Can The Addition Of Campbell’s Soup Bring Relief For Keurig Green Mountain?

Keurig Green Mountain (NASDAQ:GMCR) is, no doubt, in its toughest phase, with its stock declining a massive 60% since the start of the year. The collective impact of declining brewer sales, unimpressive sales growth of the Keurig 2.0 brewers, and uncertainty regarding the exact timeline of the Keurig Kold release has been hurting the Vermont-based company. The skepticism among investors regarding the company’s near-term growth led to a steep decline in the stock over a short period of time.

Additionally, the company’s continued sluggish growth and lowered guidance in the recently released June-ended quarter  acted as catalysts for the stock’s further downfall. (See: Keurig Green Mountain Q3 2015 earnings- Stock plunges on weak brewer sales & lowered guidance) However, the company’s only segment that has shown continuous growth is the K-Cups, or Portion Packs segment. On one hand, the brewer volume sales has been declining year-over-year, whereas, on the other hand, the portion packs’ volume growth has been consistently positive. However, the important thing to notice is that the portion packs’ volume growth is slowing down.

As a result, Keurig Green Mountain is trying to venture into new markets to boost its portion pack sales. Recently, Keurig Green Mountain announced a deal with Campbell’s Soup Company, where the former is rolling out pods that will allow the users to brew a cup of Campbell’s Fresh-brewed Soups. ^[1]

Can this deal bring the company out of misery in the near term? Can this deal create a new market opportunity for the company ?

We have a $60 price estimate for Keurig Green Mountain, which is roughly 11% above the current market price.

See our full analysis of GMCR here

Soup K-Cups: A New Market

In the U.S., the world’s leading soup market, soups are perceived as a conventional food product. The consumption of soups in the U.S. increases drastically during the winter season. Mintel Group, a global market research agency, expects the U.S. soup market to grow slightly over the next 4-5 years. Moreover, Campbell is one of the top soup brands in the U.S. ready-to-serve wet soup market. ^[2]

Keurig’s hot brewers that use K-Cups and K-Cup pods will serve Campbell’s Fresh-Brewed Soup in its portion packs. Initially, the product will be available in two varieties: Homestyle Chicken Broth and Southwest Style Chicken Broth, both available with noodle soup mix. The product kit will include a noodle packet and a broth K-Cup pod.

Now, this deal brings an added opportunity for the company to cater to those users who, aside from coffee and other beverages, are moderate consumers of soups. According to the company’s research, more than four-fifths of the Keurig Pods users also buy Campbell’s soup. This will provide the users with a quicker way of consuming soup, with a convenient method of brewing. Those users who currently use the brewer’s hot water to make soups will be able to brew the soup, with no impact to taste or experience. The rollout of such K-Cups just before the winter season might boost the company’s portion pack sales in the next couple of quarters. According to Trefis estimates, the portion pack volume is expected to increase 7% year-over-year in 2015.

Moreover, the single fresh-brewed soup pod is roughly priced at $1.50 per pod, which is higher than the usual coffee pods. Increasing sales of soup K-Cup pods might not only boost revenue growth for the segment, but also drive margins slightly.

How Hot Can It Get?

Now, one of the questions that most of us are wondering about is whether the rollout of soup K-Cups will be seasonal, and if sales of this product will be dull through the other seasons. Most of the soup brand companies in the U.S. have introduced several varieties of soup brands, including chilled soups for summer seasons. Should Keurig include these brands as well in its arsenal, it can be a new market for the company to tap further into. Incremental sales of soup K-Cups throughout the year will certainly boost the portion pack sales by a significant margin.

However, it is clear that this new product addition is not impactful enough to bring the company out of its current wretchedness. At best, it can offset the negative impact of sluggish brewer sales growth. Nonetheless, anything positive at this moment is a huge plus for Keurig Green Mountain and its investors.

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More Trefis Research

1. Campbell’s Fresh-brewed soup, the first-ever hot soup made exclusively for the Keurig Hot Brewing system, now available on Keurig.com [↩]
2. Sales of leading 10 ready-to-serve wet soup brands of United States in 2015 [↩]