Keurig bets on cold-brewing system to heat up profits

With stock slipping, company hopes for a big rebound

Keurig teamed up with Coca-Cola on the home beverage maker.

Business is running hot and cold at Keurig Green Mountain, the Vermont company behind the K-Cup single-serve brewing revolution.

Keurig's hot coffee system helped propel its shares more than 600 percent higher from the lows of 2012 to a peak last fall. But Keurig's newest coffee machine turned out to be a disappointment that angered customers and sent sales of brewers sharply lower. Keurig's stock tumbled by more than a third from its highs of late last year.

Last week, the company blamed its disappointing quarterly results on the new Keurig 2.0 brewer, which works only with its relatively expensive licensed coffee supplies and doesn't accept reusable cups that customers often fill with their own grounds. Coffee drinkers rebelled, and Keurig 2.0 sat on store shelves.

"We underestimated the passion that consumers had for this," chief executive Brian Kelley said in a call with analysts. "We shouldn't have taken it away."

Keurig's overall quarterly profits slipped 4 percent to about $156 million, and the company lowered its business expectations for the rest of the year.

Now, Keurig's prospects as a high-growth business might rest on Keurig Kold, its first cold beverage system. On Thursday, the company intends to release details about the brewer, which is scheduled to hit the market this fall.

"If cold works, Keurig is much more than a coffee company," said Brian Holland, an analyst who follows the business for Consumer Edge Research in Stamford, Conn. "If cold doesn't work, Keurig is just a coffee company that is reaching a more mature stage in its life cycle."

Similar to the hot beverage system, Keurig Kold will use pods with preset recipes to produce the same universal taste of well-known brands. Keurig has not released the price of its cold brewing system, but Holland expects the brewers to cost about $200 and the pods to range from 50 cents to 75 cents each.

"Cold will be the biggest test yet for their ability to exist in the consumer's mind as more than just a coffee company," he said. "They have a lot riding on this cold product."

So far, Keurig has signed deals with Coca-Cola Co. and Dr Pepper Snapple Group to integrate the companies' popular soda brands into the new cold brewing system.

Holland said the deals suggest Keurig has built a high-quality brewing system because the partners would not sign on unless it produced a taste that matched their brands.

"They are bringing Coca-Cola in on day one," Holland said. "There's a credibility with it. It's a meaningful brand for a US audience, and on a global basis, Coca-Cola has won the world over."

But Coca-Cola is more than just a licensing partner. It became Keurig's largest shareholder after the companies signed a 10-year pact last year to collaborate on the cold-drink system.

Coca-Cola bought 10 percent of Keurig early in 2014 and later increased its stake to 16 percent. Some investors even speculated that Coca-Cola would eventually acquire Keurig.

Holland said critics have questioned whether it's wise for Keurig to move into the soda industry as health-conscious consumers reduce their consumption of sugary drinks. Soda sales have declined for 10 straight years — putting pressure on Coca-Cola to find alternative distribution methods such as Keurig Kold.

But Holland said Keurig would need to capture only a small percentage of soda drinkers to successfully introduce Keurig Kold, which will also make still and sparkling drinks, juices, sports drinks, teas, and other beverages.

Until now, the at-home cold-brewing market has been dominated by the Israeli company SodaStream. Its carbonated beverage machines are widely available and offer brands like Ocean Spray, Crystal Light, and Kool-Aid.

But Holland said the Keurig brewer will be far different. SodaStream, he said, made the mistake of allowing customers to select their own carbonation levels.

"The problem is the consumer doesn't know how to control the carbonation levels," Holland said. "Consumers only care that it tastes good."