent on licenses that protected premium-priced products, says Tom Pirko, president of Bevmark, a food and beverage industry consultancy firm.

“The whole plan here was to provide for a kind of dominance in an industry, and that works OK if you have patent protection," Pirko says. “But once you have a business that begins to lose its protections, when people see competition is about to enter in a very meaningful way, the whole dimension has changed."

Add that to the higher cost of the coffee pods compared with traditional coffee packages, and Americans are beginning to recognize that the convenience of K-Cup brewing is not worth the price, Pirko says. Green Mountain may have fared better had it focused on lower-priced private-label opportunities, Pirko says. He cites the company's higher-end $250 Keurig Vue brewing machine, introduced in February, as an example of Green Mountain's disconnect with consumers.

In Green Mountain's second-quarter earnings call, Blanford said the company intends to add new license brands to the system and is evaluating potential private-label opportunities that would provide “long-term value for shareholders." The nutritional beverage category is another avenue the company is exploring, Blanford says.

Green Mountain has been in discussions with pharmaceutical companies about possibly partnering to sell nutritionally enhanced beverages, Blanford told IW in early June.

“We will begin to introduce some products in that area," Blanford says. “I think it's a rich area that we can mine going forward."

As for the company's slowing revenue growth and stock drop-off, Blanford says Green Mountain will continue to capitalize on opportunities in its core business of single-serve offerings.

“We're not here to manage the stock price," Blanford says. “We're here to manage the company, and I think we have made many great decisions that will continue to enhance the ability of our business to be successful as we go forward."

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