What's Next for Keurig Dr Pepper?

For beverage makers like Keurig Dr Pepper (DPS), it has become all about offering a wide range of choices across numerous platforms. The company dominates the single-serve coffee market in the United States and it has access to all sorts of brands through JAB Holdings, which owns a controlling interest in its stock. Of course, coffee is only one part of the business, which just reported its first earnings since the merger happened.

In this segment from Industry Focus: Consumer Goods, host Vincent Shen and Fool.com contributor Daniel Kline discuss the beverage giant.

A full transcript follows the video.

This video was recorded on Dec. 11, 2018.

Vincent Shen: Keurig Green Mountain and Dr. Pepper Snapple announced in early 2018 that they'd be joining forces. Another huge deal for JAB Holdings, which is pulling all the strings with its control of Keurig, which it acquired in 2016, not to mention the many other businesses that it has purchased over the years, like Peet's Coffee, Caribou Coffee, and bigger chains like Krispy Kreme, Panera Bread, and Au Bon Pain. In fact, since the Keurig Dr. Pepper deal announcement, the company's already scooped up Big Red, a smaller soft drink brand, and Core Nutrition, a premium water company. That was over a $500 million deal.

I remember at the time of this deal announcement, Dan, we were a little puzzled by the decision for these two companies to come together. You're bringing a non-coffee beverage company into the fold. But Keurig Dr. Pepper is now the third largest beverage company in North America. There is some strength, I think, in the safety of having that sort of scale. Bring us up to speed, Dan. If you had to get to some of the core strengths, what's jumped out to you about this combined entity so far? What is it?

Dan Kline: I think it's become pretty clear in the beverage space that moving away from soda is very important. But beyond that, you want to diversify. We did a show a few months back about Coke-Costa, which is a coffee company deal, which was a $5 billion transaction. It's becoming, if you're building all these channels, whether it's retail distribution, stores, restaurants, the more things you could pump into that, the better. So, while Keurig, which is largely a home-based, brand doesn't seem to fit, it is sold in stores, there is a commercial platform for it, so it becomes this, we don't know where American tastes are going to go. It might swing back to soda. Canada Dry had a really good quarter. It might swing away from water, because people might realize they're paying a lot of money for water, which they have in their house for free. [laughs] So, this is a company that covers a lot more bases.

And, while it's still only No. 3, and a relatively distant No. 3, it does give it a little more marketing oomph when it comes to shelf space or the ability to talk to some of these partners. You're not going to start seeing major restaurant chains switching over to the Keurig Dr. Pepper soda and coffee platform, but at least you will see some retail shelf space in convenience stores. It gives the company a lot more power to negotiate there.

Shen: Sure. To remind listeners and give you an idea of the scale of this brand portfolio that the company has at its fingertips, of course, there's Keurig, the coffee side of the business. In the name, Dr. Pepper. But also, the company has names like Canada Dry, Snapple, Bai Brands, an acquisition they made shortly before they announced this merger. Entering the healthier beverage space, a lot of these companies are trying to do that.

In total, between owned and partnered names, the company has over 125 brands at its disposal. It makes for a pretty, I think, formidable enterprise. Keurig Dr. Pepper actually reported its first quarter of results as a combined entity. Dan, what do you think? Are we seeing some of the promised synergies or other deal benefits materialize?

Kline: It's very early. But the good news is, we've seen a lot of these mergers. It's very hard to pull off a merger without having some sort of disruption. We tend to see it worse when it's a technology merger. Frontier Communications, if you remember, a couple of years ago, was a disaster. But here, they've maintained their supply lines, and they're on track to save $600 million over about three years. That'll be an annual savings, and it'll come in at about $200 million each year before they get to the total $600 million. It really is a so far, so good integration.

I think the company has to figure out what it's going to be. It's ended some relationships, it's added Evian Water, which is a known brand which gives it a premium water play in the market. This company, which will be about an $11 billion company, becomes a very attractive partner play. It doesn't have everything. If you're going to partner with Coke, Coke might have three brands. If you're going to partner with Pepsi, Pepsi might have the same thing, they might have two, three, four brands competing in your space. Keurig Dr. Pepper has a little bit simpler of a portfolio. There are some holes in it. There's really some room to bring in some other things and to grow what they do.