Coca-Cola, Green Mountain partner on home soda maker

by Monica Watrous
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WATERBURY, VT. — A new beverage battle is brewing.

Green Mountain Coffee Roasters and the Coca-Cola Co. on Feb. 5 announced a strategic partnership to develop a new home beverage system called Keurig Cold, a move that suggests the companies are thirsty for SodaStream International’s share of the in-home soda making market.

In addition to a 10-year agreement to collaborate on the project, Atlanta-based Coca-Cola will purchase a 10% minority equity position in Green Mountain for approximately $1.25 billion. The investment is expected to close in March, subject to customary closing conditions and regulatory approvals.

As part of the agreement, Waterbury, Vt.-based Green Mountain will become the exclusive partner for the production and sale of Coca-Cola branded single-serve, pod-based cold beverages. The companies also will explore additional collaboration opportunities on the Keurig platform.

Keurig Cold is expected to debut during Green Mountain’s fiscal 2015. With an open-architecture platform similar to Keurig’s hot system, Keurig Cold will use single-serve pods to dispense cold beverages, including carbonated drinks, enhanced waters, juice beverages, sports drinks and teas.

Coca-Cola, however, will not be the platform’s only licensed partner.

“In fact, it will work very similar to our hot system, nearly identically,” said Brian Kelley, president and chief executive officer of Green Mountain, during a Feb. 5 earnings call with financial analysts. “We’ll manufacture and design the brewers and the portion packs. We will partner with the world’s best brands and bring them into our system, and we’ll collaborate with them to build the Keurig Cold system just like we have the Keurig hot system. And what we’ve learned, though in building this hot system, it’s most powerful when you get the best brands in, and when you get the best brands that consumers love, the system wins, and that’s what we’ll do. It will be a multi-branded system with multi-partners and we know that convenience, a fresh beverage perfectly brewed every time that gives the consumer wide varieties is what they want, that’s what this collaboration will bring.”

He said Coca-Cola did not demand brand exclusivity for the platform.

“Coke understands the power of the Keurig system is they have multiple, multiple brands in it, and they support that,” Mr. Kelley said. “(Keurig Cold) will have brands of other companies as we announce them and they come in. It will have brands that we have and we’ve created. It will have consumer variety. … In fact, this came from consumer insight. When we asked them ‘What is it you want from Keurig?’ the first thing they told us is, ‘We want you to do for cold beverages what you’ve done for hot beverages. We want to be able to push a button and get a Coke’ or they named their other favorite brand. We expect to have a variety of brands in the system just like we have for the hot system.”

For Coca-Cola, the partnership presents a potential revival in its struggling carbonated soft drink business, as trends in individualization and customization begin to redefine the beverage category.

“This agreement demonstrates our creative approach to partnerships and ability to identify and stay at the forefront of consumer trends driving the industry,” said Muhtar Kent, chairman and chief executive officer of Coca-Cola, in a statement. “By pairing the Coca-Cola Co.’s brand leadership and global footprint with G.M.C.R.’s innovative technology, together we will be able to capitalize on the many exciting growth opportunities in the single-serve, pod-based segment of the cold beverage industry. Importantly, this partnership provides our consumers with a convenient way to enjoy the brands they love through in-home preparation.”

Green Mountain expects fast growth for the platform, based on established consumer loyalty and brand recognition.

“There’s 18 million plus homes out there today that have a Keurig brand in it,” Mr. Kelley said. “We have built in basic consumers, and so we won’t be able to start and ramp up as slowly, nor do we want to ramp up as slowly with the cold system as the hot system.”

The system also represents Green Mountain’s evolution beyond the classic K-Cup, which lost share to unlicensed competitors when its patent expired in 2012. The company recently unveiled the Keurig 2.0 system, which brews both single-serve K-Cups and new K-Carafe packs that dispense 28-oz of coffee. The platform, which is incompatible with portion packs produced by unlicensed manufacturers, positions the company to win back its market share.

Additionally, the partnership reflects Green Mountain’s recent push to change its name to Keurig Green Mountain, Inc. The company plans to propose the name change at its March stockholder meeting.

“The Green Mountain coffee company has become very quickly Green Mountain beverage company,” Mr. Kelley said. “We’ve moved from having deep expertise in coffee, which we still have, to broader expertise across a number of beverages, which now include cold beverages. We have an infrastructure. We have a business with beverage experts that started in their base in coffee, and now we can expand that base to other beverages and that’s what we’re doing.”

As for future innovation, don’t expect to see a dual hot-and-cold beverage system anytime soon.

“If you look at the spectrum of a kitchen having five appliances, one for hot beverages, one for cold, one for alcoholic beverages, one for other beverages, it’s not likely consumers want that, but on the other hand they don’t necessarily want, they’ve told us, one machine that does them all because they don’t trust that it does each of them with perfection,” Mr. Kelley said. “They don’t believe that you can get the perfect brewed coffee or the perfect brewed soda unless you have a machine that’s distinct. Could we over time offer a very expensive machine relative to what we price it at today that can do multiple? Perhaps, but that’s certainly not in the short term.”
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