Keurig Dr Pepper explores inorganic growth opportunities after intense internal focus

By Elizabeth Crawford contact

- Last updated on GMT

Source: Getty/Jonathan Knowles
Source: Getty/Jonathan Knowles

Related tags: keurig dr pepper, Mergers and acquisitions, Investment

After two years of focusing internally to navigate pandemic-related supply chain, labor and other challenges, Keurig Dr Pepper will begin to look outward once again for inorganic opportunities, including mergers & acquisitions, partnerships and minority investments in emerging businesses.

At the same time, the beverage company is building out a strong foundation to support its scaling business by ensuring the management team has sufficient bandwidth, improving distribution capabilities and rethinking the best way to support fast-growing e-commerce, executives told investment analysts yesterday during the company’s first quarter earnings call.

The shift comes as CEO Bob Gamgort prepares to pass the baton on to CFO Ozan Dokmecioglu – allowing Gamgort to focus more on inorganic opportunities as he moves into his new role as executive chairman.

“I am certainly looking forward to being able to have more space”​ to work on inorganic opportunities and particularly mergers & acquisitions and partnerships, Gamgort said.

He explained that during the past 2.5 years the company has has been “very intensely operationally focused, very much managing … one crisis to the next,”​ as have many in the food and beverage industry.

And, he added, “while that’s critically important and is the right priority it didn’t leave a lot of time to think about and work on the strategic aspects of the business that require a significant amount of time, investment, patience and even relationship building to be able to do that properly.”

Partnerships

Thinking ahead to the types of deals and arrangements that would most likely catch Keurig Dr Pepper’s attention, Gamgort said he sees three primary opportunities.

The first is developing a range of partnerships that don’t require a change in ownership, such as Keurig Dr Pepper’s recently reinstated arrangement with Community Coffee, announced yesterday, which later this year will reunite the family-owned retail coffee brand as a Keurig partner brand.

“The relaunch of our partnership after a five-year hiatus is a testament to the quality, innovation, service and consumer insights the Keurig ecosystem can provide to coffee brands,”​ Gamgort said.

He added, “We don’t need to own that business, by any means, to have the benefits of that. And, likewise, by partnering with us they win as well.”

Seed investments

In that same vein, Gamgort said Keurig Dr Pepper also will consider seed investments as a way to drive inorganic growth.

For example, Gamgort pointed to the company’s minority equity investment in Tractor Beverage to expand innovation in the fountain and foodservice channels, also announced yesterday.

“Available nationally in Chipotle restaurants since 2020, Tractor offers the first and only certified organic, non-GMO beverage solution specifically tailored to foodservice operators,”​ Gamgort said. “To enable Tractor to achieve widespread distribution across multiple food service channels, we have also agreed to enter into an exclusive sales agreement with Tractor that leverages the strength of our fountain foodservice sales team,”​ he added.

Mid- and large-scale M&A opportunities 

Finally, Gamgort said, the company is also looking for mid- and large-scale M&A opportunities and is “constant dialogue with a large number of potential partners”​ about which he could not go into details.

However, he did note the company is reticent to overpay for large deals and that it would carefully scrutinize multiples.

“We’re in an environment now where we’re seeing all kinds of valuation shifts. And people – our investors – are more in favor of paying for cash flow and earnings than jut multiple of sales with no earnings potential in them,”​ he added.

Preparing for scale

As Keurig Dr Pepper explores partnerships and mergers & acquisitions to grow its business, it is also reinforcing its infrastructure to ensure smooth integration and execution.

“There are three big areas in which we’ve set up a business to scale,”​ Gamgort said.

The first is building out a management team that has the capacity to support additional obligations beyond that which they are balancing currently.

“Our focus on North America, I think, gives us a big of an advantage here. Having managed global businesses in my past to be able to focus in one region where you have common consumers, common customers, yet a significant amount of white space for expansion is an advantage for management to be able to continue to take on more without being distracted,”​ Gamgort said.

Secondly, the company has made significant investments in its distribution capabilities to support expanded business opportunities. This includes building out its foodservice footprint, such as through the Tractor arrangement,  and significant investment over the last three years in direct store delivery options with the acquisition of 25 independent distributors.

Shipping liquids by UPS or FedEx 'is not a great business model over the long term'

Finally, the company is exploring how best to leverage e-commerce, recognizing that shipping liquids by UPS or FedEx “is not a great business model over the long term,”​ Gamgort said.

“We see that area rapidly evolving and we’re in a really good position. Part of enabling us to do exactly that required us to go back and redefine and renegotiate a number of our distribution agreements that were not contemplated in an environment of e-commerce and we’ve been very successful doing that over the past now four years to set ourselves up so that we have a win-win with our distribution partners, our independent partners”​ and others.

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