Coca-Cola Buys Stake In Green Mountain Coffee Roasters

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In a move that aims to revolutionize consumption of traditional soft drinks, The Coca-Cola Company (NYSE:KO) has bought 10% stake in Green Mountain Coffee Roasters (NASDAQ:GMCR), which makes novelty coffee and owns Keurig brewers. Green Mountain introduced the innovative single-serve K-cup brewing technology over a decade ago, which allowed its customers to use their own Keurig brewers to prepare single coffee portions without having to make an entire pot. As consumers slowly shift from sugary drinks to healthier alternatives such as ready-to-drink (RTD) teas, sports drinks and carbonated water, Coca-Cola together in partnership with Keurig hopes to boost its sales by providing a new convenient platform for its consumers to enjoy their favorite cold beverages through in-home preparation.

We estimate a $42 price for Coca-Cola, which is around 10% above the current market price.

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Deal With Green Mountain Aims To Boost Soda Sales

Coca-Cola bought around 16.7 million shares of Green Mountain for ~$75 apiece, thereby buying a 10% stake in the company for $1.25 billion. [1] Keurig’s patent on its K-cups already expired in September 2012, allowing its competitors to grab around 8% of its market share in the single-pod service market in only one year. [2] The company together with Coca-Cola will now work on developing and launching the latter’s soft drink portfolio for use in its Keurig Cold systems. The Keurig Cold single-serve beverage system will be on sale by the beginning of Green Mountain’s fiscal 2015, which starts later this year. This system will allow consumers to freshly prepare soft drinks by just pushing a button. [3]

Coca-Cola has entered into a ten year agreement with Green Mountain for this development, and aims to improve its slacking soda sales as well as boost its sales in the fast growing beverage segments such as enhanced waters and sports drinks. On the other hand, this move will allow Green Mountain to leverage Coca-Cola’s strong distribution channels and marketing muscle to promote its Keurig Cold in-house systems. Green Mountain’s shares surged by 35% following this announcement on February 6, marking the biggest intraday gain since March 2011.

Coca-Cola Will Now Compete With SodaStream

Coca-Cola together with Green Mountain will now be a direct competition to SodaStream, which manufactures home beverage carbonation systems along with carbon dioxide refills and flavors added to carbonated water. While SodaStream supplies carbon dioxide cylinders and allows customization of fizzy drinks, Keurig Cold systems will use precisely formulated single-serve pods to prepare the familiar tasting and valued Coca-Cola soft drinks. This could hurt sales of SodaStream systems as consumers might prefer the Keurig systems over the homemade do-it-yourself soda machines made by it. Although SodaStream has partnered with well known beverage companies such as Kool-Aid, Crystal Light, Welch, Ocean Spray and Country Time Lemonade, it doesn’t have a strong carbonated soft drinks (CSD) partner. CSDs still constitute 45% of the U.S. beverage market by our estimates, despite declining sales. Competing against the beverage giant Coca-Cola will be tough for SodaStream and could impact its top line in the long run. [4]

Revenue for SodaStream in the fiscal year ended December 2013 was $562 million, out of which over $300 million was contributed by consumables, including flavor pods, by our estimates. [5] [6] Coca-Cola will now compete with SodaStream and in partnership with Green Mountain, will aim to gain from the fast growing single-serve, pod-based segment of the cold beverage industry.

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Notes:
  1. Coca-Cola to buy 10% stake in Green Mountain Coffee“, February 2014, bloomberg.com []
  2. With K-cup patent expired, others try to cash in“, October 2013, usatoday.com []
  3. Coca-Cola and Green Mountain enter into long-term global strategic partnership“, February 2014, marketwatch.com []
  4. SodaStream’s new mainstream rivals: Coke and Green Mountain“, February 2014, businessweek.com []
  5. SodaStream press release“ []
  6. SodaStream 20-f“ []
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