Why Coca-Cola invested in Keurig

Why Coca-Cola invested in Keurig

By Beth Kowitt, Writer February 6, 2014: 11:40 AM ET

A billion-dollar stake? Believe it. We get the details from Green Mountain CEO (and former Coca-Cola executive) Brian Kelley.

FORTUNE — Eyes rolled when Green Mountain Coffee Roasters (GMCR), best known for its single-serve pod Keurig brewing machine, first announced at its September investor day that it was building a system for cold beverages.

What was the Vermont-based company doing, thinking it could expand into sodas, juices, flavored waters and the like? Did it even have the know-how to do it?

Skeptics got a little bit quieter Wednesday when Green Mountain received a major endorsement from Coca-Cola (KO). The two companies announced an agreement to make Coca-Cola’s brands — such as Sprite, Fanta, and Minute Maid, though the companies didn’t specify which — available on the “Keurig Cold” platform. They also announced the beverage giant’s $1.25 billion purchase of a 10% minority stake in Green Mountain.

Green Mountain CEO Brian Kelley, a former Coca-Cola executive, told Fortune that the deal had been in development for a number of months. “They needed to have the confidence that we could make Coke and it would taste perfectly every time,” he says. The Keurig Cold platform is scheduled to launch next year.

The partnership seems unusual on the surface, but it has the potential to be a big win-win for both companies. The deal means access to a strong global distribution network and a portfolio of powerful brands for Green Mountain, which is only just starting its international expansion. For Coca-Cola, single-serve pods give the company a new channel to consumers, who have already embraced Keurig in the coffee space.

Single-serve has been a boon for the coffee industry. A recent Bank of America analyst note reported that single-cup coffee has now captured 30% of the dollar share of the market, up from 8% three years ago. That’s a point likely not lost on Coca-Cola, which is looking for a boost with fizzy beverages as soda consumption has seen eight straight years of decline in the U.S.

Green Mountain managed to get its Keurig platform for hot beverages into 15 million households by offering consumers choice. Don’t like Green Mountain coffee, the company’s namesake brand? No problem — there are 21 other partner brands in the system, including Starbucks, Celestial Seasonings, and Caribou.

Analysts have said Green Mountain would have to create a similar ecosystem to win over consumers in cold beverages, and Coca-Cola is a huge first step. Its portfolio includes not only sodas, but also names in tea and juice like Fuze and Honest Tea that have wide recognition.

While the partnership does give Coca-Cola a first-mover’s advantage, Kelley says it won’t preclude other brands from having access to Keurig Cold. He doesn’t believe that Coca-Cola’s equity stake will keep others from wanting to be part of the system. That certainly hasn’t been the case in hot. “Lavazza has an equity stake,” he says, “and that didn’t prevent their competitors from coming to us.”

Keurig Cold will be a separate machine from the hot Keurig brewer, although CEO Brian Kelley told me this fall when I visited the company’s offices in Burlington, Mass., that the company could one day build a machine that handles both hot and cold. Kelley says that Coca-Cola’s involvement with the hot Keurig brewer is something the two companies may pursue over time.

Conversations between the two likely would never have taken place if Green Mountain’s approach to making beverages wasn’t so in line with Coca-Cola’s demand for consistency. With Sodastream, for example, users decide how much carbonation to add to their water through a carbon dioxide tank. They can also pour in as much flavoring as they’d like. That’s great for consumers who may like more or less fizz, but makes it unlikely Coca-Cola would ever partner with Sodastream because it wants its product to taste exactly as Coke should every time.

As we wrote in the January 16, 2014 issue of Fortune magazine, according to a patent application from Green Mountain, its cold beverages may be carbonated by granules inside the pod that contain absorbed gas, such as carbon dioxide, which would be released upon contact with water. That means the Keurig Cold, which won’t have a carbon dioxide tank, will dose for the exact level of carbonation and flavoring necessary for, say, a Diet Coke or a Sprite.

When I visited Green Mountain’s offices late last year, I got a sneak peak at employees working on Keurig Cold, which at the time went by the code name Geyser. Despite the secrecy surrounding the project, executives knew I would have no idea what I was looking at since I don’t have an engineering degree.

What I could tell, however, was that the project was far along — it had been in development for five years. So why give Coca-Cola an equity stake at this point in the game? Kelley told me that the deal means that not only does Coca-Cola have an interest in its products doing well on the Keurig Cold, but it means Coca-Cola has in interest in the entire system doing well.

Kelley was drinking a Diet Coke when I met with him in November. (He switches to soda after 10 a.m. to reduce his caffeine consumption because he says soda has less caffeine than coffee.) In our January magazine story we noted that if he had it his way, he’d soon be able to get his soda out of a machine made by his own company than out of a can. That moment is no longer that far off.