In 1981, Green Mountain Coffee Roasters opened its doors when an entrepreneur and his partner purchased a small coffee roasting operation in Vermont and started selling their wares to both fine-dining establishments and convenience stores. In 1993, a growing Green Mountain invested in a fledgling startup that was developing a single-cup coffee brewing machine, called Keurig. Eventually Green Mountain became the first coffee producer to market the “K-cup” coffee pod utilized by coffee systems Keurig had developed and ultimately acquired Keurig outright in 2006.
Following the Keurig acquisition, Green Mountain Coffee Roasters went on a roller coaster ride of ownership changes, joint partnerships, and renaming efforts before acquiring the Snapple Dr. Pepper Group, changing its name once more to Keurig Dr. Pepper (KDP) and re-listing on the NYSE in June of 2018. In 2019, KDP generated $3.3 billion in EBITDA on $11.1 billion in revenues, representing a ~29.7% EBITDA margin. In July of 2020, the company reported weakly positive earnings, showing just 1.9% year over year revenue growth. Shares have more than doubled in value over the historical five-year period and increased approximately 47% in the last six months.
As Keurig Dr. Pepper’s history would suggest, the company operates in the non-alcoholic beverage industry through segments focused on coffee systems, packaged beverages and beverage concentrates. Keurig is certainly best known for their coffee systems operation, which produces 75% of single-serve K-cups pods consumed in the U.S. in addition to physical coffee brewing devices. In addition to manufacturing their own private label products, KDP also holds exclusive manufacturing agreements with other large coffee brands like Starbucks, Peet’s, Caribou, and Dunkin. The packaged beverage segments markets finished coffees, teas, juices and waters directly to consumers, while the beverage concentrates segment markets concentrated syrups to 3rd party beverage bottlers.
A look at the company’s financials shows that in 2019, Keurig generated approximately 38% of its net sales via its coffee systems segment, 44% via its packaged beverages segment, and 12% via its beverage concentrates segment, with the remainder coming from sales in Latin America, which are reported separately. This mix is interesting when considered alongside KDP management’s commentary regarding the impact of COVID-19 on the business. In 2020, Keurig has seen massive growth in the coffee systems segment resulting from the increase in at-home coffee and beverage consumption accompanied by a significant drop-off in their commercial business, which caters to office buildings and hotel chains. KDP’s packaged beverages segment also saw modest growth. However, due to a reduction in the number of operating food service businesses, the company noted a decrease in the beverage concentrates business as orders for concentrated soda syrup dropped.
Taken in this context, the 1.9% year over year revenue growth reported in KDP’s Q2 2020 earnings may not be paltry at all and could in fact point to the degree to which Keurig Dr Pepper is effectively insulated from the worst of the economic impacts of COVID-19. Although the company is not soaring quite as high as some of the large technology firms who dominate stock market headlines these days, the past six months have been good to Keurig Dr. Pepper investors. The company is exposed to both the at-home and commercial (Office and Hotel) markets in a big way, and it appears that declines in commercial beverage appetites have simply shifted to a domestic setting. What’s more, whenever office buildings open up again and white collar workers flock once more to the coffee machine, Keurig Dr Pepper will welcome them back with open arms.