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Keurig shakes up U.S. coffee import system in unprecedented move

NEW YORK (Reuters) – Keurig Green Mountain Inc plans to import coffee beans into the United States through duty-free sites, an unprecedented move in the coffee industry as the single-serve company aims to cut costs amid falling sales of its pods and brewers.

The plan is the latest move by the company to overhaul its coffee-buying strategy after it moved its coffee sourcing operations to Switzerland from Vermont in part to take advantage of an obscure tax exemption that has drawn scrutiny from U.S. lawmakers.

Using the strategy in fiscal year 2014 would have saved the company $1.6 million, according to Reuters calculations.

In applications to create so-called foreign trade zones (FTZs) submitted to U.S. regulators and seen by Reuters, the company said it intends to use four coffee warehouses in ports in Seattle, Virginia and New Jersey for storing and distributing green coffee beans.

The applications were approved by the various ports earlier this year, though they have not yet been activated by Customs and Border Protection, a process that can take several months

The “red tape” and costs associated with establishing FTZs can be substantial, meaning setting them up is generally worth it only if a company can see a return of 100 percent to 200 percent, according to a Congressional Research Service report.

Keurig is the first U.S. coffee company to register a FTZ, which allows companies to import goods into a country without paying duties or passing through customs until the items leave the zone, often after being manufactured into finished goods with lower tariffs than the raw material.

While coffee does not incur any tariffs or import duties, Keurig expects to benefit from another perk of FTZs: the ability to pay customs processing fees once per week, rather than on every shipment, a spokeswoman said. Keurig also expects to save on payments to customs brokers.

She said the FTZs are a “strategic investment that will lower product cost as well as generate additional savings through increased logistical efficiencies.”

The move comes as the company’s share price has tumbled 60 percent this year as sales have suffered. In the third quarter, sales of its pods fell 1 percent and sales of its brewers and accessories fell 26 percent year over year, prompting the company to slash its workforce by 5 percent.

Without an FTZ, companies must pay a merchandise processing fee on each shipment equivalent to 0.3464 percent of the value of the goods, though the fee cannot exceed $485. With an FTZ, companies can total the value of all their shipments in a given week and pay a single fee, which is still capped at $485.

The spokeswoman declined to comment on Keurig’s overall savings.

According to a Reuters calculation based on Keurig’s fiscal year 2014 results, the company would have saved $1.6 million in merchandise processing fees on the 228 million lbs (103 million kg) of coffee it bought at an average price of $2.22 a lb.

That is a fraction of Keurig’s $2.9 billion cost of sales over that period.

In mid-2014, coffee prices hit a two-year high due to a drought in top-producer Brazil, so savings in future years could be smaller.

Futures on ICE Futures U.S. are currently hovering around $1.20 per lb.

Euromonitor data show Keurig is the largest U.S. coffee roaster by sales, with more than $2 billion in coffee sales, beating out J M Smucker Co, the maker of Folgers; Starbucks Corp; and Kraft Heinz Co, maker of Maxwell House.

Craig Pool, president of Foreign Trade Zone Corporation consultancy in Mobile, Alabama, said he had completed a FTZ cost-benefit analysis for a coffee importer in the past, but the company decided not to move forward due to market conditions.

“At the time, the price of the beans was so inexpensive,” Pool said.

The fact that FTZ use is not widespread for coffee importing is likely due to misconceptions about FTZs, such as the idea that they are not beneficial for duty-free imported products, said Amie Ahanchian, managing director for trade and customs services at consultant and auditor KPMG.

“This will likely pave the way for importers of coffee and other duty-free products,” Ahanchian said. “Once it is on the radar screens of these other companies, they may examine their supply chains and consider the benefits of an FTZ.”

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