Beverage maker Keurig Dr Pepper (KDP) ended 2022 with double digit sales of $14 billion with expectations that gross margins will expand in the coming year as pricing and inflation moderate, especially in the company’s coffee segment.
KDP’s 10.8% net sales growth year-over-year compared to 2021’s results showed that the drink maker has bounced back from recent challenges to ingredient and labor sourcing, as well as steep inflation at the beginning of the fiscal year.
“As we approach the end of the year and enter 2023, we became more focused on the potential impact of recession on our consumers,” KDP CEO Rober “Bob” Gamgort said in prepared statements during the earnings call. “Despite seeing minimal evidence of changing behavior today, we are monitoring consumer behavior closely and are taking proactive steps to ensure our brand strength continues into 2023 and beyond.”
Net sales for the fourth quarter 2022 increased 12.1% to $3.8 billion. GAAP operating income decreased 7.2% to $673 million, compared to $725 million in Q4 2021. Gross profits were up nearly $2 billion in the quarter compared to $1.7 billion year over year.
Company leadership laid out plans to build on its Keurig coffee system business, which includes not only Keurig coffee brewers but Green Mountain Coffee Roasters, Tully’s Coffee and Donut Shop Coffee, among others. KDP is expecting to drive more household penetration with Keurig machines after consumer demand in 2021 depleted inventories, creating a challenging environment for the segment during 2022. Coffee system net sales for the year increased 5.6% to nearly $5 billion, compared to $4.72 billion in 2021.
KDP reported a U.S. consumer base for the Keurig brand of 38 million households with about 2 million new households added in 2022, in line with the company’s long-term annual targets. Gamgort said there is opportunity to expand further into the market with the brand’s new connected brewers and platform innovation as well as continuing to expand its roster of coffee company partnerships, citing the addition of specialty brand Intelligensia and Black-owned BLK and Bold.
Gamgort said KDP will focus even more heavily on its iced coffee brewer platforms and products in 2023.
The coffee segment grew net sales 5.6% for the year with pricing up 7% and volume mix down nearly 1%. Despite a deceleration of at-home coffee sales in 2022 compared to 2020 and 2021, the coffee category is still an “attractive long term growth category” for KDP and is expected to drive growth this year, said CFO Sudhanshu Priyadarshi on the call.
PepsiCo veteran Priyadarshi joined KDP in October just before Gamgort took over the role of CEO once again when Ozan Dokmecioglu abruptly resigned over conduct violations.
Before leaving the company, Dokmecioglu signed a sales partnership with Red Bull to carry the energy drink as part of its Mexico distribution network. KDP went on to finish the calendar year with two more key investments to broaden the brand’s reach into other avenues of the beverage industry.
In April, KDP and Tractor Beverage Company entered a long term exclusive partnership, with KDP investing $60 million in Tractor to help grow its visibility in the foodservice channel. Beverage Concentrates’ total shipment volume for the year increased 1.6% versus 2021. In the fourth quarter, KDP reported net beverage concentrate sales were up 14.3% to $447 million.
Later in the year, KDP invested $50 million in non-alc beer maker Athletic Brewing Company, and then proceeded to enter into a $863 million strategic partnership with C4 Energy producer Nutrabolt.
During the call, Priyadarshi highlighted that KDP is excited about new innovation this year. It has permanently added a new flavor to its Dr Pepper portfolio, Strawberries and Cream, which has already garnered 1% share of the CSD category, he said. Pointing to the strength of the company’s packaged beverages portfolio, KDP has expanded its hydration drink offerings with the three-SKU, functional line called Core Hydration+ and a March launch of a new Snapple Elements variety.
For the year, KDP reported that it forecasts the rate of inflation will moderate to mid-single digits, creating an unprecedented cumulative inflation rate of approximately 30% over the past three years. Yet, the company is confident that price increases that the company took throughout 2022 and in early 2023 will carry through to increase margins.
The company sees “substantial improvement” of its gross margins, but Priyadarshi cautioned that some of those profits will be reinvested into fresh marketing campaigns.
“You will see some flow through but we expect that we should start investing money in our brand,” he said in the question-and-answer portion of the call.