Analysts: Coke/Green Mountain Deal Could Reignite CSDs; Is Pepsi/SodaStream Deal on the Way?

Bonnie Herzog, Wells Fargo Securities

Following yesterday’s announcement that the Coca-Cola Co. will purchase a 10 percent stake of Green Mountain Coffee Roasters and enter into a long-term partnership with the Vermont-based company, a number of beverage industry analysts weighed in on the move, one that will result in a new line of Coke-branded pod-based products.

Bonnie Herzog, Managing Director of Beverage, Tobacco & Convenience Store Research, Wells Fargo Securities, hailed Coke’s investment as a “bold” and “transformative” and views the partnership between Coke and Green Mountain, which plans to launch a cold beverage version of its Keurig brewing dispenser in 2015, as a critical step for Coke and the CSD category as a whole.

“This partnership leverages the power of [Coke’s] brands, marketing, and distribution with [Green Mountain’s] technology and innovation,” Herzog said. “Overall, we view this as very positive as we believe this could help reignite CSD volumes.”

Herzog noted that the addition of pod-based products have added significant value to other companies that partner with Green Mountain, which include Starbucks and Dunkin’ Donuts.

“Importantly, we believe this partnership should drive revenue and profit growth for [Coke] and the CSD category based on our analysis of how [Green Mountain’s] partnership with [Starbucks] and other leading brands helped drive incremental growth and profits to the ground coffee category.

Herzog views the deal as having limited upside to Coke bottlers, noting that consumers will soon have the ability to become “his/her own “bottler.” Moreover, “this partnership could accelerate the decline of packaged CSD beverages in the take-home channel, which could have an incremental negative impact on Coke Bottlers,” Herzog said, a notion that Coke Chairman and CEO Muhtar Kent disagrees with.

Muhtar Kent, Chairman & CEO, The Coca-Cola Co.

In a call with reporters yesterday, Kent called Green Mountain’s new cold beverage machine “real game-changing innovation” that will create new business opportunities for the cola giant, according to Reuters.

“This is not a zero-sum game,” Kent said. “It just provides more opportunity for our brands.”

That opportunity could come from growing consumer demand for beverage variety, and an “all-in-one” at-home beverage dispenser, according to Jonas Feliciano, Beverage Analyst, Euromonitor International.

In a recent blog post, Feliciano wrote that “Green Mountain states that there are fourteen occasions in the average U.S. household where consumers drink a beverage. The cold system, with its ability to create such a wide variety of beverages, can cater to entire families with varying beverage preferences or even the single consumer who wants variety at home without having to stock his/her refrigerator with a dozen different bottles and cans.”

After the announcement of the Coke/Green Mountain deal, Feliciano noted that for Coke, “this really recognizes the fact that there is potential in the at-home beverage market and make sure that [Coke is] at the ground floor before losing to companies like SodaStream.”

Soda Stream currently leads the market for at-home preparation of carbonated beverages, however, Feliciano told the Associated Press that the company’s machines, which require CO2 carbonation devices, may be at a disadvantage compared to Green Mountains new cold beverage units. The new Keurig Cold system will, unlike Soda Stream, not require the use of replaceable carbonation cylinders. As a result, Feliciano believes that the potential for Coke’s deal with Green Mountain is “even beyond SodaStream.”

Nevertheless, Rick Munarriz, an analyst with investment website The Motley Fool, sees an upside for Soda Stream. Munarriz believes that Keurig Cold could represent a healthy competitor for SodaStream, which has its own licensing deals with a number of popular beverage brands including Kool-Aid, Ocean Spray and Crystal Light, and bring greater attention to a growing segment of the market.

“Validation and education aren’t always easy feats for a disruptive industry,” Munarriz wrote in a blog post. “SodaStream continues to sell a healthy number of beverage makers, but Coca-Cola and Green Mountain entering the market could draw more attention to the niche. This would be a positive for the entrenched and connected market leader: SodaStream.”

One big question that’s been raised since the Coke/Green Mountain deal was announced is how Coke’s chief rival would react. While PepsiCo has made no official statement, rumors that the company would look to counter the move with an acquisition of SodaStream have — once again — risen to the surface. Last year, PepsiCo was thought to be interested in purchasing SodaStream; the company, however, denied any interest to do so.

In a note to investors, Deutsche Bank AG analyst Bill Schmitz Jr., stated that “many will view this announcement as negative for SodaStream, but there is a small possibility that PepsiCo follows Coke’s lead and partners with [the company].” Schmitz noted that “it will be interesting to see if [Green Mountain’s] product, which relies on a chemical reaction, gains traction relative to [SodaStream's] CO2-based solution.”

Interestingly, Schmitz said that he was “surprised by the announcement” of a partnership between Coke and Green Mountain, instead viewing an outright purchase of the coffee company as a more likely possibility and a way for Coke to enter the U.S. coffee category, particularly as Green Mountain  president and CEO Brian Kelley had previously been the president of Coca-Cola Refreshments.

That being said, Coke has the option to raise its stake to as much as 16 percent during the first 36 months of said Ben Deutsch, a Green Mountain spokesman.