The Case for Keurig Dr Pepper

Brands

Compared to Coke and Pepsi, Keurig Dr Pepper has the most brands out of the 3 with about 32 beverage brands including Dr Pepper, 7up, Crush, Sunkist and much more. While Coke and Pepsi have considerably fewer brands, Pepsi has the advantage of also owning Frito Lay and Quaker Oats in addition to their beverage business. Coke is behind these two as it is a pure beverage play similar to Keurig Dr Pepper. However, I believe that the massive amount of brands Keurig Dr Pepper has gives it a considerable moat. These brands are leaders in their category and with the addition of Keurig, the company’s scale is magnified.

Keurig Dr Pepper’s strong brands allow it to cultivate a strong relationship with retailers and distributors. For example, it has Canada Dry and Schweppes, which are the two leading ginger ale brands. Another example would be Sunkist and Crush, which are 1st and 3rd respectively. Dr Pepper is 1st in the pepper category and A&W is 1st in root beer. These leadership positions demonstrate how Keurig Dr Pepper has a huge advantage over Coke and Pepsi with multiple brands being leaders rather than a couple.

However, the loss of Fiji Water and the potential acquisition of allied brand Body Armor are tough losses to Keurig Dr Pepper. The acquisition of allied brand Big Red was encouraging and the company should continue to acquire brands/businesses that it believes are attractive. With the addition of Keurig, several coffee brands are added to Keurig Dr Pepper’s portfolio including Krispy Kreme and Green Mountain. As long as Keurig Dr Pepper continues to reinvest in its brands and acquire new ones. For example, they should acquire the Arizona Beverage Company which manufactures Arizona Ice Tea because tea is still growing and Arizona is the market leader.

Domestic Presence

While Coke and Pepsi are largely multinational companies, Keurig Dr Pepper is a pure US domestic investment. About 90% of Dr Pepper’s revenues came from the US, which made it a huge beneficiary of the 2018 tax reform bill. Since most sales come from the US, Keurig Dr Pepper isn’t as exposed to the international markets as Coke or Pepsi. While Keurig Dr Pepper should try to expand and grow abroad, it also means that it is largely immune from geopolitical risks that may affect its competitors.

Management

Finally, we come to management. CEO Bob Gamgort is a phenomenal manager. Gamgort came from Keurig Green Mountain and has worked at Mars and Pinnacle Foods. He has helped turn around consumer brands and make them appealing to the public. Look at his record at Pinnacle Foods — Gamgort took Pinnacle public in 2013 and the company has been up 200% since it went public. He plans for Keurig Dr Pepper to be a “company [that] combines hot and cold beverages at scale”.

JAB, which owns a majority of Keurig Dr Pepper and also owns several food chains such as Krispy Kreme, Peet’s Coffee and Panera Bread, has this vision of owning the coffee sector. Most of JAB’s purchases within the last couple of years have focused on coffee and JAB seems intent on becoming a serious competitor to Starbucks. They have a long-term strategy with these brands and they may integrate their brands into Keurig Dr Pepper. This would create a serious food/consumer staples powerhouse armed with many successful brands.

Conclusion

The merger between Keurig Green Mountain and Dr Pepper Snapple Group has created a serious competitor to Coke and Pepsi. With a strong portfolio of leading brands, domestic presence, and superb management, Keurig Dr Pepper will reach $30 a share by the end of the year.

Disclaimer: I own shares/am long in KDP and may add to my current position in the near future.