GMCR Cutting Prices on Vue Brewers sold on Amazon.com

“…But should something like that happen we have a number of tactical responses, one of which could in fact be deciding to raise the price of the K-Cup brewing system.” - Larry Blanford, CEO of Green Mountain Coffee Roasters, Piper Jaffray Consumer Conference, June 6, 2012

”Misconceptions play a prominent role in my view of the world” – George Soros

Boy, oh boy, Mister Blanford spoke to soon (or lied): Green Mountain Coffee Jokers’ revolutionary Vue Brewers are now selling on Amazon.com for $195.00 as of earlier today (they were selling for $225.00 just WEEKS ago) :

Note that the Vue brewers continue to sell on eBay for even lower…there seems to be a healthy pipeline of Vue brewers on sale anywhere between $140-$180 (this is just the returnable ones; the ‘no return’ ones are fetching for as low as <$100)

A Few Questions and Comments for GMCR Bulls:

(1) How does a 10%-20% decline in brewer prices impact 2013 earnings? How does a 10%-20% decline in k-cup prices impact 2013 earnings? What is the combined impact? Is it a 1:1 change? Hint: “Operating Leverage” works both ways.

(2)  Do you believe GMCR can lower prices on their “next generation” brewer while concurrently increasing prices on their older brewers?

So… you’re essentially saying that if Apple were to lower prices on the iPad II, you believe Apple could nevertheless increase prices on the iPad I? You might say, in response, “but but but…that’s different” to which LongShortTrader would say, “Balderdash!” (channeling Jim Rogers’ spirit, as he seems to like to say ‘balderdash’ with quite a bit of gusto)

(3) Why is it that Amazon is currently not directly selling and shipping the Vue brewers? Said differently, why is the Vue brewer sold on Amazon.com through a third party?

The above questions & comments assume you trust their numbers. LongShortTrader does not trust their numbers and believes lower prices has an even worse impact on GMCR’s business, even without factoring in improper capitalization of costs/expenses as inventory, capital expenditures, and/or depreciation/amortization.

 

Debunking the Razor, Razor blade Misconception

GMCR has long claimed to sell their brewers (more or less) at cost, and make money on the k-cups. What if GMCR is simply lying? After all, Mr. Coffee sells their machines at a lower price point as shown below:

In case the above doesn’t make  you wonder, LongShortTrader will spell it out for you, and provide some additional food for thought:

(1) How in the world does GMCR sell their brewers at cost, even as Mr. Coffee sells k-cup compatible brewers for 20%-40% lower prices ? Mr. Coffee is a for-profit entity, after all. Mr. Coffee doesn’t sell k-cups. Mr. Coffee must sell these brewers because it’s economically gainful for them to do so.

(2) In fact, Mr. Coffee probably pays a cut to Keurig so…the price point at which it is profitable for them to sell brewers is effectively even lower.

(3) If LongShortTrader is correct, and GMCR is misrepresenting the profitability of its brewers…doesn’t this mean GMCR has room to CUT (not raise) prices to stimulate demand?

(4) If another player were to enter the scene  and offer a popular k-cup compatible brewer for $50-$60 … wouldn’t that pressure pricing?

And Don’t Forget Starbucks’ Verismo…doesn’t the entry of the Verismo pressure brewer prices?

LongShortTrader strongly believes GMCR in the 20s is like RIMM in the 30s …

“…Eventually the gap between reality and its false interpretation becomes unsustainable, and the bubble bursts.” - George Soros