Keurig Green Mountain (NASDAQ: GMCR) shares fell nearly 9% on Friday after a disappointing unveiling of Keurig Kold, the company’s highly anticipated cold brewing coffee machine. Clearly investors were not too impressed with Keurig’s latest product, which will retail at $299.
Keurig had an undoubtable hit on its hands when it first rolled out its at-home hot beverage system in 2004. This was a convenient, easy way for consumers to make their own coffee, tea or other blended drinks right at home.
Since then, Keurig has suffered a steady stream of negative press. First, the brand was damaged when consumers became aware that the coffee and tea pods used in the Keurig machines were not recyclable. Turns out, consumers were using massive amounts of the plastic single use-pods, which resulted in significant environmental concerns.
Then, Keurig alienated consumers when they realized that the Keurig 2.0 machine would not use older Keurig K-cup packs, third-party portion packs or older reusable coffee filters, which were a hit with consumers who preferred to use their own ground coffee.
Add it all up, and Keurig desperately needed a reprieve from the constant criticism. Investors were hoping that the unveiling of the Keurig Kold would do just that.
The Keurig Kold could be a revolutionary product in the industry. The company has none other than Coca-Cola (NYSE: KO) as an investor and strategic partner. Coca-Cola initially invested $1.2 billion for a 10% stake in Keurig last year, then soon after upped its stake to 16%.
At the time, the investment was a no-brainer. Together, the two companies collaborated ahead of the launch of the Keurig Kold beverage platform as part of a 10-year agreement. The deal created obvious synergies, as Coca-Cola had the potential to get its own beverage products to customers through an innovative new system. Keurig Green Mountain benefited from the ability to tap into Coca-Cola’s world-class brand and massive distribution capabilities.
But now that the mystery behind the Keurig Kold platform is over, it looks like the bloom is off the rose. Fundamentally, there were clear challenges to the partnership that investors are now finally taking into account.
When the Coca-Cola investment was first announced, shares of Keurig soared from around $75 per share to over $150. The valuation bloated as well, as the stock traded for 40 times earnings at its peak. This was clearly unsustainable for a company whose flagship product hadn’t even been released yet.
Since the 2014 high, investors have steadily bailed out of the stock, as hope for the Keurig Kold revolution faded. It’s easy to doubt whether the Kold machine will truly be a disruptor.
To me, there is a clear difference between the Keurig hot platform, which was a rousing success, and the Keurig Kold. First and foremost is that consumers have not demonstrated much, if any, desire to brew their own sodas.
This is why SodaStream International (NASDAQ: SODA) has seen its growth slow dramatically in recent years. SodaStream’s namesake machine started fast out of the gate. The company registered high growth and the stock roared to $70 two years ago. Since then, the stock has cratered to its current level of $22.
The reason is that consumers came to view at-home soda machines as a novelty buy. The concept simply didn’t latch on. Consumers love the convenience of brewing a gourmet cup of coffee at home because it saves them a trip to the local coffee house.
Making soda at home only saves a consumer a trip to their own refrigerator. And, chances are, they probably already have a case of Coca-Cola, which likely tastes much better.
Lastly, the price of the Kold machine is likely prohibitive for many. The most expensive machine is $369. The pods start at 99 cents each. This is far more expensive than simply buying cases of soda.
The bottom line is that Keurig Green Mountain’s fall from grace has been swift, and it’s highly doubtful that Keurig Kold will be the cure for what ails the company.
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