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Will Keurig Green Mountain’s Cold Brewing System Be a Success? By Sean O’Reilly

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Will Keurig Green Mountain’s Cold Brewing System Be a Success? By Sean O’Reilly


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The Kold System The Kold is Keurig Green Mountain’s (NASDAQ: GMCR) first new business line since introducing the Keurig to the mass market Developed in partnership with Coca-Cola (NYSE: KO) Will be released in Fall 2015 in limited quantities online Will be available nation-wide at retail outlets by December 2016 Source: Keurig Green Mountain Investor Presentation


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The Kold System cont. The Kold will offer branded products from Coca-Cola and Dr. Pepper Snapple, as well as GMCR’s own brands of ice tea, lemonade, carbonated water, etc… GMCR believes that the Kold beverage system will deliver on the same elements as the Keurig® hot beverage system: quality, convenience, choice and simplicity Source: Keurig Green Mountain Investor Presentation


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Why The Kold Is So Important In the quarter ended June 27, 2015: GMCR’s Gross Margin has fallen from 43.5% to 36% YoY Net sales fell 5% year over year in the same quarter Diluted EPS fell 22% to $0.73 year over year Pod net sales fell 1%, even after factoring in volume growth of 5% Keurig brewers and accessories net sales fell 26% To Summarize: Growth is slowing – a lot


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Why The Kold Is So Important Cont. The Keurig 2.0 – once thought to be the company’s saving grace - has been a disaster GMCR continues to generate profits thanks to its pod business, but it’s days of growth appear to be over In-home coffee brewing business is suffering from both pod price competition and market saturation Keurig Green Mountain as pinned all of its future growth on The Kold


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Bull Case: The Kold’s Potential Market The Kold was born out of the company’s partnership with Coca-Cola (NYSE: KO) which also owns 16.8% of GMCR Partnership with Coca-Cola, the largest and most successful beverage purveyor in the world, is a bullish point The potential market for cold beverage is multiples of the hot beverage market Another potential use for the Kold is in-home alcoholic cocktail creation


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Bull Case: The Kold’s Potential Market Cont. Source: Keurig Green Mountain Investor Presentation


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Bear Case: Can Kold Succeed Where Sodastream Failed? Investors already have a case study for in-home cold beverage systems – Sodastream (NASDAQ: SODA) Sodastream too offered investors two somewhat separate businesses A stable, profitable, European-based carbonated water business A new U.S. focused soda business that offered investors a good deal of potential upside IF the American consumer bought in The results of Sodastream’s U.S. push were not good


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Bear Case: Can Kold Succeed Where Sodastream Failed? Cont. For its FY 2014: Revenues fell 9% YoY to $511.77 mil. Net income fell from $42.03 mil. to a depressing 12.3 mil. Losses marred by inventory write downs in anticipation of U.S.-division sales that never materialized For the quarter ended June 30, 2015: Revenues fell 28% to 101.7 mil. Net Income fell from $9.2 mil. To $3.5 mil. YoY Sodastream has more or less thrown in the towel as an in-home soda system company, opting to become a “ ’Water brand’ behind a health and wellness positioning” according to CEO Daniel Birnbaum in SODA’s Q2 Conference call


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Bear Case: Can Kold Succeed Where Sodastream Failed? Cont. The Kold will be priced at $299 Coca-Cola flavored cold beverage pods are estimated to cost $0.99 to $1.29 per pod at retail This pricing does not compare well with Sodastream’s models which start at $80


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Key Takeaways Keurig Green Mountain has a lot riding on the Kold It’s hot-beverage Keurig based business is still profitable but it’s days of growth are gone The weight of the evidence seems to imply that the Kold has a steep hill to climb Investors hoping for the days of growth in both the company’s top and bottom lines need to have a high opinion of the Kold’s prospects


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