Last week, Keurig Green Mountain announced 330 layoffs, including 200 in Vermont. The move came after sales and profit shortfalls hammered the company’s stock price. (Last November, KGM traded at more than $150/share. Now it’s barely over $50.) One analyst told MarketWatch.com that KGM shows “‘telling’ signs of a company struggling to turn around its business.”
The layoffs were widely reported in the Vermont media. What wasn’t mentioned is that since 2007, KGM has received approval for a whopping $7 million in job creation tax incentives through the state’s Vermont Economic Growth Initiative (VEGI). What does KGM’s contraction (and uncertain prospects) mean for its generous tax incentives?
I sought answers from Fred Kenney, Executive Director of the Vermont Economic Progress Council and head honcho of VEGI. He offered a fair bit of reassurance on the VEGI mechanism and state oversight of KGM grants, but I remain dubious on the fundamental concept of tax incentives as a means to economic growth.
In short, while VEGI is a well-designed program of its kind, the KGM experience rings some very real alarm bells about it.
The good news first. My fear was that KGM would continue to rake in the taxpayer cash, even if its workforce continued to shrink. According to Kenney, that’s not so. KGM has received several different VEGI incentives. Each is doled out over a five-year period, and the company must show every year that it has created at least as many jobs as promised, and maintained that larger payroll.
Some of KGM’s early incentives have been fully paid out. But incentives authorized in 2010 or later are still in the five-year window. If KGM falls short of promised employment growth or retention, the funding stops. Automatically. And the process is overseen, not by Kenney or VEPC, but by the state’s Tax Department.
Kenney points out that “in past years, they’ve far exceeded the requirements” for job growth. Which means that KGM may continue to draw VEGI payments from earlier years because its workforce will still be larger than it was in, say, 2010. But KGM’s eligibility would be limited, and would dwindle to nothing in a couple of years if KGM continues to shrink. The best news, to me, is that the process is automatic. And because it’s done in the Tax Department, it should be insulated from political pressure.
KGM and VEGI in review
At this point, a brief history of KGM is helpful. The single-cup brewing system was developed by Massachusetts-based Keurig back in the 90s. In 2006, Keurig was acquired by Green Mountain Coffee Roasters, and the synergy sparked rapid growth for the combined firm. But in 2012 key patents expired, leaving KGM vulnerable to price-cutting competition on the single-brew K-Cups, the source of KGM’s substantial profits. (It’s the same business model as, say, home office printers: the machine was effectively a loss leader, while the real money is made on the refills.)
The loss of patent protection was an existential challenge to KGM’s growth, if not its very future. KGM has responded with some really bad decisions. Its move to effectively DRM its Keurig 2.0 alienated customers in droves. Sales of the 2.0 machines have been well below expectations. Even more troubling is its next big innovation, the Keurig Kold device. It seems to answer a question that nobody is asking: How can I home-brew a one-cup serving of a cold beverage at a vastly inflated price?
Market analysts warn that Keurig Kold may never catch on. And now, the company itself is downplaying expectations for KK’s launch: CEO Brian Kelley told MarketWatch.com he’s expecting a mere “minimal sales contribution” from KK in its first months on the market. All this led to KGM’s decision to lay off five percent of its workforce.
There’s KGM in a nutshell. Now, let’s overlay that with the VEGI program.
A crucial aspect of VEGI is the “but for” provision. Here’s the relevant bit of the law:
“The council shall first review each application [for VEGI incentives] and ascertain, to the best of its judgment, that but for the economic incentive to be offered, the proposed economic development would not occur or would occur in a significantly different and significantly less desirable manner. Applications that do not meet the “but for” test are not eligible for economic incentives, and shall not be considered further by the council.”
The aim of “but for” is to ensure that VEGI performs as intended: it fosters job creation that would not happen “but for” the VEGI incentives. Because, after all, if job growth would have happened without VEGI, then we’re just giving away taxpayer dollars to a growing business. And failing to support other worthy enterprises for which VEGI might be crucial.
Okay, now look at the arc of KGM history and tell me what wouldn’t have happened “but for” the VEGI incentives. The acquisition of Keurig by GMCR happened before the first VEGI grant. It seems rather obvious that the acquisition was the moving force in GMCR’s growth, and it’s awfully difficult to argue that GMCR would not have bought Keurig “but for” VEGI grants it had yet to receive.
This is a broad overview, and I may well be missing some important details. Maybe the growth would have happened outside Vermont. Maybe VEGI helped the company mature quickly into a market leader. (The hardest thing for a mid-sized enterprise to do is make the leap to national and global markets. That’s a very expensive and risky proposition. It’s why growing companies like Ben & Jerry’s and Stonyfield have merged with larger firms.) But looking at the broad outline, I don’t see how anyone can say the VEGI funds were an indispensable element in the growth of KGM.
And now KGM is at a crossroads. Wall Street has soured on the company, and its short- and medium-term prospects are iffy at best. KGM will have to overcome serious corporate mistakes and self-inflicted reputational damage to re-establish itself in a now-mature market. But even so, because of its K-cup-fueled growth from 2006 to 2014, KGM could be in a position to continue receiving VEGI funds for at least another four years.
Which raises the same question in a different way: even if a VEGI incentive passes the “but for” test, does it really accomplish its purpose? If a growing company like KGM can go from rockstar to “Where Are They Now?” in a matter of months due to the vagaries of the marketplace and the quality of its management, how can you argue that VEGI really helps retain jobs? Compared to the billions at play in a given market, how can you assert that a million or two VEGI dollars can make a tangible difference?
To me, the whole KGM experience shines a very harsh light on VEGI and similar incentive programs. At the very least, it argues for a tight focus on startups and small businesses with growth potential, where the state’s money can have the most significant impact. GMCR may have fit that profile in 2007; it doesn’t anymore, and hasn’t for quite a while.