Will the US warm up to the Keurig Kold?
Prices — $1 per drink, $369 for the machine — may dampen debut
After six years and more than $1 billion in backing from the Coca-Cola Co., Keurig Green Mountain Inc. finally brings its cold soda and beverage maker to market Tuesday.
But it will probably have to wait another year to learn if it will be either an expensive novelty or a big enough hit to rescue the Waterbury, Vt., company from lukewarm sales of its marquee coffee business.
Keurig believes the market for cold beverages will be much bigger than for coffee, but acknowledged that sales of Keurig Kold may ramp up slowly — not least because of the prices, $369 for the machine and more than $1 for each 8-ounce drink.
"As we changed how hot beverages are consumed in the home, we think this will do that for cold beverages," Brian Kelley, chief executive of Keurig Green Mountain, said during a recent demonstration of Keurig Kold.
Kelley said he expects retailers to offer discounts on Keurig Kold during the upcoming holiday season, and predicted the machines will become less expensive over time as it manufactures and sells more of them.
"There are a lot of things consumers will pay $299 dollars for and we think this is one of them," Kelley said. "We've literally brought a bottling plant into your home in a size that fits on your counter."
The company has a potent partner in Coca-Cola, which in early 2014 invested $1.25 billion in Keurig to help develop the cold drinks machine. The soda giant now owns 16 percent of Keurig, and chief among the first drinks that consumers can make with the machine is a Coke.
Analysts who have tested Coca-Cola and other brands from the machine say the homemade drinks taste similar to fountain versions.
Similar to Keurig's coffee maker, the Keurig Kold uses small packages of ingredients — two connected pods with syrup in one, carbonation beads in the other — and a novel chilling method to cook up a cold drink in about one minute. In addition to Coca-Cola products, consumers can buy flavor pods to make Dr Pepper and Canada Dry, as well as in-house brands of soda, sparkling water, iced teas, and sports drinks.
Bruce Cohen, head of the private equity and strategy practice for the consulting firm Kurt Salmon in San Francisco, said he expects the variety of offerings and 8-ounce serving size to appeal to consumers. But he predicted it might take another year to determine the machine's long-term potential.
"The real question is, is it going to be enough to drive the company's performance?" he said. "I think we're going to wait and see."
Keurig could use a jolt. Revenue in the third quarter declined 5 percent, to $969.6 million, compared to a year earlier, with sales of coffee machines down 26 percent. Most of Keurig's income comes from sales of coffee pods, which were down 1 percent in the quarter.
Keurig also recently downgraded its forecast for 2015. It has not publicly discussed detailed estimates for Keurig Kold sales but said it expects to sell hundreds of thousands of the machines in the first 12 months.
Once a piping-hot growth stock, Keurig closed Monday at $53.19, down 4.2 percent and well off its high of $158.87 in the last year.
Analysts who follow the company say it's far from certain Keurig Kold will become a staple in American homes. Their chief concern is that it's simply too expensive to be widely adopted early on.
Like its coffee, cold drinks from Keurig are expensive, compared to buying them in bulk. The pods sell for $4.49 to $4.99 for a pack of four.
"When you compare that to a 33-cent can of soda you pull out of your refrigerator, this is a significant price increase," said Scott Van Winkle, a stock analyst at Canaccord Genuity Inc. "It's much higher than coffee was."
There are also fundamental differences between the hot and cold machines. Unlike soda, hot coffee doesn't come premade or prepackaged, so consumers need either to have a coffee maker at home or to go out to get a hot cup, Van Winkle said.
"In the case of soda, you don't have to make soda at home to have soda at home," Van Winkle said. "It's a very innovative product and they have the right partners, but there are some drawbacks."
Keurig contends that the cold brewer will give consumers more variety and notes that the pods will take up less space than a 12-pack or a 2-liter bottle of soda. The pods will be launched in 25 flavors.
Other analysts said the pricing on the cold drinks line won't help Keurig and places even more pressure on its main coffee business. Mark Astrachan, an analyst at Stifel Financial Corp., warned that Keurig's coffee sales have nearly peaked.
But Kelley said he believes Keurig's coffee sales can rebound, with room to grow in markets on the West Coast and overseas.
He also said that the company heard criticism about its coffee maker that was similar to what it is now fielding about Keurig Kold, and yet the machine went on to become the top single-cup coffee maker brand on the market.
The company has said it plans to invest more than $100 million in the cold brewer in 2015 alone.
Kelley said Keurig is already working on several new models of the machine, including a brewer that makes both hot and cold beverages.