The Business Behind Keurig and Where It’s Heading

“Razor-Razorblade model”

• Selling dependent goods for different prices• Primary product sold at a discount (the Keurig

brewing machine)• Dependent good sold at a markup (the K-Cup)

• The K-Cup represented 73% of sales in 2013.

Keurig sales mix

K-Cups become a higher percentage of sales as consumers adopt brewing systems.

Partnerships

More than “35 owned, licensed, partner and private label brands” Photo Source: Q2 2014 Presentation

Declining YOY growth rate

Declining growth spurs plans for new initiatives

Source: Morningstar2013 2012 2011 2010 2009

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Keurig Green Mountain YOY Revenue Growth

Keurig Green Mountain YOY Revenue Growth

New initiatives – Keurig Cold

• Keurig Cold represents the most notable initiative in 2014.

• The company utilizes investment proceeds from beverage giant Coca-Cola to build facilities for making the home carbonation system.

• The market potential for cold exceeds hot by roughly 4 to 5 times.

Experienced management

• Keurig’s CEO, Brian P. Kelley joined the company from Coca-Cola in 2012.

• One of his roles at Coca-Cola was Chief Product Supply Officer.

• A Chief Product Officer oversees innovation, project management, and release management.

• His experience in the role will help guide the company in its new initiatives especially the Cold device.

More profitable than SodaStream

Keurig’s operating margin exceeds SodaStream’s.

Source: Morningstar

2013 2012 2011 2010 20090

2

4

6

8

10

12

14

16

18

20

Keurig Green Mountain Operating Margin % SodaStream Operating Margin %

More profitable than SodaStream (continued)

• SodaStream incurs freight costs from CO2 cylinder exchanges.

• Keurig Cold will utilize a system without a CO2 tank which means that it can preserve its margin advantage over SodaStream.

• This will give Keurig a convenience advantage over SodaStream.

Market penetration - room for growth

Keurig estimates that only 13% of U.S. households own one of its brewers.

Source: 2013 annual reportPhoto Source : Motley Fool Flickr by Ben Popkins

New initiatives – Keurig Bolt

• Makes 64 ounces of coffee in two minutes

• Foodservice penetration equates to less than 1%.

Photo Source:http://www.keurig.com/bolt

Other new initiatives

• Keurig plans a new water purification system to aid customers in getting potable water.

• International expansion planned for Australia, United Kingdom, Sweden and South Korea Photo Source Q2 2014 Investor Presentation

What now?• Keurig’s Cold device will sport a “one touch

simplicity” that will add a convenience, personalization, and product consistency edge over SodaStream.

• Coca-Cola’s 500 brands should provide the Keurig Cold with many opportunities.

Looking ahead • Look for Coca-Cola to buy Keurig if its cold

system proves successful.• Coca-Cola already made two investments in the

company in 2014.• Keurig’s forward P/E ratio of 30 versus 17 for the

S&P 500 makes it richly valued.• Expect significant volatility that comes with

growth companies.

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