How Is Keurig Dr Pepper Making Money Post Its Merger With DPS?

Keurig Dr Pepper (NYSE: KDP) was formed following the merger between Dr Pepper Snapple (DPS) and Maple Holdings Parent Corp. (which owned Keurig), in July 2018. Post the deal, Keurig, which was initially a major player in the coffee business, saw diversification in its offerings and operating segments, making it the fourth largest U.S.-based beverage company.

You can view the Trefis interactive dashboard – Keurig Dr Pepper: How Does KDP Make Money? – to better understand the company’s business model, along with revenue trends for all its divisions. In addition, here is more Consumer Staples data.

A] What Does It Offer?

KDP offers products under the following 4 operating segments:

1)  Beverage Concentrates

• Reflects sales of branded concentrates and syrup – mostly carbonated soft drinks (CSDs) – to third-party bottlers, primarily in the U.S. and Canada.
• Major brands are Dr Pepper, Canada Dry, Crush, Schweppes, Sunkist soda, A&W, and 7UP.

2) Packaged Beverages

• Manufactures and distributes packaged beverages of its brands, along with distribution of packaged beverages for allied brands and manufacturing for certain private label beverages in the U.S. and Canada.
• 90% of revenues come from sale of its own brands.

3) Latin America Beverages

• Includes carbonated mineral water, flavored CSD, bottled water, and vegetable juice categories.
• Major brands include Peñafiel, Squirt, Aguafiel, Clamato, and Crush.
• 90% of segment sales are from Mexico.

4) Coffee Systems

• Develops and sells a variety of Keurig coffee brewers, sale of specialty beverages such as hot and iced teas, hot cocoa, and other beverages in K-cup pods, for use with Keurig brewing systems, and brewer accessories.

B] Total Revenue Trend and Segment Revenue Analysis and Projection

KDP’s Total Revenue is expected to maintain its rising trend, with the company projected to add close to $0.4 billion to its revenue base in the next 2 years.

Beverage Concentrates

• Revenue marginally increased in 2018 and the rising trend is expected to continue through 2020.
• Strong price realization along with growth in sales of Squirt, Schweppes, Big Red, and Hawaiian Punch is expected to drive revenue growth.
• However, total segment volume is expected to decline, largely due to declines in the carbonated soft drinks (CSD) category, as millennials are moving toward healthier non-carbonated options.

Latin America Beverages

• The segment revenue grew in 2018 on the back on higher net price realization and rising sales of Penafiel, along with Clamto, Squirt, and Motts.
• Though revenues are expected to increase, revenue growth in the near term is likely to remain subdued, due to loss of revenue following the exit of Aguafiel bulk water business, which was one of its largest brands.

Coffee Systems

• Segment revenue remained flat in 2018 as volume growth was offset by lower price realization.
• However, Coffee Systems is expected to add over $200 million to its revenue base in the next two years, driven by increase in K-Cup pod volume and brewer volume.
• Additionally, volume growth of branded partners and private label is expected to drive revenue growth.
• The division would also benefit from the success of its K-Cafe campaign, which enables consumers to make lattes and cappuccinos at home using any K-Cup pod.
• Improvement in the brewer quality is also expected to lead to better price realization.

Packaged Beverages

• Though the segment saw revenue growth in 2018, revenue is expected to drop marginally in 2019, mainly due to changes in the allied brands portfolio (under which KDP distributes 3rd party brands for a fee).
• Post the merger with DPS, the company lost two of its biggest allied partners – Fiji Water (which decided to build its own distribution network) and BODYARMOR.
• Loss of revenue from allied brands portfolio (which comprises about 10% of segment revenues) is expected to be partially offset by higher sales of CORE, Evian, Dr Pepper, Canada Dry, and Xyience, led by a new marketing campaign, along with growth in contract manufacturing.

C] Outlook For 2019 and 2020

• For the full year, we expect revenue to increase by about 1.3% to $11.2 billion in 2019, and further by 2.3% to $11.4 billion in 2020, benefiting from the launch of new varieties.
• KDP is expected to capitalize on the launch of Diet Canada Dry Ginger Ale & Lemonade and the introduction of Canada Dry Ginger Ale and Orangeade, both of which will be supported by marketing investment.
• The company has also stuck to its strategy of partnerships, which is a key element of its Coffee Systems business.
• KDP recently partnered with Tim Hortons, the iconic coffee brand in Canada, which was previously unlicensed, and Panera, the well-regarded bakery cafe brand in the U.S.

As per Keurig Dr Pepper Valuation by Trefis, we have a price estimate of $30 per share for KDP’s stock. We believe that strong organic growth, improving margins, and benefits from new launches would provide support to KDP’s stock.

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