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

By Sean O’Reilly

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

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

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

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

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

Bull Case: The Kold’s Potential Market

Source: Keurig Green Mountain Investor Presentation

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

• 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?

• 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?

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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