Will Keurig Gain Traction From The Kraft Coffee Deal?

in order to maintain the monopoly in
the U.S. coffee market
, Keurig Green Mountain
(GMCR)
publish his new coffee machine
. after the expiry of its
‘K-cup’ patent in September 2012. Along with the release of Keurig’s new
brewing system 2.0, the Vermont based K-cups maker has announced
another lucrative deal on August 22 with
Kraft Foods Group (KRFT).

Let’s take a closer look at the deal, and judge its long-term implications.

What the deal is all about

Starting this fall, caffeine addicts would be able to brew Maxwell
House, Gevalia, Yuban coffee brands of Kraft Foods and even McCafe
coffee of
McDonald’s (MCD)
using Keurig Green Mountain’s popular single serve brewing system.
Keurig’s shares hit a new 52-week high of $135.99 on August 22 when it
signed the multi-year licensing, manufacturing and distribution
agreement with one of the biggest names in the packaged food and
beverage industry, Kraft Foods.

Keurig’s CEO Brian Kelley commented on the agreement: “Adding Kraft’s celebrated brands to the licensed
Keurig family means Keurig consumers will be able to enjoy even more
beverages they know and love with the quality and consistency they
expect from their Keurig brewer.” The agreement would also help Kraft
Foods to expanding distribution across multiple channels.

In a spree of winning bigger share of the $11 billion U.S. retail
coffee market, this deal earmarks another big partnership for Keurig
which recently saw an uptick in its share price close to 79%
year-to-date, largely due to
Coca-Cola (KO) having
acquired 16% stake in the company. And with the current deal with Kraft
Foods, Keurig would also strongly add the McDonald’s McCafe coffee to
its beverage lineup.

That’s because earlier in August, Kraft Foods agreed to ship
McDonald’s McCafe to supermarkets and food outlets that were already a
part of its extensive distribution network. And now with Kraft’s deal
with Keurig, McCafe brand would be distributed via Keurig portion packs.

Keurig to benefit enlarge

Though the leader in coffee technology has been facing intense
generic competition, the addition of Maxwell House in its product
portfolio of pods offers Keurig almost all the major coffee brands. This
May, it had signed a similar distribution agreement with
J.M.Smucker for the Folger’s coffee of the latter.

Currently, Folger’s coffee is the top selling brand by volume in the
U.S. claiming nearly 15% of the market share. Maxwell House is the
second most favored brand with 10% market share, and this is expected to
give Keurig’s revenue a big boost. The brisk addition of Kraft’s coffee
brands to the Keurig family would increase the beverage options for
Keurig customers.

And this synergic relationship will allow the availability of all the
added coffee options in K-cups format, K-Carafe packs and Keurig Bolt
packs at-home and away-from-home channels.

According to the National Coffee Association’s info-graphic report for 2014, the daily consumption of coffee in the U.S. is increasingly
with every passing year. Presently around 34% of the Americans consume
gourmet coffee regularly, which is a rise of 3% over last year. Over the
past six-months Keurig has entered into several distribution deals with
the top retail chains and coffee brands – such as
Nestle and Subway.
The latest deal with Kraft Foods offers huge opportunity to the company
to strengthen its market share and accelerate top line growth.

Both companies have decided to work together initially to manufacture
Kraft-branded portion packs. But a slow transition is likely to take
place sometime later with Keurig solely manufacturing these packs using
coffee that will be sourced and processed by the packaged food giant,
Kraft Foods.

The partnership with the coffee giant would help Keurig to reduce
competition in the retail coffee market. Moreover, as Kraft Foods raised
the prices of Maxwell House and Yuban coffee products by around 10%
this June, it could mean increased price for Kraft-branded portion
packs, translating to increased revenue for Keurig. Also, this
collaboration could lead to customers ending up buying their favorite
coffee brands in bulk at retail stores, as now they just need to buy
Keurig branded portion packs with their favorite coffee brands.

Final takeaway

With a full range of coffee producers lining up to have their coffees
offered through the new Keurig machine, this coffee maker will have
little trouble brewing up its instant sales growth in the U.S. Overall,
the Kraft deal provides a huge platform to Keurig Green Mountain to
widen its customer base in the single-serve market. Keurig might be seen
to add more of licensed partners, and see its top and bottom lines
register healthy growth.

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