Keurig Dr Pepper a match made in consolidation heaven

 Can Keurig do for soda what it's done for coffee?  (Photo: Shutterstock)

Can Keurig do for soda what it's done for coffee? (Photo: Shutterstock)

On first blush Keurig Green Mountain's purchase of Dr Pepper Snapple may seem like an odd pairing. Keurig is a coffee and hot beverage company; Dr Pepper Snapple is cold beverages and leads with carbonation. Upon closer examination, however, it creates a powerful partnership now called Keurig Dr Pepper, a beverage giant with a combined $11 billion in revenue. More important even than its current valuation is what it could mean for the soda industry, and the retail-ecommerce relationship.

Three logistics principals are: (1) don't ship air, (2) don't ship water and (3) consolidate, consolidate, consolidate. That's why beverage makers and Consumer Packaged Goods (CPG) producers place manufacturing facilities near major metropolitan areas, to reduce distribution costs and keep materials from traveling long distances.

If the single-cup brewing model takes off in the soda industry like it has with coffee, Keurig Dr Pepper could be making a powder or syrup that takes up less space in delivery trucks and on retail shelves. And, if you listen to the CEOs from each company, it doesn’t take much to realize the product can also bypass retail stores entirely and ship directly to consumers.

Speaking on CNBC, Dr Pepper Snapple CEO, Larry Young says, “It’s a fabulous deal not only for our shareholders, but also our consumers, our customers, and our partners. We talk about being a total beverage solution. This was the perfect avenue to take us so that we’re not only in cold beverages but also in hot beverages, in any category. Beverages are changing very quickly now. There’s sub-categories; we want to be there every minute in every place.”

Bob Gamgort, Keurig Green Mountain CEO, also speaking on CNBC, says the distribution can help customers get their brand anywhere they shop.

“I don’t think there’s anything quite like it. DPS’s delivery system is a huge benefit to us. Beverages are born in small venues. It’s hard to get a sophisticated distribution system that can get them in small outlets and vending convenience. That’s exactly what DPS has,” he says.

Currently, Keurig is in traditional grocery. Gamgort also says that they already have a terrific e-commerce business. “Among CPG companies we have one of the biggest exposures. The combination of those two allow us to get to anywhere consumers are shopping.”

“Carbonated still has a place,” says Young, who says he’s tremendously excited about the next ten years.

Gamgort adds that there are pockets of growth that are faster than others.

“The bev category is a fascinating category,” he says. “This allows us to put together the two businesses. Carbonated beverages are built for scale. That pays for the infrastructure that allows us to take emerging brands out to all consumers. Let’s face it. One of the fastest growing segments across beverages is coffee in all forms. We deliver it in hot. We’re the number one player in retail coffee right now. Now we can get into cold as well.”

Is that flavor or packaging size or both? “All the above,” says Young.

The partnership also gives the companies “optionality to look at partnerships in a different way, to be able to expand that portfolio. Having a public company currency certainly allows you to be more creative at times,” says Gamgort.

Gamgort acknowledges that the Keurig system has seen some ups and downs, but right now things are strong. They recently climbed from a market penetration of being in 17% of all households to 20% in a relatively short time with “renewed innovation and marketing efforts.” They estimate that the penetration upside is upwards of 50% of all households.

Instead of soda cans and bottles taking up shelf space in stores, or refrigerator space in homes, consumers could customize their own carbonation level and sweetness. They could also simply order from Amazon, and that could make for some serious market penetration.

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