Keurig, Campbells, and Coke: Hot and Cold
"A Keurig in every office" can describe both the company's business strategy as well as the state of the modern American business in 2015. This relative newcomer to the coffee industry has manufactured so many machines that they've circled the earth a dozen times with the discarded pods of coffee ubiquitous to the brand. Yet it hasn't been all coffee and roses for Keurig since an explosion of growth in 2014. Even as the price of coffee has seen a gradual decline while the machines became a smash hit, Keurig stock has fallen by over 50% in the 2015 calendar year, very near to the lower limit of their 52-week range. Rather than try to re-invent the wheel from the coffee angle -- they've already done that -- the company has decided to look outward to improve their business and has formed a partnership with Campbells's Soup Company, the 25th-largest food corporation on Planet Earth, as well as the Coca-Cola Company. Each business hope that the mergers will heat up their products to something better than the current room temperature.
What's In A Name
While customers cannot, alas, drop a tin can of chicken noodle into a standard machine and heat it up, the upcoming Keurig (GMCR on the NASDAQ, trading for $55.52 a share) models intend to do exactly that. Campbell's (CPB on the NYSE, trading for $51.69 a share) announced they would release soup pods capable of being warmed up to proper serving temperatures using the Keurig machines way back in 2013. By 2014, the company claimed they would delay the release for another year; come 2015, they've finally began to see proof of concept and will hit the shelves in the next months. Both companies hope that the combination of coffee and soup (an odd confluence, but nobody thought a computer company could make cell phones in 2005 either) will energize holiday spending and facilitate better sales of both machines and pods. While the original announcement claimed that three soup flavors would make the cut, it turns out that only two will arrive this year: an original chicken noodle and a Southwest chicken noodle, ensuring that their most popular brand of soup serves as the launching pad for the product. Campbell's claims that its chicken noodle soup along with its tomato and its cream of mushroom routinely place in the top-10 of all products sold at grocery store checkout lanes, giving the Keurig pod soup an extra bit of firepower to scratch out a customer body.
The Pod Market
While Keurig and Campbell's alike have a lot to hope for with their new market overlap, they're not standing alone in the pod market any longer. General Mills (GIS on the NYSE, trading for $57.42 a share) has tried to muscle into the food-pod scene by releasing a Nature's Valley oatmeal pod capable of running through a coffee machine and coming out on the other side with a hot breakfast. Indeed, General Mills likely had the better idea by combining breakfast food with coffee instead of soup, and they don't even need to pay the royalties to Keurig since the coffee pod patent expired in 2012. Relative to the price of instant oatmeal, in fact, General Mills pods are downright affordable, while Campbell's soups scale poorly in price compared to their tin-can cousins; a dozen Campbell pods cost about thirty dollars, while a dozen cans of Campbell soup cost only about a dollar each. On the surface, the Campbell deal won't swing Keurig stock fantastically upward, but rather will give the company a good sense of the expansion of their customer base in addition to developing new tests and processes for food preparation in their machines. The biggest fish of all looms on the horizon: the Keurig cold pods, which debut in 2016 with the potential to make your own soda.
Coca-Cola and Keurig already inject a lot of caffeine into the global economy on their own. Together, there's certain to be ample amounts of insomnia to come when the cold home-brewing soda system hits shelves next year. Coke (KO on the NYSE, trading for $39.62 a share) needs an upturn in their stock for the same reasons that Keurig does, even if they haven't felt as much heat as the coffee producers. Coca-cola stock is trading perilously close to their 52-week close, mostly because their archrivals PepsiCo acquired the Theo Muller Group and turned into the United States' largest food and beverage corporation. Coke wants to aggressively shoehorn themselves into the home brewing market and believes that the Keurig cold-brew system offers the best engine to do so, at a price tag of about three hundred dollars per pop. Given the recent popularity of cold-brewing in the US, a trend that's driving up the prices of coffee, Coke thinks they can further expand on the fifty-billion-dollar cold beverage market in the US. Keurig is only too happy to go along with the big boys, since the hot beverage market comes in at just a fifth the price tag of that of a cold beverage market selling soda, beer, iced tea, water, juice, energy drinks, wine, and milk. Thirsty investors should do well to follow suit.
- The Takeaway: the value of Keurig stock at the moment could hardly look better. The company will soon launch two separate innovations that drastically expand the scope of their product and will return the brand to the list of high-demand products right in time for the holiday spending. Investors should buy now and retain Keurig for as little as six months or as long as several years, depending on the desired rate of return. Coke stock also offers a value buy but is subject to more variance and likely won't grow as much. While Campbell's is a slow but steady grower, it's standing firm at 52-week highs, rendering its value much lower.
- General Mills won't see as much of a spike for short-term investors, but their success using Keurig's innovations demonstrates the company's versatility. General Mills is a fantastic growth stock for longer-term investors, having doubled since 2011, tripled since 2005, and quadrupled since 1998.