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Will Keurig Green Mountain’s Cold Brewing System Be a Success?

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Keurig Green Mountain's future rests in the hands of the Kold - will it succeed?

Published in: Food, Economy & Finance
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Will Keurig Green Mountain’s Cold Brewing System Be a Success?

  1. 1. Will Keurig Green Mountain’s Kold Brewing System Be a Success? By Sean O’Reilly
  2. 2. The Kold System • The Kold is Keurig Green Mountain’s (NASDAQ: GMCR) first new business line since introducing the Keurig to the mass market • Developed in partnership with Coca-Cola (NYSE: KO) • Will be released fall 2015 in limited quantities online • Will be available nationwide at retail outlets by December 2016 Source: Keurig Green Mountain Investor Presentation
  3. 3. The Kold System • The Kold will offer branded products from Coca-Cola and Dr. Pepper Snapple, as well as GMCR’s own brands of ice tea, lemonade, carbonated water, etc. • GMCR believes that the Kold beverage system will deliver on the same elements as the Keurig® hot beverage system: quality, convenience, choice, and simplicity Source: Keurig Green Mountain Investor Presentation
  4. 4. Why The Kold Is So Important In the quarter ended June 27, 2015: • GMCR’s gross margin has fallen from 43.5% to 36% year-over- year • Net sales fell 5% year-over-year in the same quarter • Diluted earnings per share fell 22% to $0.73 • Pod net sales fell 1%, even after factoring in volume growth of 5% • Keurig brewers and accessories net sales fell 26% • To summarize: growth is slowing -- a lot
  5. 5. Why The Kold Is So Important • The Keurig 2.0 -- once thought to be the company’s saving grace -- has been a disaster • GMCR continues to generate profits thanks to its pod business, but it’s days of growth appear to be over • In-home coffee brewing business is suffering from both pod price competition and market saturation • Keurig Green Mountain has pinned all of its future growth on The Kold
  6. 6. Bull Case: The Kold’s Potential Market • The Kold was born out of the company’s partnership with Coca-Cola which also owns 16.8% of GMCR • Partnership with Coca-Cola, the largest and most successful beverage purveyor in the world, is a bullish point • The potential market for cold beverage is multiples of the hot beverage market • Another potential use for the Kold is in-home alcoholic cocktail creation
  7. 7. Bull Case: The Kold’s Potential Market Source: Keurig Green Mountain Investor Presentation
  8. 8. Bear Case: Can Kold Succeed Where Sodastream Failed? • Investors already have a case study for in-home cold beverage systems -- Sodastream (NASDAQ: SODA) • Sodastream also offered investors two somewhat separate businesses – A stable, profitable, European-based carbonated water business – A new U.S. focused soda business that offered investors a good deal of potential upside IF the American consumer bought in • The results of Sodastream’s U.S. push were not good
  9. 9. • For Sodastream’s fiscal year 2014: – Revenues fell 9% year-over-year to $511.77 million – Net income fell from $42.0 million to a depressing $12.3 million – Losses marred by inventory write-downs in anticipation of U.S. division sales that never materialized • For the quarter ended June 30, 2015: – Revenues fell 28% year-over-year to $101.7 million – Net Income fell from $9.2 million to $3.5 million • Sodastream has more or less thrown in the towel as an in-home soda system company, opting to become a “ ‘water brand’ behind a health and wellness positioning” according to CEO Daniel Birnbaum in Sodastream’s second quarter conference call Bear Case: Can Kold Succeed Where Sodastream Failed?
  10. 10. • The Kold will be priced at $299 • Coca-Cola flavored cold beverage pods are estimated to cost $0.99 to $1.29 per pod at retail • This pricing does not compare well with Sodastream’s models which start at $80 Source: Sodastream Bear Case: Can Kold Succeed Where Sodastream Failed?
  11. 11. Key Takeaways • Keurig Green Mountain has a lot riding on the Kold • It’s hot beverage Keurig-based business is still profitable, but its days of growth are gone • The weight of the evidence seems to imply that the Kold has a steep hill to climb • Investors hoping for the days of growth in both the company’s top and bottom lines need to have a high opinion of the Kold’s prospects
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