K-Cup Revolution Perks Up With Tea, Cocoa ... and Soup?

It wasn't too long ago when the dowdy drip coffeemaker was the default appliance for a home-brewed cup o' joe. That's no longer the case. With the explosion in popularity of single-cup pod coffee brewers, 21st century machines like Keurigs and Verismos and Nespressos are rapidly becoming the new standard.

A rising tide lifts all boats, and the vessels getting boosted here are those companies smart enough to sell versions of their coffee -- or other comestibles -- for the single-serving systems. And some of them make products you wouldn't expect to load into a coffeemaker.

Java Jolt

According to figures from researcher Euromonitor International, since 2007 the total global market for pods has grown at more than five times the rate of the overall coffee industry, to stand at $10.8 billion in 2013. The U.S. market was expected to total $3.1 billion that year -- a more than 200 percent increase from the 2011 number.

The master of the U.S. pod market is Keurig Green Mountain (GMCR), inventor of the K-Cup, the pod that contains the stuff to brew in Keurig machines. Out of its three product categories (K-Cups, brewers/accessories, other products), net sales of only K-Cups saw a year-over-year increase (8 percent, to be exact) in Keurig Green Mountain's last quarter. It's good they did, because they accounted for over two-thirds of total revenue, or $931 million out of $1.39 billion.

%VIRTUAL-article-sponsoredlinks%Many market players feared that Keurig Green Mountain would implode not long after September 2012. That was when its patent protection for K-Cups expired, throwing the pod segment wide open.

But the apocalypse didn't materialize -- fiscal 2013 saw the company's revenues advance by 13 percent on a year-over-year basis (to $4.36 billion), and its net profit rocket upward by 33 percent, to $483 million.

It managed to do this through old-fashioned market dominance and smart licensing. As of late 2013, Keurig Green Mountain still had a grip on an estimated 92 percent of the U.S. pod segment. And its strongest potential rivals were and continue to be business partners -- Starbucks (SBUX) and Dunkin' Brands (DNKN), to name two -- have inked licensing deals to make and sell their coffee in K-Cups.

The Buzz About Tea, Cocoa and Soup

In spite of that tight hold, many other firms have rushed to profit from the American thirst for K-Cups, manufacturing on- or off-license products.

Customers can brew several flavors of Dr Pepper Snapple's (DPS) Snapple iced tea (filling the glass to the brim with ice before starting the machine's brewing cycle, of course). Or cocoa lovers can get their fix by popping a K-Cup of ConAgra Foods' (CAG) Swiss Miss into their Keurig.

The segment is even widening to include goods that are not, strictly speaking, beverages. Later this year, Campbell Soup (CPB) will roll out a trio of its signature products in pod form. To make the soup, users put the dry ingredients in a cup and brew the powder into the cup.

The 2.0 Generation

Keurig Green Mountain this fall will introduce Keurig 2.0, a machine that will scan codes on the pods to brew product in a specific way (it'll also have the ability to brew more than a single cup at a time). Those pods, naturally, will be manufactured or licensed by the company, conveniently shutting out rival companies that don't want to play its game.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain and Starbucks and owns shares of Starbucks. Try any of our newsletter services free for 30 days.
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