Dr Pepper Snapple- New Addition To Keurig Green Mountain’s Arsenal

On January 7, the novelty coffee maker, Keurig Green Mountain (NASDAQ:GMCR) signed a multi-year agreement with Dr Pepper Snapple (NYSE:DPS), where the two companies will be joining hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Keurig Cold will provide its users the convenience of at-home carbonation technology and the ease of carrying compact flavor sachets, rather than the bulky PET bottles from retail stores. Keurig Green Mountain plans on launching the Keurig Cold Platform in the fall of 2015. Keurig will be the exclusive producer of single-serve carbonated DPS K-Cups and pods used in Keurig Cold in the U.S. and Canada. ^[1] The financial terms of the agreement has not been disclosed yet.

Keurig Green Mountain will be releasing its Q1 2015 earnings report on February 4. Last year, Coca-Cola (NYSE:KO) bought a 10% stake in Keurig Green Mountain, and raised it to 16% in May 2014. Coca-Cola and now Dr Pepper are looking to introduce some of their beverage offerings with the Keurig Cold Machine later this year, and hope to improve falling soda consumption rates. Moreover, it will provide Keurig with nearly 30 different beverage varieties from several brands of the company’s soda partners.

We have a $108 price estimate for Keurig Green Mountain, which is roughly 20% below the current market price.

See our full analysis of GMCR here

Keurig Preparing To Enter New Market

Keurig believes that the cold beverage market has the potential to become bigger than the single-serve hot beverage market. As a result, the company decided on introducing a cold beverage platform. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas.  Beverage giants, such as Coca-Cola and PepsiCo, have been struggling with sales of carbonated soft drinks (CSD) in developed markets due to increasing health concerns. Consumers are shifting towards alternatives such as iced coffee, juices, and sports drinks. However, according to our estimates, CSDs still constitute about 43% of the 30 billion gallon liquid refreshment beverage (LRB) industry in the U.S., forming the largest segment. ^[2]

With Coca-Cola already a brand partner, Keurig has been keen on adding more options to its list of beverage varieties. In December, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014. ^[3] So adding Dr Pepper Snapple’s brands to its arsenal gives Keurig an additional option. In 2013, Dr. Pepper partnered with Keurig Green Mountain to sell Snapple premium iced teas in K-Cups and Vue packs compatible with Keurig single cup brewing systems. The extended partnership between the two companies will now provide an additional consumption platform for select Dr Pepper brands and could possibly raise sales.

The domestic CSD market is mature, with Coca-Cola, PepsiCo, and Dr Pepper accounting for almost 90% of the industry-wide volumes. Two of these brands have joined hands with Keurig, giving them an edge during the initial phase after Keurig Cold’s launch. According to our estimates, Dr Pepper’s market share has risen in each of the last four years, reaching 17.5% last year. More beverage options might translate to more consumers opting for the cold beverage machine.

Moroever, with Bevyz under its product line, Keurig might dominate the segment. The Bevyz Fresh machine has a completely different technology, as it is compatible with both hot and cold beverages such as carbonated soft drinks (CSD), frappes, juices, teas, energy drinks, and coffee. An all-in-one machine replaces the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization.

Despite the recent marketing disappointments, Keurig sees a great potential in the Bevyz product line. Recently, Keurig has been adding various coffee, retail, and soft drink brands under its portfolio, and now with the addition of new technology and beverage partners, the company might be looking to extend its reach among U.S. consumers and to strengthen its dominance in the carbonation market.

Looking at the company’s strategy of adding partners to its list of licensed brands, we can expect Keurig to join hands with more beverage companies in the coming months.

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1. Dr Pepper Snapple Group, Keurig to bring products to Keurig Cold system [↩]
2. U.S LRB Market, www.beveragemarketing.com [↩]
3. Keurig Green Mountain to acquire Bevyz Global Ltd. [↩]