“We’re on track with the product development efforts, including brewer technology, the manufacturing of pods and appliances, and all of the brand development required” to launch Keurig Cold in the fall of 2015, which will be “well in time for the holiday season,” CEO Brian Kelley told investment analysts during the firm’s fourth quarter earnings call.
“We are well beyond the development stage in all of the core technical processes,” and “we are now in the scale stage. So, we are scaling the pods, we are scaling the brewer itself and we are scaling the equipment that makes the pods” by building two new facilities in Vermont and Georgia, he added.
Next the firm will give the product to consumers to test and in doing so will begin tapping into the cold beverage category, which is four times the size of the hot beverage category and has significant consumer interest, Kelley said.
“As we’ve stated before, the long-term growth potential for Keurig Cold in both North America and globally is significant,” given the “timing is right, as the launch of Keurig Cold converges with the on-trend consumer preference for premium at-home experiences,” he added.
The firm also hopes to tap into consumer preference for sustainable products by touting the new system as requiring “30% less water than producing a beverage via traditional bottle or can processes,” Kelly said.
A speedy take-off anticipated
CMGR anticipates the new Cold Keurig, which will compete with long-installed SodaStream, will penetrate the market significantly faster than its hot beverage counterpart in part by building on the firm’s well-established brand awareness.
“The awareness of the Keurig brand today versus when it launched is obviously significantly different. We have 20 million households out there with the installed [hot] base today that have a strong interest looking at the cold system and a number of other consumers who are not in the hot system who want it,” Kelley said.
The cold system also should grow more quickly because the firm will launch it into homes and offices at the same time, whereas the hot system began in offices and has been offered for home use for only three to four years, Kelley said.
And finally, he noted, the firms partnership with The Coca-Cola Company “brings some of the most famous beverage brands out there into the system immediately and that certainly adds to awareness of the system” and will help accelerate penetration.
Coca-Cola bought a 10% stake in Keurig in February and increased its hold to 16% in May, which some investors likely see as a vote of confidence in the new platform and also as a safety net for stock prices in case the launch does not go as planned. The beverage giant likely would buy up shares of the smaller firm if the price drops too low.
Weak contribution expected in 2015
The anticipated quick uptake by consumers, however, likely will not translate into a fast financial contribution to the overall company, noted CFO Fran Rathke.
She said “minimal revenue from our Cold platform” will contribute to the firm’s overall net sales in 2015, which she expects will grow in the high-single to low double-digits over fiscal 2014.
Fiscal 2014, which ended Sept. 27, went out strong with a 14% increase in revenue in the fourth quarter to $1.19 billion, the firm reported. This pulled up overall sales for the year to $4.7 billion, an 8% increase over the prior fiscal year, according to a Nov. 19 press release.
Rathke also surprised the industry by announcing the same day that she will step down as CFO and treasurer. She has agreed to stay with the company through as late as Sept. 26, 2015, as the firm searches for her successor.
The potentially slow contribution of the cold platform in fiscal 2015 could rub some investors the wrong way given that Kelley said the product innovation and roll out will cost the firm between $50 million and $100 million.
He justified the “significant expense” as including the opening of two new manufacturing plants, research and development, training and other components associated with the startup process, he said. However, he added that he does not expect the last year of roll out to be weighted more heavily than the previous years of investment.
The introduction of the cold platform will come hot on the heels of the Keurig 2.0 launch in the fourth quarter, about which Kelley said retailers are “very excited … and have been very supportive by highlighting the product with advertising, promotion and merchandising, as we move through the holiday season.”
The firm also is supporting the launch of the more versatile brewer with a broad-based marketing campaign with 9.5 weeks of national TV, 9.5 weeks of local TV in designated areas and 12 weeks of local digital advertising in the same areas, Kelley said. It also will increase in-store demonstrations through the holidays to drive trail, awareness and direct sales, he added.