Will Keurig Gain Traction From The Kraft Coffee Deal?

The market leader in specialty coffee, teas and other beverages, Keurig Green Mountain (GMCR, Financial) recently redesigned its coffee machine for maintaining the monopoly in the U.S. coffee market that stood endangered after the expiry of its ‘K-cup’ patent in September 2012. Along with the release of Keurig’s new brewing system 2.0, the Vermont based K-cups maker has announced another lucrative deal on August 22 with Kraft Foods Group (KRFT, Financial).

Let’s take a closer look at the deal, and judge its long-term implications.

What the deal is all about

Starting this fall, caffeine addicts would be able to brew Maxwell House, Gevalia, Yuban coffee brands of Kraft Foods and even McCafe coffee of McDonald’s (MCD, Financial) using Keurig Green Mountain’s popular single serve brewing system. Keurig’s shares hit a new 52-week high of $135.99 on August 22 when it signed the multi-year licensing, manufacturing and distribution agreement with one of the biggest names in the packaged food and beverage industry, Kraft Foods.

Keurig’s CEO Brian Kelley commented on the agreement: “Adding Kraft’s celebrated brands to the licensed Keurig family means Keurig consumers will be able to enjoy even more beverages they know and love with the quality and consistency they expect from their Keurig brewer.” The agreement would also help Kraft Foods to expanding distribution across multiple channels.

In a spree of winning bigger share of the $11 billion U.S. retail coffee market, this deal earmarks another big partnership for Keurig which recently saw an uptick in its share price close to 79% year-to-date, largely due to Coca-Cola (KO) having acquired 16% stake in the company. And with the current deal with Kraft Foods, Keurig would also strongly add the McDonald’s McCafe coffee to its beverage lineup.

That’s because earlier in August, Kraft Foods agreed to ship McDonald’s McCafe to supermarkets and food outlets that were already a part of its extensive distribution network. And now with Kraft’s deal with Keurig, McCafe brand would be distributed via Keurig portion packs.

Keurig to benefit enlarge

Though the leader in coffee technology has been facing intense generic competition, the addition of Maxwell House in its product portfolio of pods offers Keurig almost all the major coffee brands. This May, it had signed a similar distribution agreement with J.M.Smucker for the Folger’s coffee of the latter.

Currently, Folger’s coffee is the top selling brand by volume in the U.S. claiming nearly 15% of the market share. Maxwell House is the second most favored brand with 10% market share, and this is expected to give Keurig’s revenue a big boost. The brisk addition of Kraft’s coffee brands to the Keurig family would increase the beverage options for Keurig customers.

And this synergic relationship will allow the availability of all the added coffee options in K-cups format, K-Carafe packs and Keurig Bolt packs at-home and away-from-home channels.

According to the National Coffee Association’s info-graphic report for 2014, the daily consumption of coffee in the U.S. is increasingly with every passing year. Presently around 34% of the Americans consume gourmet coffee regularly, which is a rise of 3% over last year. Over the past six-months Keurig has entered into several distribution deals with the top retail chains and coffee brands – such as Nestle and Subway. The latest deal with Kraft Foods offers huge opportunity to the company to strengthen its market share and accelerate top line growth.

Both companies have decided to work together initially to manufacture Kraft-branded portion packs. But a slow transition is likely to take place sometime later with Keurig solely manufacturing these packs using coffee that will be sourced and processed by the packaged food giant, Kraft Foods.

The partnership with the coffee giant would help Keurig to reduce competition in the retail coffee market. Moreover, as Kraft Foods raised the prices of Maxwell House and Yuban coffee products by around 10% this June, it could mean increased price for Kraft-branded portion packs, translating to increased revenue for Keurig. Also, this collaboration could lead to customers ending up buying their favorite coffee brands in bulk at retail stores, as now they just need to buy Keurig branded portion packs with their favorite coffee brands.

Final takeaway

With a full range of coffee producers lining up to have their coffees offered through the new Keurig machine, this coffee maker will have little trouble brewing up its instant sales growth in the U.S. Overall, the Kraft deal provides a huge platform to Keurig Green Mountain to widen its customer base in the single-serve market. Keurig might be seen to add more of licensed partners, and see its top and bottom lines register healthy growth.