An Unlikely Alliance

February 19, 2018

Investment group JAB is merging coffee and soft-drink businesses with the hope of arresting the industry’s continuing stagnation

 

Hot and cold. Sweet and spicy. Coffee and soft drinks. Hearing this, one may think of opposites that should normally never interact. Yet investment vehicle JAB Holdings seems to disagree. Two weeks ago, JAB announced its acquisition of Snapple of Dr. Pepper for $18.7 billion in cash with $103.75 a share. The nature of the deal itself isn’t uncommon, but the choice of the company is. JAB has been acquiring coffee-based American consumer retailers – namely Krispy Kreme, Keurig, and Panera Bread among others. This diversification beyond coffee-based companies to a soft-drink company has left analysts and investors struggling. What is even more noteworthy is that JAB will be merging Dr. Pepper Snapple with its Keurig Green Mountain coffee business to create the first hot-cold drink hybrid company the market has seen in a long time.

 

JAB claims that changing consumer demands have resulted in the need for a company that offers a range of beverages for any time of the day, as opposed to PepsiCo or Nestle, which exclusively focus on either hot or cold beverages. This might be what the beverage industry needs, as demand for soda and sugar-based soft drinks is seeing a rapid decline. Industry giants, PepsiCo and Coca Cola saw a 1% dip in global volume of sales in Q4 2017. Keurig is not any better off, as their sales in the US coffee market have seen a 2.5% dip over the last 3 years.

 

Although JAB is claiming cost reductions of $600 million with the new company by 2021, the primary takeaway from the merger is behind-the-scenes distribution channels. Keurig sales rely heavily on its coffee pods, which are traditionally distributed through online channels and ecommerce websites. This has led to good relations with both Amazon and Best Buy. On the other side of the industry, Dr. Pepper Snapple has access to both Coca Cola’s and PepsiCo’s bottling and distribution networks. This grants it access to more readily accessible outlets such as convenience stores and vendors. For the new company, Keurig Dr. Pepper, this could mean a flurry of new products that could hopefully help it regain some lost ground. These include ready-to-drink coffees distributed through Dr. Pepper Snapple’s networks. A potential complication is that Starbucks distributes its ready-to-drink coffee brand through PepsiCo’s network. This could potentially lead to PepsiCo refusing to stock Keurig Dr. Pepper products on it shelves.

 

The uncertainty surrounding this acquisition is what is confusing analysts. While JAG and Keurig chiefs are optimistic about the cost synergies and growth potential, will the acquisition be enough to pull both companies out of what has been a tumultuous few quarters? Furthermore, is additional debt leveraging what Keurig needs right now? While proponents state the diversification will allow the Keurig Dr. Pepper to increase its total market share, and even compete with PepsiCo and Coca Cola, is unsure if consumer demand will respond as positively as Keurig has stated. For the time being, all we can do is sit and watch – preferably with a coffee or cold drink.

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