Keurig Dr Pepper Inc – K-Cup Strength & Beverage
Portfolio Update – 20 October 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Richard Alvarez (RA)
Former International Marketing Manager at Keurig Dr Pepper Inc
Agenda:
1. Keurig Dr Pepper’s (NASDAQ: KDP) market share in single-serve coffee brewing systems
2. Competitive positioning vs Coca-Cola (NYSE: KO) and Pepsi (NASDAQ: PEP)
3. Consumer behaviour changes across beverages
4. Health and wellness innovation
Contents
Q: Could you give an overview of the non-alcoholic beverage market, including the different categories and
growth drivers and how they relate to Keurig Dr Pepper?
3
Q: Are any beverage players leading the charge on health-conscious trends such as zero sugar? How well are
Keurig or other players keeping up vs new brands appealing to this crowd, such as Bing Energy?
4
Q: Did coronavirus supercharge the health-conscious trends? Did it affect companies’ ability to innovate and
test consumer perception when consumers were going into retail grocery and just grabbing what they knew? 5
Q: Where is the biggest brand opportunity within subcategories such as water, other non-carbonated drinks
or coffee? How challenging is it to establish a brand and have consumers adopt it? Is it as easy as putting a
zero sugar label on it and throwing it in your biggest retail channel, or is it a lot more strategic in building
brand awareness through different marketing channels?
5
Q: Why do you think private label hasn’t been able to effectively market or achieve heavy penetration into
the beverage category as a whole when it comes to non-carbonated drinks?
6
Q: What are the innovation strengths of Keurig and its beverage portfolio? How has that evolved over the
years? Coca-Cola tried to roll out an energy drink that failed within a year. What differences have you noticed
throughout Keurig’s portfolio? What do you think of its ability to build brands, customer anticipation and
loyalty?
Q: Are there any brands or subcategories in Keurig’s portfolio that are less of a strategic fit? Is the number
one reason for brands falling out of favour with consumers that a company can acquire and scale it but if it
scales it, it may not be profitable?
Q: What is the strength of Keurig’s coffee system segment? How sustainable is that strength?
Q: What do you think about the innovation around the coffee system? Keurig continues to roll out different
types of machines. In how many different ways can you make a cup of coffee in a single-serve format? Are
consumers gravitating towards different Keurig machines because of style or capabilities? What are the
dynamics outside of Keurig’s IP or licences around the K-Cup format? How does the competition for
different types of single-serve machines from other brands affect Keurig’s position?
Q: Keurig’s Green Mountain brand doesn’t really taste like Starbucks. What do you think of that brand’s
strength?
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Q: The Keurig coffee systems continue to grow in terms of sales volume, presumably due to innovation and
newer or more sophisticated models. What are your thoughts on the levelling off of that growth given that if
a consumer is paying much more for authentication, they presumably expect it to last longer? What is the
total life value of the different systems and when will there be growth stabilisation for the systems given that
K-Pod volume seems pretty consistent and flat? It doesn’t seem that people are drinking more coffee, just
that they’re getting better systems.
10
Q: How heavy is branding in the K-Pod segment vs other traditional beverage categories? If Keurig raises
prices on Green Mountain, is there immediate consumer reaction in the form of buying less? It’s hard to tell
one coffee system from another. Do you think Keurig is doing a good job communicating the benefits of its
systems to consumers? Do I know I’m getting more from the 2X model?
10
Q: Is there an opportunity to market the K-Pod brand more for a Starbucks or a mass channel angle?
11
Q: How has the promotional or marketing landscape shifted with the big drive of e-commerce and different
digital marketing channels? What is the retail-manufacturer relationship when it comes to marketing? Some
retailers require you to put up ad spend dollars and things like that. How has that changed when you can
directly to target people on Facebook, order a specific ad or throw up an Instagram ad for your product?
11
Q: What are the strengths of waters, juices and tea? Pepsi recently decided to sell off its juice business due to
distribution challenges. Why or how is Keurig maintaining its market share in juices and tea? How are its
water partnerships performing?
12
Q: Why hasn’t Keurig focused more on energy drinks given there has been so much growth and the margins
are 40%-plus? Would it make sense for Keurig to pursue a stronger presence?
13
Q: What are Keurig’s biggest advantages and disadvantages vs Coca-Cola and Pepsi?
13
Keurig Dr Pepper Inc – K-Cup Strength & Beverage
Portfolio Update
Transcription begins at 00:00:04 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Keurig Dr Pepper Inc – K-Cup Strength and
Beverage Portfolio Update. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Richard Alverez,
former International Market Manager at Keurig Dr Pepper.
Richard, before we get started today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
RA: I agree.
NH: Could you start by giving the audience an introduction of your background and various roles you’ve held
in the industry?
RA: My name is Richard Alverez, I am a Consumer Marketer. That’s my background. I’ve been in consumer
marketing for 25 years. I started on the advertising agency side and then migrated towards corporate
marketing. I’ve been in corporate marketing for 20-plus years. I spent close to seven years at Keurig Dr Pepper
in two different roles. The first role was US domestic and North America, basically, Canada and my second
role was what you just stated, as Global Marketing Director working on the entire beverage portfolio and also
snacking portfolio for the company. I’ve worked in other industries as well, mostly in consumer packaged
goods but I’ve also worked in retail, telecommunications, health and beauty, run the gamut. That’s my
background. Like I said, mostly consumer marketing in a 20-plus-year career.
[00:01:46]
Q: Could you give an overview of the non-alcoholic beverage market, including the different categories and
growth drivers and how they relate to Keurig Dr Pepper?
RA: We’re seeing growth. The market continues to grow, the non-alcoholic beverage space. It’s growing pretty
modestly considering some of the health issues, and I can speak to that in greater detail later on. It’s growing
about around a 5% pace over the next five years, at least predicted. Really the largest segments that are driving
growth in the space are bottled water and carbonated soft drinks continue to grow. There’s been a lot of
innovation behind carbonated soft drinks and making them, quote unquote, healthier and providing healthier
options. That’s why we’re seeing some growth in that space.
The growth seen particularly in ’21 this year is as companies are basically rearranging operations and
recovering from COVID so we’re seeing that some of the manufacturing and supply chain issues that were
plaguing some of the bigger beverage companies in 2020 are starting to be reversed so we’re seeing companies
coming out of that. I think overall as a trend and really what’s driving the category is this overall increasing in
health awareness and consciousness among consumers that’s really driving demand for beverages that provide
things aside from typical refreshment, consumers looking for things like nutrition, antioxidants, probiotics
just to name a few.
Health beverages that support these types of things. In some cases, weight loss, digestive health, nutrition and
more. Those are really some of the factors that are driving the category. Bottled water also continues to drive
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the category. Just, again, health and wellness awareness is a trend that we’re seeing even before COVID-19 but
even more now coming out of that so that’s really significantly impacted the beverage industry, even the food
industry but particularly the beverage industry in recent years. Not only does the increased focus on health
and wellness cause consumers to make replacement choices meaning that they’re replacing what was
considered bad for you, quote unquote, with good for you or healthier options, but it’s also creating new
purchase occasions.
Consumers want to be more preventative in the approach to their health so functional beverages are really
growing and we’re seeing companies innovate around functionality in drinks. What I mean by functional
drinks is that those are drinks that offer benefits through non-traditional ingredients. Vitamins, minerals,
we’re seeing the growth of vitamin water was huge in that category and then there are other brands and
products that are taking suit, things like amino acids, antioxidants are very popular in beverages. Those are
the types of things I mean when I’m referring to a functional drink.
Consumers are looking for beverages to play new roles in their lives. It’s all about creating healthy routines
and being conscious of what they put in their bodies so these, quote unquote, smart drinks are increasingly
popular and they’re really being fuelled by this interest in nutrition and also performance. It’s really about
getting that guilt-free pleasure in a beverage or a drink that maybe traditionally in the past you haven’t had. I
think the industry as a whole in the space really should expect that to continue and seeing it continue to grow
well into 5-10 years from now.
I think that there are beverages that are improved quality and innovative whether it be for refreshment or
energy or immunity-boosting or other things. Those are the things that we’re seeing with these multifunctional
beverages that are happening. Energy is also on the rise as well as sports drinks. Those are all feeling growth
as well. This promise of convenient on the go but also caffeinated beverages is growing in the category offering
more flavour options, natural ingredients. That also continues to drive the category as we’re seeing more
people turn to sports and energy drinks to not just only replenish water and electrolytes but also for flavour
and other things that those products offer.
Sugar replacements is also a big thing on the rise especially in the cola space, zero sugar or sugar alternatives,
not just aspartame but other forms of sugar replacement is another trend that is being seen in the space right
now. I would say the overall trend that’s driving I think the beverage categories is better-for-you and
awareness of health.
[00:07:30]
Q: Are any beverage players leading the charge on health-conscious trends such as zero sugar? How well are
Keurig or other players keeping up vs new brands appealing to this crowd, such as Bing Energy?
RA: I would say the big three are really leading the charge, Coke, Pepsi and Keurig Dr Pepper. I think they are
the ones that obviously have the largest resources, they are the ones who innovate the most. They’re really
driving, especially in the cola categories they’re really the ones driving the zero sugar push. The thing with this
category is that it’s so fragmented, so there are a lot of players and entry into the category is fairly easy. There
are a lot of smaller brands that are out there, that are doing it are very niche in this space so they’re providing
a lot of health benefits with products that compete.
In this space, pretty much everybody’s competing with each other. In the industry, they call it competing for
share of stomach. If you’re a water or a carbonated soft drink or even a juice you’re really competing for that
consumer. Obviously, the mindset is different on what you want to consume but you’re ultimately competing
for that overall share of stomachs. I would say the big three are really leading the charge as far as innovating
on health and wellness and they need to because I think the proliferation of those smaller brands that are
coming into the market really either focusing entirely on health or promoting brands or innovating behind
those have really made, I don’t want to say that they’re reactive because I think the big three have really taken
a proactive approach around health and wellness and innovating around that.
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I think the smaller brands that are coming into the industry or have come into the industry have really pushed
the big three to really innovate more around that because, again, it’s a trend that’s not going away and I think
even the big three are looking at I think a way to grow as well is through acquisitions. We’ve seen it in the past
that the big three companies have acquired those smaller brands just because it’s just easier to acquire them
than continue to compete with them so Dr Pepper did that when they purchased those products.
They purchased Vita Coco because coconut water is another really big segment in I guess the non-carbonated
space that’s growing. Rather than continuing to compete with them, it’s just easier to acquire them, fold them
into your portfolio and then continue to innovate around them once you have acquired the brand. That’s I
think what’s happening in the space. I still think the big three, Coke, Pepsi and Keurig are leading that charge.
[00:10:58]
Q: Did coronavirus supercharge the health-conscious trends? Did it affect companies’ ability to innovate and
test consumer perception when consumers were going into retail grocery and just grabbing what they knew?
RA: I think this whole health trend was happening even before COVID hit the US. I think consumers were
becoming more savvy but I think coming out of it I think there’s even been more of a holistic approach to
health and wellness, like you said, scanning store shelves, searching online for clean labels and functional
beverages. I think coming out of COVID, I think everybody’s really taking a hard look at their health, the state
of their health and how they can improve upon that.
I think even more so now, it’s all really now about preventative health, not necessarily a cure or treating
something but it’s, “How can I become healthy before major issues arise and how can I become a healthy
person to fight off viruses like COVID and other things like that?” I think especially the younger millennial age
segment, I think they’re very conscious of what they put in their bodies and what’s on labels. I think that’s
what’s happening so it’s really about adopting this prevention over cure approach. As a result of this, I think
beverage companies are striving to innovate and offer consumers these products. I think healthy hydration is
important so that’s how we’ve seen the rise of bottled water and other better-for-you options right now.
I think COVID has really accelerated that. We’ve been seeing it in the industry for the last 10 years or so as
colas slowly decline and you see bottled water and juice and other even clear like lemon and lime CSDs has
relatively remained flat just because of this halo health benefit that it gets vs dark colas. I think COVID has
really pushed that agenda even further and accelerated that. Where I think we’re going to see a really big
difference now in consumers’ habits when it comes to the consumption of beverages than we’ve probably ever
seen.
[00:13:44]
Q: Where is the biggest brand opportunity within subcategories such as water, other non-carbonated drinks or
coffee? How challenging is it to establish a brand and have consumers adopt it? Is it as easy as putting a zero
sugar label on it and throwing it in your biggest retail channel, or is it a lot more strategic in building brand
awareness through different marketing channels?
RA: It depends on the brand in which you’re doing this innovation to. If it’s a brand like Dr Pepper, for
example, that launched a zero sugar alternative, it’s a lot easier obviously because the awareness of that brand
already exists so it’s basically offering a, quote unquote, healthier option of the brand you already know and
love. That is a lot easier. That’s more about creating awareness around the new innovation so if you’ve now
created a zero sugar offering of a brand that’s been around for 150 years then it’s just creating awareness
around that and now this option allows you to enjoy all of the great flavour of your original Dr Pepper but now
in a zero sugar guilt-free version that you can not feel bad about drinking and know that you’re not consuming
added sugar that’s not good for you.
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That’s a lot easier and obviously, yes distribution counts in getting it into the right channels where you’re
going to have the most success. Price promoting it I think sometimes also helps so consumers are more apt to
try something if they feel like, to the industry at trial. When it’s a brand that’s relatively unknown, has very
little awareness, then that’s where more of the heavy lifting comes into play where you need to generate
awareness about the brand and then secondarily maybe talk about its benefits. It’s a two-pronged approach
where it’s not just slapping zero sugar on it and putting it out there if nobody knows who you are.
Yes, that might be attractive I see, “Oh, something has zero sugar,” but if I’ve never heard of the brand and
there’s a bit of that education that needs to come into play vs doing that, innovating against a brand that’s
already very well-known in the market. Marketing approaches vary. The bigger brands oftentimes have the
bigger advertising spends behind them and they’re also the brands that probably have the most heritage.
Within any given portfolio you have brands that play different roles and Dr Pepper is no different.
If you have a brand like Dr Pepper that’s the flagship and then you have smaller brands that are probably very
much only retail-only messaging, there’s no mass communication to consumers. I think it varies. I think if you
have an existing established brand then it’s a little bit easier for when it’s a smaller more unrecognisable brand
with little brand awareness then there’s a little bit more communication and marketing efforts that need to go
into to generate that broader awareness of the brand.
[00:17:15]
Q: Why do you think private label hasn’t been able to effectively market or achieve heavy penetration into the
beverage category as a whole when it comes to non-carbonated drinks?
RA: Private labels generally just don’t do a lot of mass advertising. They’re usually regulated to wherever
they’re being sold so they’re very heavy with price promotion efforts inside stores, they’re not necessarily a
mass advertiser so there’s little broad awareness that’s created with private labels. The intention usually of a
private label brand if it’s a brand that’s created by the chain where it’s being sold is really to compete against
those national brands.
Their whole play is price. “I’m going to basically undercut the national brand by 20-30% and tell consumers,
basically merchandise it right next to the other brand and hopefully consumers think that these are the same
things and basically cost a lot less, so I’m just going to pick that up.” I think that’s part of, private labels in
other categories like other consumer packaged goods brands have made very strong inroads because of that
just having worked in other segments as well, particularly health and really they have made some strong
inroads where private label brands do heavily compete.
In other beverage categories, for example, a commodity like apple juice, for example, because Mott’s is another
brand within the Keurig Dr Pepper portfolio. When you’re talking about 100% apple juice, 100% apple juice is
pretty much the same no matter, the juice inside is the same no matter if you’re selling Mott’s or private label.
There that’s where marketing has to play a really big role to create differentiation between the two products
where you’re speaking about heritage and quality of your product, Mott’s vs this private label to get consumers
to buy you and really justify why you’re a little bit more expensive at stores. I think private labels really don’t
go after that.
They haven’t been at least consciously going after that broader audience and they don’t spend, there’s no
marketing spend behind private label brands so I think that’s why they’ve probably had a tough time being on
the same level as the national brand but they defend their space very well and believe me, every national
beverage brand takes a hard look at private labels and knows they’re a major player in their competitive set so
it’s something that all brands mainly keep an eye on because their margins are a lot lower. They’re always
going to have the shelf space available because this is just how they work, they’re meant to compete with you. I
think while they may not have the awareness that the national brands have, they definitely don’t perform as
poorly as me or you might think.
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[00:20:40]
Q: What are the innovation strengths of Keurig and its beverage portfolio? How has that evolved over the
years? Coca-Cola tried to roll out an energy drink that failed within a year. What differences have you noticed
throughout Keurig’s portfolio? What do you think of its ability to build brands, customer anticipation and
loyalty?
RA: The Keurig portfolio has evolved I would say considerably over the last 20-30 years. They’ve done it like
you said, through acquisition and innovation. I think those are the two big, probably more even through
acquisition starting with the flagship brand, Dr Pepper which is actually the oldest CSD in the US. First brand.
As they continue to evolve, the company just continued to make major acquisitions even date going back to the
early ’80s where they acquired brands like Snapple, they acquired Mott’s which is the apple juice brand I
spoke about. Then, they continued to acquire other CSD brands.
If you look through their entire portfolio you can probably pick out well more than half of their brands were
always acquired through acquisition. I think that’s been their formula. Then, once they own the brands then
they start to innovate around them. They’re not necessarily creating new brands. It’s really been through
acquisition and then as this whole, in the 2000s when we started seeing the industry shift towards better-for-
you alternatives, Dr Pepper followed suit. They started acquiring, they acquired Bai which came with a
complete line-up of better-for-you, antioxidant-fused waters and carbonated, other flavoured waters and
coconut water and premium teas, etc, so they wanted to add that to their portfolio because they didn’t have
them.
That’s what I was talking about earlier. I think for the big companies, even Coke and Pepsi it’s a lot easier
when VitaminWater took off, Coke acquired them. It’s just easier to acquire these brands vs to try to create
your own and compete with them. If you have the monetary wherewithal and possibilities to just acquire these
brands it’s just easier to do that, to bring them into your fold. I think that’s been the secret sauce, if you will,
for Keurig Dr Pepper. Even back in 2018 when Dr Pepper merged with Keurig Green Mountain at the time
now this whole comprehensive coffee portfolio that the company didn’t have just came into this, created this
new segment that didn’t exist within the company in the past.
Again, continuing that whole merger acquisition path and formula for growth I think has been part of how Dr
Pepper has been able to continue to stay relevant, has continued to grow. I honestly think it’ll continue to be
the way of the future. Not necessarily creating new brands but either acquiring and then definitely innovating
behind those brands once you own them. That’s really I think the success. It’s hard to stay, usually brands
when they get to a certain level of success or volume of sales then other bigger brands start to look at them as
possibility or potential acquisition candidates and usually they just get swallowed up to them. It’s hard to
continue staying challenging, these big three. I think that’s for Dr Pepper, I think that’s been the way the
company had been able to stay relevant and continue to build upon these trends that we’re seeing in the
industry.
[00:24:56]
Q: Are there any brands or subcategories in Keurig’s portfolio that are less of a strategic fit? Is the number one
reason for brands falling out of favour with consumers that a company can acquire and scale it but if it scales
it, it may not be profitable?
RA: One that’s not strategically, I could say maybe there’s a subcategory where Dr Pepper doesn’t compete as
well as the other brands may be in the water space though they’ve made a lot of improvements on that over the
years. There’s going to be not one subcategory that I say Keurig shouldn’t be participating in. I think that they
may not have an expertise in an area like coffee but then they acquire, they merge with a brand that does I
think that expertise and that knowledge becomes part of your overall company base. Why brands fall out of
love, there are a lot of reasons I think.
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A brand could become old or stodgy if you’re stuck in the ways you used to do things. I think if you fail to
innovate I think that’s the death of any brand. There was a brand that I worked on within the Keurig Dr
Pepper portfolio called Mistic which is a carrot-based juice beverage that when I was working there hadn’t had
any innovation behind it in more than a decade and the brand was seriously in decline. That’s what was
happening. Consumers were just moving away from, it was a very high-sugar content beverage to begin with
and the brand hadn’t come out with anything new in, like I said, over 10 years. Consumers move on.
I think you need to, in fast-moving consumer goods, I think you need to offer consumer newness on a fairly
regular basis or they move away. I think that could be part of, and also failing to stay top of mind I think also
could play a role. You think Coke, the most recognisable iconic brand probably on planet earth I think
continues to remain top of mind with its consumers and continues to innovate behind its brand so I think that
those are two big things that stick out when I think about the health of an overall brand and why consumers,
sometimes taste profiles or trends in the market, so if your product is particularly unhealthy or high sugar like
I said whereas consumers now are moving away from that, that could hurt your brand.
That’s where the innovation portion comes into play where you need to then offer a healthier version of that
original if you want to continue to stay relevant with consumers or you really run the risk of being forgotten
and left behind. Those are I think the things that stick out most to me in my experience working on brands
that were starting to fall away from consumers and they were starting to move on from them.
[00:29:00]
Q: What is the strength of Keurig’s coffee system segment? How sustainable is that strength?
RA: I think the strength of Keurig’s coffee systems and coffee for Keurig is actually doing quite well, in Q1 of
this year their coffee systems grew almost 20%. I think it’s really driven by the pod volume. Especially now
there’s really strong at-home consumption. It was strong before but I think obviously coming out of COVID
and during COVID we’re seeing a spike in that home consumption of pretty much everything. It’s offset by this
softness that we’re seeing from away-from-home businesses. I think that’s part of the strength that Keurig has.
It’s not just in the product itself but it’s like you said, the coffee systems as well so they’re continuing to
innovate around the systems and the products that make the coffee at home, this work-from-home trend that
we’re seeing that I think is here to stay even post-COVID, this inability to visit coffee shops. Really the trend
where consumers want that coffee shop experience at home, I think that’s consequently making this segment
grow and continue to grow and Keurig is really capitalising on that. Single-serve is a huge player for Keurig Dr
Pepper now and the single-serve products that are manufactured by the company continue to grow as well.
Also, the fact that they licence the K-Cup technology to other coffee brands in the world also plays a big role. I
think the coffee systems part of the Keurig business is probably one of the healthiest and I think probably one
of the ones that probably grew as a result of coming out of a pandemic and I think leading up after it I think
that’s why it’s strong and the numbers reflect that. I think it’s just going to continue to grow for the company.
[00:31:36]
Q: What do you think about the innovation around the coffee system? Keurig continues to roll out different
types of machines. In how many different ways can you make a cup of coffee in a single-serve format? Are
consumers gravitating towards different Keurig machines because of style or capabilities? What are the
dynamics outside of Keurig’s IP or licences around the K-Cup format? How does the competition for different
types of single-serve machines from other brands affect Keurig’s position?
RA: Like you said, there are only so many ways you can make a cup of coffee but I think introducing things
like smart technology in different formats and there’s very much an aesthetic piece to having this piece of
equipment in your home. I think consumers want it to look a certain way and I think it’s about replicating as
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much as possible that coffee shop experience at home I think through different touchless options. I’m just
naming some of the innovations that have come across, have come about in the last couple of years, ways in
supporting hygienic coffee brewing at home with safe, self-cleaning machines. Things like that.
I think that’s where different types of coffee, so I think consumers nowadays want sophistication in their
coffee. Like I said, much like the coffee shop experience, it’s not just a traditional black cup of coffee, I think
there’s more sophisticated brewing that’s happening at home. Also, in a single-serve. I think a lot of people
just want that cup of coffee to go and want the convenience to be able to do that vs creating an entire pot that
may go bad, especially people that are younger, that are on the go. I think that’s the convenience factor,
making machines smaller to fit in more spaces.
That’s another thing as well I think where innovation is striving to make changes and make improvements on
existing equipment. Yes, the competition is offering, but I think this whole K-Cup innovation is really genius I
think in the sense that it’s really ease, so ease of use I think is another important piece. We don’t want to make
it too complicated and I think that’s where they’ve really cornered the market on that. Can something more
ingenious come along down the road?
Possibly, but I think now the introduction of creating this single-serve possibility at home in pretty much any
type of coffee you want has really boded well for the company obviously in being able to licence that
technology to other brands because they realise that this is, “The only way I can compete is I need to offer my
coffee in the same format or nobody’s going to buy me.” I think that’s a very strong position to be in where this
technology that you’ve created, you own, and it’s proprietary to you. You obviously can put in your brands and
then you can licence the technology out to other brands. I think it creates a very strong position of leadership
within the overall segment.
I haven’t seen anything come along that quite pales to that. Like I said, there might be something that comes
along in the future but right now Keurig has a really strong position with that technology and the continuation
of innovating behind their systems and the brands as well so it’s not just hardware but it’s also creating new
ways to brew and create a simple cup of coffee. Commodities like coffee and certain juices. I think we see them
as they’re all the same. That’s where it can get, you have to get creative in how you differentiate yourself.
NH: Does Keurig own the IP to the whole single-serve format?
RA: No, definitely not. I think it’s just around this cup and the way to serve a single-serve format. There could
be other ways to do it. You have to be very careful. I am not that familiar with I guess the patent process on
that particular, on the K-Cup itself where I could say, “It has to be this much different than that in order to not
violate any patent or trademark on it.” I would assume that there could be other ways to produce a single-
service cup of coffee that doesn’t infringe upon that.
I think it was just easier for everybody to just pay a licencing fee and get their brands into a K-Cup and do it
that way. There can be someone out there right now trying to develop something that’s really different to really
compete with that and say, “I don’t want to pay you a licencing fee to get my brand in there. I’m going to create
my own version of this and make it very different.” That could very well be happening.
[00:37:50]
Q: Keurig’s Green Mountain brand doesn’t really taste like Starbucks. What do you think of that brand’s
strength?
RA: The brand’s been around for a while. Does it taste like Starbucks? No. I think Starbucks as a brand is a lot
bigger. I think Green Mountain has its space within all of the other coffee brands that exist. I think it’s
definitely a top-five from a volume perspective in the US as far as coffee goes. It’s a brand with some heritage
behind it so I think that’s the strength of the brand. I don’t think it’s trying to be a Starbucks, I think it’s a
unique coffee brand that competes within the segment of other brands that exist.
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I think obviously being able to offer that in a single-serve format and just happening to be owned by the
company that created the technology I think helps as well. I think you have the strength of a large company to
gain the distribution that you want to sell Green Mountain, so you have that muscle of the large company
behind you. I think that’s also propelled Green Mountain to be where it is but honestly from a flavour profile,
it’s hard to say that it’s better tasting, it’s not, it’s very, that could be subjective.
I think it’s a quality coffee but I think it’s more about being available in a lot of places and the strength of
distribution capability of a brand like Keurig to get the product in front of mass amounts of people has really
been one of the strengths. Obviously, the brand’s not bad. People wouldn’t buy it if it just tastes terribly. I
think that’s one of the strengths and one of the reasons why the brand is successful is also the power behind
Keurig owning it. I think if Green Mountain was probably with a smaller company it may not be as successful.
[00:40:17]
Q: The Keurig coffee systems continue to grow in terms of sales volume, presumably due to innovation and
newer or more sophisticated models. What are your thoughts on the levelling off of that growth given that if a
consumer is paying much more for authentication, they presumably expect it to last longer? What is the total
life value of the different systems and when will there be growth stabilisation for the systems given that K-Pod
volume seems pretty consistent and flat? It doesn’t seem that people are drinking more coffee, just that they’re
getting better systems.
RA: I think yes, like you said, I think the difference in the systems is all about, “How can we make that cup of
coffee more sophisticated, taste more like what you get at your local coffee shop, make it easier, make it easier
to brew?” I think the technologies or the advancements or the innovation behind the systems is around that.
Not necessarily about more consumption but I think it’s about different types of consumption. If I don’t want
just a regular cup of coffee, I want to do something else, can the system provide that? Can I start brewing my
cup of coffee through my smartphone while I’m still at work so by the time I come home it’s ready?
Things like that. I think it’s more about ease of use and replicating that coffee shop experience at home where
because the big-ticket obviously is the machine and then buying the coffee for it is a lot less. If you spend more
on the machine it doesn’t necessarily mean you’re consuming more, it’s probably more around wanting to have
greater ease of use and have greater technological capabilities that your machine can do. The sales of the lower
end machines are just as high so you have that introductory machine where people are just coming into the
single-serve category and maybe don’t want to spend USD 300-400 on a very sophisticated machine in order
to do that single-serve Keurig machine that costs USD 40 at Target or Walmart.
That equipment is also growing at a very fast pace because there are a lot of people entering the category that
may not necessarily, I think once you get into the higher-end ticket machines, that’s really that more
sophisticated coffee drinker that is more discerning. They know, they don’t want to just do the regular cup of
coffee, they want other options and so they feel like, “That’s an investment that I can make for myself with this
machine that I’m going to have for the next 5-10 years.” I think it’s a different type of consumer that’s buying
one vs the other but necessarily the purchasing of the machine doesn’t necessarily mean I’m drinking more, I
think it’s just about how I’m making this coffee in more sophisticated ways and consuming it and giving myself
more options and more variables, and a variety if you will to my coffee drinking experience.
[00:43:48]
Q: How heavy is branding in the K-Pod segment vs other traditional beverage categories? If Keurig raises
prices on Green Mountain, is there immediate consumer reaction in the form of buying less? It’s hard to tell
one coffee system from another. Do you think Keurig is doing a good job communicating the benefits of its
systems to consumers? Do I know I’m getting more from the 2X model?
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RA: I think from a systems perspective there’s not a lot of broad communication like you do in the beverages,
where you’re talking about I would say the machines are very, it’s a hard good, almost a home appliance.
You’re seeing a refrigerator, an oven, these are high-ticket items, they’re not a fast-moving good. You don’t buy
a lot. You make one investment and you may not buy it again for 5-7 years. I don’t think there’s concerted
effort as far as doing a lot of communication around differentiating the machines.
I think when you’re at retail and you’re looking at them obviously, there is where you can tell the difference.
There’s some information on websites, things like that but there’s not this mass communication where it’s
traditional advertising that’s talking about the different machines. I think the consumer who’s looking for one
can do their research, they can go on the website, look up the features of each one, see the prices then go to
retail and see them in person vs the branding that you do on an actual beverage brand where you are using
traditional means of communication like television or other traditional advertising.
I think the machines they’re sold more like an appliance, so they’re not necessarily advertised, if you will, in a
mass way. I think it’s more up to the consumer to do that research to see which machine is right for them.
Same thing with Green Mountain as a coffee brand, there’s not a lot of traditional advertising that goes behind
that. I think it’s more in-store communication that’s happening so it could be displays at different retailers and
that’s really more of the means to communicate the brand and advertise it vs traditional advertising that you
see with like a CSD brand like Dr Pepper, for example, where they’re very heavy television, promotions,
sponsorships and things like that where the coffee brands don’t necessarily do that.
I think that’s across the board. We don’t see a lot, unless you’re Starbucks or Dunkin’ or one of those brands
that sells coffee, they’re mass advertisers as well but they’re really more promoting their retail vs their at-home
coffee that they sell as well. When I used the Dunkin’ example I think it’s promoting more of the overall retail
experience that includes coffee, not necessarily coffee alone. I think it’s pretty much that way in the entire
segment and with the machines, again, it’s very much sold and thought of as a major appliance.
[00:47:39]
Q: Is there an opportunity to market the K-Pod brand more for a Starbucks or a mass channel angle?
RA: Yes, I think there are opportunities to talk about the technology, the K-Cup itself and the ease of use and
the fact that pretty much anyone can brew a cup of coffee at home using this technology so I think there is
opportunity to create awareness around that especially for people that are entering the category, so I think it’s
very much that introductory consumer that’s coming in, the person who’s been in the category, this segment
for a number of years doesn’t really need that.
I think yes, there is opportunity and then there’s also opportunity to advertise the brand. If you like Starbucks
coffee, well you can get Starbucks in this K-Cup and make it at home or if you like Dunkin’ coffee or if you like
Krispy Kreme coffee, you can get all of these coffees that you enjoyed at those retail chops at home through
those K-Cup technologies. I definitely think there are opportunities there to do that. Whether they start doing
it, that’s another question but I do think there are opportunities to tap those brands within this technology to
consumers.
[00:49:04]
Q: How has the promotional or marketing landscape shifted with the big drive of e-commerce and different
digital marketing channels? What is the retail-manufacturer relationship when it comes to marketing? Some
retailers require you to put up ad spend dollars and things like that. How has that changed when you can
directly to target people on Facebook, order a specific ad or throw up an Instagram ad for your product?
RA: I think the retail component will always have a role but the way shopping is being done has changed quite
a bit. Like you said, there’s more digital e-commerce. I think in the beverage world there’s opportunity for that
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but I think working with retailers for certain other things like where maybe you can buy online and pick up at
retail are components now that I think are becoming very popular. They were even before COVID but I think
even now more so. I think the retailer still has a role.
I think people still want to buy at retail but the way I think they’re doing it or consuming is different. In
beverages it’s a little harder I think to do e-commerce. You can through maybe third parties where you can
have it shipped from a third party, but not doing it direct I guess to consumers, it’s a little harder. I think the
way it’s changed with retailers is that they’re incorporating more of that online model where you can buy
online, maybe pick up in-store or have it delivered through like I said, third party platforms that are direct to
consumers.
I don’t see retail going away. I think it’s changed a little bit, but still the largest percentage of retail is still
people in person. I think that’s still the case. I think people still like the idea of actually going to a store and
buying. We’re seeing that change quite a bit but it won’t ever completely go away I think, in my opinion.
Maybe in some distant future it will but I don’t see that happening in the next 5-10 years.
[00:51:42]
Q: What are the strengths of waters, juices and tea? Pepsi recently decided to sell off its juice business due to
distribution challenges. Why or how is Keurig maintaining its market share in juices and tea? How are its
water partnerships performing?
RA: I think innovation is the big key. I think that’s how they’ve maintained their share in all of their brands.
It’s keeping up with trends that are happening in the marketplace, offering these better-for-you options, I
think continue to innovate around that is key and critical to the success of any of, you can name any brand
within the portfolio. I think it has to follow that formula and some of the brands are already in that space so
it’s really maybe innovating around flavour profiles, packaging, moving more to a single-serve, distribution.
There are some opportunities I think for Keurig brands for broader distributions like food service, for
example, I think in the CSDs I think that there are opportunities to compete there against Coke and Pepsi
where they’re not as strong. Vending is another opportunity that I think Keurig has where they’re not as strong
with some of their brands in the US. I think there are opportunities for additional distribution but I think
innovation has probably been the biggest key as far as staying relevant and maintaining that share.
In some of the categories within the portfolio where others are struggling, for years Dr Pepper, regular Dr
Pepper was in decline so it was really up to the other brands in the portfolio to help offset that decline and
make the overall bottom line for the beverage portfolio remain positive because we saw colas going down and
the same was in Coke and Pepsi’s world I’m sure as well, they were looking towards all their water brands and
other better-for-you brands to help offset the decline in some of their dark colas and some of their other
brands that traditionally just weren’t doing well.
I think Dr Pepper has done a good job in acquiring brands that play in those spaces to help continue that
growth trajectory that they’ve had over the years and they continue to look at opportunities in other segments.
Particularly water I think that’s something that they’re looking at quite a bit to see how they can get into more,
compete more in flavoured water. I think they did really well in carbonated options that are not necessarily
dark colas, so ginger ales and other sparkling options. I think they do well with brands like Schweppes and
Canada Dry which is another big brand within their portfolio. I think they’re looking to do more in the water
space because that’s I think an opportunity when you’re comparing against Aquafina and Dasani which are
huge brands for Coke and Pepsi. I think that’s where Dr Pepper falls off.
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[00:55:31]
Q: Why hasn’t Keurig focused more on energy drinks given there has been so much growth and the margins
are 40%-plus? Would it make sense for Keurig to pursue a stronger presence?
RA: It does make sense. The brand itself doesn’t have, the brand is Venom, it doesn’t have a lot of awareness
in the market obviously when you’re competing against Red Bull and Monster and some of the other bigger
brands that do a bit of advertising to consumers to create that awareness. It’s an interesting question that I
don’t necessarily have a good answer for and I think they see the opportunity in energy. They want to do more
with the brand but I think I think it’s creating an overall. I think the need there is really creating more
awareness around the brand. I think not a lot of people have heard of it. I think if you mention the brand
people are going to say, “Never heard of it.” Also, increasing distribution.
I think it’s getting it to more places. I think that’s the first thing because you don’t want to advertise something
that consumers go out and can’t find. I think it’s creating more of a mass distribution effort behind the brand
and then doing a concerted awareness campaign or awareness efforts around it to create broader awareness of
the brand. I think the company does see value in energy and I think they want to play in that space but, again,
It’s hard when your brand is significantly less known than your other two big competitor energy brands. I
know they’ve done some efforts internationally around energy more so than in the US but it’s definitely
something that they’re I think looking at and to try to improve upon.
[00:57:32]
Q: What are Keurig’s biggest advantages and disadvantages vs Coca-Cola and Pepsi?
RA: From a distribution standpoint, I would say that’s probably one of their weaknesses just because while
there’s a lot of, Keurig has a lot of manufacturing locations throughout the country and warehousing, etc, they
don’t have the complete distribution network like Coke and Pepsi actually use some of Coke and Pepsi
distributors and bottlers to help offset that so I think there are opportunities there. I would say from a network
of distributors in the US there could be opportunities to move away from that and create your own. I think
from a strength standpoint I think the breadth of their portfolio, so they not only have carbonated soft drinks,
water, energy, but now coffee as well which is another big subsegment in the non-alcoholic space.
I think the breadth of their portfolio and the variety of their portfolios is I think a strength. May not
necessarily be a huge competitive advantage but I think it definitely puts them on a closer playing field. While
the sizes of the brands are not as big as Coke and Pepsi’s but I think the variety is there and also the better-for-
you options, some of the brands that they’ve acquired over the years have really I think put them closer to
Coke and Pepsi as far as options are concerned. I see that as a strength of theirs. I think the opportunity I
think will be more on the distribution side.
[00:59:54]
NH: Let me close by saying thank you, Richard, for your input. Clients, if you would like to speak to Richard
in a private call or meeting, please let your relationship manager know. Thank you again for joining Third
Bridge Forum’s Interview today, this now concludes our meeting. Goodbye.
RA: Thank you. Bye-bye.
Transcription ends at 01:00:08 of the recorded material
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