Keurig Dr Pepper sales surge as soda growth offsets slowdown in coffee
- Keurig Dr Pepper's sales during the third quarter were $2.86 billion, an increase of 2.9% from the same time a year earlier. The increase was driven by a 3.6% jump in volume, that was partially offset by currency fluctuations and lower prices. Income rose 14.3% to $697 million compared to $610 million. This was the first quarter the company announced earnings that combined both its Keurig and Dr Pepper divisions since the merger closed in July.
- Sales in beverage concentrate rose 3.1% to $331 million and 4.9% in packaged beverages to $1.336 billion. Revenue in its coffee division edged up 0.4% to $1.05 billion as lower prices offset a 3% volume increase for pods and an 8% gain for brewers.
- "We're off to a great start as a combined company," Bob Gamgort, Keurig Dr Pepper's CEO, said in a statement. "Our new organization is working well and delivered a strong quarter, with both top- and bottom-line growth and market share strength across our major categories."
The combined company gives Keurig Dr Pepper a hand in a diverse range of beverages found at nearly every place consumers frequent during the day. Keurig Dr Pepper now has a more dominant position at homes, convenience stores and supermarket shelves with sodas like 7UP and Dr Pepper, ready-to-drink coffee from K-cups and fruit-flavored antioxidant drinks such as Bai. One advantage of the merged entity was evident this quarter as challenges in one beverage brand can be overcome by another division.
The first quarter together appeared to be a good one for its soda division, providing evidence that the fizzy drink remains lucrative despite a multi-year slide. Last week, Coca-Cola also reported strong results in soda as the popularity of Diet Coke and Coke Zero Sugar pushed the category 2% higher during its third quarter.
For Keurig Dr Pepper, sales growth in its soda concentrate business was driven by Dr Pepper and A&W, partially offset by Sunkist. An increase in shipment volume came from Canada Dry, Crush and Hawaiian Punch, while Dr Pepper and Sunkist declined.
Revenue for packaged beverages jumped, reflecting a higher volume/mix, but lower prices. Shipment volume rose as an increase in contract manufacturing and growth in Canada Dry, BodyArmor, Core and Bai helped partially counter lower shipment volume for 7UP and Dr Pepper.
One area where growth wasn't as robust during the quarter was in coffee. Sales edged slightly higher as volume/mix growth was almost entirely offset by a 1.7% drop in prices. The company latched on to growing consumer demand for premium coffee during the period by launching its new coffeehouse brewers — the K-Café and the K-Latte — that enable consumers to make lattes and cappuccinos at home. As companies like Nestlé and J. M. Smucker expand their coffee lines to include more gourmet brews, Keurig needs to keep pace and this brand extension seems like a good start.
Bonnie Herzog, an analyst for Wells Fargo Securities, called the results "solid," noting a moderation in pod price declines and better-than-expected operating margins.
"We remain encouraged by KDP’s revenue growth opportunities and believe that KDP can leverage legacy Dr Pepper’s distribution network to expand the reach of brands such as Peet’s Coffee and its branded K-cups," Herzog said. "That said, we remain mindful of several challenges, including elevated input/transportation costs, and we think this could limit further upside near term. However, we also believe that KDP should start to benefit from recent pricing actions and brewer innovation, limiting potential downside risk."
While the new company has a hand in multiple times of the day when people consume a beverage, it's uncertain whether the synergies Keurig Dr Pepper can mine from the merger, or the roster of products themselves, will be enough to sustain the company long term. Executives appear to realize it needs to do more. As a result, it has been adding drinks to the mix that cater to what consumers are increasingly gravitating toward.
During its third quarter alone, Keurig Dr Pepper purchased Big Red, a regional soft drink marker; signed a definitive agreement to acquire premium water company Core; and added Forto, a rapidly-growing brand of coffee energy shots, to its partner portfolio. It also expanded its distribution relationship with Peet's, and entered into a partnership with Danone to sell, distribute and merchandise Evian premium water.
The company in recent years has collected a large amount of revenue from its "allied brands," a roster of drinks made by other companies that it distributed. This segment has been undergoing sweeping changes in recent months. Fiji announced in July it would build its own distrubtion network, while Coca-Cola acquired a minority stake in BodyArmor for an undisclosed amount with an opportunity to fully acquire the sports drink brand in the future. Keurig Dr Pepper has been known to acquire some of those brands from time to time, including Big Red and Bai last year.
Keurig Dr Pepper has a stable of well-known brands that will remain the foundation of the company for the near future, but its growth could ultimately hinge on how well it builds up its roster of brands outside of soda and coffee. The move to add Evian and Core to offset the loss of Fiji shows the company is aware of how it needs to position itself, but the beverage space is rapidly evolving and it's likely that Keurig Dr Pepper will have to make more moves in response.
- Keurig Dr Pepper Keurig Dr Pepper Reports Strong Third Quarter 2018 Results
Follow Christopher Doering on Twitter