GMCR – Poking holes in the business model

GMCR’s success relies on the razor/razor blade growth model in that the company is currently selling its Keurig At-Home Single Cup Brewers at cost. The company justifies foregoing margin on the sale of this product in an attempt to further penetrate the market and increase sales of its K-cups, which it recognizes as the driver of future margin growth. This strategy is taking its toll on the company’s profitability as GMCR’s sales mix has been shifting more toward this zero gross margin At-Home product, which has resulted in significantly lower YOY gross margins. Thus far, the company has been able to generate improved profitability by offsetting these huge gross margin declines with significant cuts to its SG&A line, which is not a sustainable business strategy.

Although I have questioned GMCR’s razor/razor blade growth model, My-Kap.com may further complicate the company’s strategy with its promotion of a product that allows customers to recycle their K-cups. My-Kap.com maintains that its product allows customers to reuse each K-Cup up to 20 times by filling it with any coffee or tea, which if true (full disclosure: I have never bought or used the My-Kap product so I cannot vouch for it), could provide real risk to GMCR’s K-Cup sales projections and margin story. Keurig already sells a reusable K-Cup, which costs about $15, but My-Kap.com states that Keurig’s reusable product does not make as good a cup of coffee as the K-Cups due to its different design.

The GMCR story is dependent on significant growth in sales of K-cups. Given there are zero profits generated from selling the brewers, a blip in the sales trends of K-cups could be disastrous for the stock.