For a number of years Keurig Green Mountain (NASDAQ:GMCR) has essentially been a one product company.
That's not such a bad thing when your one product -- K-Cup coffee pods -- changed an entire industry. Over the course of a relatively short period of time Keurig actually changed how much of the United States made coffee in the home and workplace. Instead of brewing an entire pot, the company managed to get people to use its single-cup brewing system.
Doing that was incredibly lucrative because the freedom to make one cup at a time using K-Cups came at a much higher price per cup than the previous pot-at-a-time method. It was a great business to be in, but the market for single-cup coffee may have peaked.
In its quarter which ended June 27 Keurig saw its net sales decrease by 5% over the same period in the previous year. During that period pod revenue fell slightly as well from $826 million to $815 million. It's by no means a disaster or a sign that the company has entered a major downward spiral, but it suggests that a return to significant growth will require a second hit product -- something the company hopes to have with the release of its KOLD, single-serve cold-beverage creation system.
A history of new Keurig brewers
Since the various K-Cup brewers became successful Keurig has tried to launch a second product line. It tried to break into cappuccinos and lattes with its Rivo line and attempted to make full-pot pods a thing with its 2.0 brewers. Neither concept has gained much market traction and the vast majority of the company's revenue still comes from sales of K-Cups.
That's a bit of a problem as there has been a growing backlash over the trash created by people using the non-recyclable, disposable pods. The company has pledged to fix this by making all K-Cups recyclable by 2020, but that's still a long ways away and by the time it happens, some one-time customers may have lost the habit of single-cup brewing.
Enter the KOLD
While Rivo and the Keurig 2.0 were simply different variants on coffee makers, KOLD brings the company into an entirely new area -- cold beverages -- in partnership with Coca-Cola (NYSE:KO), the biggest player in that space. The new, single-drink machine launched with pods available from Coke, making it the first machine that allows people to make single servings of the company's iconic drinks in their homes.
The introduction is a major step for the company, which CEO Brian Kelly explained in a press release where he cited his company's past success in changing how people consume hot drinks before laying out the massive challenge ahead.
Keurig has redefined the way consumers enjoy coffee and tea in their homes and offices and today with the launch of Keurig KOLD, we're embarking on a new journey that will change the way consumers enjoy cold beverages at home. The disruptive countertop-size innovation in KOLD is like nothing consumers have ever experienced -- from the rapid chilling that turns room temperature water to a perfectly chilled drink at the push of a button; to the dispensing technology that produces consistently great tasting beverages; to the pod technology which enables fully carbonated beverages. KOLD delivers game changing, on-demand variety of sparkling or non-carbonated beverages all fresh made with Keurig simplicity.
That's a bold promise, but even if KOLD delivers -- and early looks at the machine suggests it does -- the company still has to convince people to pay for it. That may be a big challenge given that KOLD retails for $369.99 and a four-pack of pods sells for $4.49-$4.99.
Can this possibly work?
Keurig is taking a slow approach to launching KOLD. It can be purchased at Keurig.com and will be sold at select retailers both online and in six cities as of now -- Atlanta, Boston, Chicago, Dallas, Los Angeles, and New York.
Going slow makes sense because the company has to convince people the convenience of being able to make a large variety of cold beverages on demand is worth the initial expense. Keurig also has to somehow get people to pay over $1 per drink when the cost of a can of soda is well less than that.
The biggest challenge is going to be getting people to lay out over $350 for a product that looks like fun, but is hardly essential. That could have been said of the original K-Cup machines, which cost a lot more than traditional brewers, but the gap was not as large.
At this price point Keurig faces a major uphill battle to establish KOLD as something people actually buy. Still, it's hard to not see the technology be demonstrated and not be intrigued. That, plus Keurig's base of business customers, might win the company a place in a reasonable number of office break rooms.
If that happens, not only may pod sales begin to build, but people who use the machine at work may decide they have to have one at home.
That's a long road -- and it seems like the price has to come down before there is widespread home adoption -- but Keurig appears to have a long-term strategy here. KOLD wont be an immediate hit, but if the company is patient it could build into a significant revenue generator.
Daniel Kline has no position in any stocks mentioned. He wants a KOLD, but can't see spending the money right away. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.