Secret to Homemade Coke: Instant Cold, No Canisters; Coca-Cola and Keurig Dream of Less Lugging, More Glugging

Secret to Homemade Coke: Instant Cold, No Canisters

Coca-Cola and Keurig Dream of Less Lugging, More Glugging

ANNIE GASPARRO and MIKE ESTERL

Feb. 6, 2014 8:00 p.m. ET

For a century, the executives of Coca-Cola Co. KO +1.12% have done everything possible to put their famed cola “within arm’s reach of desire,” to the point that one chief executive frequently pondered an extra tap at the kitchen sink—with Coke flowing from it.

The company’s plan to team up with the maker of the Keurig single-serve coffee brewers to develop a do-it-yourself countertop Coke machine comes pretty close.

The new cold drink machine won’t look anything like SodaStream, the leading home soda maker, says Coke’s new partner, Green Mountain Coffee Roasters Inc. GMCR +26.24% It will have a similar design to Green Mountain’s boxy coffee maker, and keep the Keurig name.

“You put a pod in, push a button, and get a drink,” Brian Kelley, chief executive of Green Mountain said in an interview Thursday, one day after Coke said it will pay $1.25 billion for a 10% stake in its new partner.

The companies are betting that customers want convenience, he says, not having to lug cases of Coke or carbon dioxide canisters like those used in a SodaStream.SODA +7.15%

The soda Keurig won’t depend on canisters, says Green Mountain, because consumers found them inconvenient to refill and hard to manipulate.

In a statement Thursday, SodaStream International Ltd. said Coke’s announcement “serves as further validation of the relevance of our unique business model and the enormity of the global opportunity that lies ahead for us.’

Avoiding CO2 cannisters was one of the highest hurdles in the five-year process of creating the cold brewer, Mr. Kelley said. Another challenge was figuring out how to instantly chill the soda. “We make our hot drinks come out hot quickly; we had to make the cold ones come out cold quickly,” he added.

The soda pods will contain two chambers, he said. The first will have a liquid syrup for flavoring; the second will contain a pre-form of carbonation that will be released when the drink-making process starts. In addition to pods for Coke brands, the Keurig will also offer pods for non-carbonated cold teas, juice and sports drinks. The company wouldn’t say whether they will contain powder or liquid.

The flash-chilling and pre-measured doses of drink syrup are what differentiates the new Keurig soda maker from SodaStream and are probably why quality-obsessive Coke is willing to take such an unusual step.

But the move is no guaranteed home run. Coke’s last attempt to create a miniature soda fountain for the home, BreakMate, flopped in the early 1990s after great fanfare.

“The opportunity is small, will likely frustrate bottlers trying to accelerate bottle/can sales, reflects a bias for pushing brands over innovating “in the bottle’ and carries significant execution risk,” Mark Swartzberg, a Coke analyst at Stifel, wrote in a note to investors Thursday.

Green Mountain says it already has reached 13% U.S. household penetration for its pod-based coffee machine in a few years. (SodaStream has a 1% household penetration.) But soda is different than coffee. Coffee needs to be brewed fresh to taste good and most consumers prefer it hot, unlike soda, which can be bottled or canned and sit on shelves or in fridges for weeks while retaining its taste and carbonation.

Soda is already readily available and cheap, thanks to extensive bottling and distribution systems built up over decades. Many consumers might not want to fork out $100 to $200 for a Keurig cold drink machine that would sit next to their coffee makers on increasingly cluttered kitchen counters—especially when SodaStream machines start at $80.

The companies haven’t said what the soda pods will cost. The coffee K-Cups are more expensive per serving than buying a tin of coffee of a comparable brand. But people are willing to pay a premium for the convenience, Green Mountain has said. The company also has marketed Keurig as a good deal, since they are cheaper than buying a cup at a coffee shop.

If the at-home push succeeds, it could turn the cold beverage industry on its head. U.S. household penetration of soda is roughly 90%–nearly rivaling toilet paper.

Dorothy Chatman, a 69-year-old retired school teacher, and lifelong Coke drinker, is intrigued. She already owns a Keurig coffee maker. As for a Keurig cold drink machine with pods of Coke, “I’d probably buy that too,” she said, adding that it sounds “convenient.”

Coke could fatten its profit margins if more consumers agree to make its sodas and other flavored cold drinks at home. That’s because customers would be adding the water, which is heavy and inflates transportation costs. The lightweight pods also make e-commerce more financially feasible.

Bottling and distributing soda is a high-cost, low-margin business. In Europe, where Coke sells concentrate mix to independent bottlers and distributors, the company’s operating profit margin is around 40%. The company’s margin in North America dropped to the low teens from around 20% after acquiring its largest U.S. bottler in 2010.

Shares in Green Mountain soared 26% to $102.10 on Thursday after the Coke partnership was announced late Wednesday. But shares in SodaStream also rose Thursday, gaining 7.2% to $38.35, as some investors placed bets the at-home movement will gain momentum and that SodaStream could team up with PepsiCo Inc. PEP -0.04% or Dr Pepper Snapple Group Inc.

SodaStream, PepsiCo and Dr Pepper declined to comment on any potential talks.

SodaStream’s website makes fun of its rivals, with the slogan “Sorry, Coke and Pepsi.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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