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Keurig Dr Pepper - A bit good. A bit bad - Comment

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Late last month, Dr Pepper Snapple Group and Keurig Green Mountain agreed a merger - in effect an acquisition of the former by the latter - to create Keurig Dr Pepper. Our regular soft drinks commentator, Richard Corbett casts his expert eye over the development.

Dr Pepper Snapple Group will merge with Keurig Green Mountain later this year

Dr Pepper Snapple Group will merge with Keurig Green Mountain later this year

January's move on Dr Pepper Snapple Group means that Keurig Green Mountain has finally realised its aspiration to get into cold drinks. This was not quite how the company had originally planned it, though. After all, it was in 2015 that its partnership with The Coca-Cola Co bore fruit - remember Keurig Kold?

It all seemed like such a good idea, for both consumers and Coca-Cola alike: No more heavy bottle and can packs for consumers to lug back from the grocery store, while Coca-Cola would be immune from the intensifying price competition in supermarkets. Not to mention the theory that the threat from private-label would just melt away. Keurig Kold didn't deliver for a number of reasons, most notably the hefty price tag and an unreliable, bulky system.

But, less than two years on from the axing of Kold, Plan B has come to fruition for Keurig: The acquisition of Dr Pepper Snapple Group.

Reaction to the deal has been relatively lukewarm from investors, but that's not surprising. Like the curate's egg, the deal is good in parts, bad in parts.

The challenges in the US for CSD companies remain all too evident - this is unsettling for the merger. According to GlobalData, sales of CSDs in the country have fallen every year since 2003. In the last decade alone, the market has fallen by 16% - that's 8bn litres! And, it's not going to get any better soon either, with a number of cities implementing or signing up to taxes on sugary drinks.

In other markets, low-calorie products are considered an important remedy to faltering CSD sales. Not in the US. Concerns over the sweetener aspartame, mean that consumers are not staying in the category, but migrating to other beverage categories.

Investors understandably will be asking if it was wise to do a deal with a company with such a large stake in a shrinking CSD market. To an extent Keurig Dr Pepper, as the company will now be known, does have some plausible answers. Talking on NSBC after the announcement, DPSG CEO Larry Young said that "carbonated soft drinks will always pay the light bill", adding that this will allow them to "play in other categories". By other categories, he was no doubt referring to those soft drinks segments offering faster growth. The US is by no means a distressed soft drinks marketplace: Discount CSDs, and overall category volumes have expanded by a fifth in the last ten years.

There are still plenty of soft drinks opportunities to be tapped into.

With $11bn in combined annual sales, the new company will certainly have the scale to nurture the development of brands in the fast-growing segments of flavoured waters, iced tea & coffee and, of course, energy drinks. Even with their existing portfolios, the merged company is anticipating annual growth of 2% to 3%. Successfully integrating further into those fast-growing segments of the soft drinks market will determine how successful Keurig Dr Pepper will be in the future. I would expect plenty of activity in the coming years through partnerships, licensing agreements and acquisitions.

From Keurig's perspective, the most attractive component of the purchase is the enhanced distribution structure it will be gaining. DPSG has an extraordinarily well-developed network that reaches into every nook and cranny of the traditional US retail environment - indeed, the group has the Mom-and-Pop stores sewn up. This will marry well with Keurig's well-established relationships in e-commerce and grocery.

With a hot and cold 'total beverage solution', then, the new company will have the reach to sell its diverse range of brands wherever consumer wants to buy them. This will prove very advantageous when the company looks to build brands in those fast-growing segments that will ultimately determine the longer term prospects for the business.

On the whole, then, I see the deal as being more positive than not for both parties. Keurig's move into cold this time has been more conventional than the radical route that Keurig Kold offered.

That said, one can't help thinking 'what if?' with Keurig Kold. Had the price-point been right and the machine been a thing of sleek beauty that purred as it dispensed ice-cold, environmentally-friendly soft drink bliss, then Keurig Kold could have brought about a revolution in the soft drinks business.

KGM and DPSG will be hoping their future partnership performs more as Keurig Kold could have done, rather than how it actually did.


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