Keurig Dr Pepper Inc. KDP offers growth potential after its 2% rise over the past year.
The beverage company is aiming to increase its efficiency, adapt its products so that they resonate with a broader range of consumers and is entering into partnerships to boost its financial performance.
Efficiency
The company is investing in its manufacturing facilities to improve its efficiency. In fiscal 2020, it plans to open two large manufacturing facilities that it expects will increase its productivity and reduce its costs.
In addition, the business expects to deliver further synergies following the $200 million in cost reductions that it recorded in fiscal 2019. It will consolidate a number of its existing warehouses to make its distribution network more efficient, and it will remove duplicate roles and functions from its corporate operations. It will also invest in its delivery network to reduce transport costs. These changes could support the company’s margin growth and improve its financial performance.
Coffee prospects
The business is seeking to increase consumer take-up of its domestic single-serve coffee machines by subsidizing retailers that sell its coffee machine to make their price more attractive to consumers. This contributed to a 7% increase in the number of U.S. households that use its coffee machines in the fiscal 2019 fourth quarter.
This means that there are now 30 million U.S. households that use the company's coffee machines, with a further three million in Canada. This should provide Keurig Dr Pepper with a loyal customer base that regularly purchases its single-serve coffee pods.
Partnerships
The company is increasing its number of partnerships to broaden its appeal to a wider range of customers and growth markets. For example, it entered into a long-term partnership with beverages company Danone in fiscal 2018 to distribute Evian branded water in the U.S. This has contributed to Keurig Dr Pepper becoming the second largest premium water business in the U.S. in a market that is forecast to grow at a rate of 5.4% per year in the next four years.
Additionally, the company has partnered with beverage entrepreneur Lance Collins to launch energy drink A Shoc. This could increase the size of its potential customer base and widen its appeal among consumers who do not currently purchase Keurig Dr Pepper’s other brands.
Potential difficulties
Changing consumer tastes have the potential to create challenging conditions for Keurig Dr Pepper. U.S. soda sales have been on a downward trend for over a decade as consumers have become more concerned about their health. They have also sought products with cleaner labels in terms of being produced with natural ingredients. Further changes in consumer tastes could cause some of the company’s popular products to experience weak demand in upcoming years. This may negatively impact its financial performance.
In response, Keurig Dr Pepper is seeking to adapt its products so that they resonate with changing consumer tastes. For example, it expects to make every pod used in its single-serve coffee machine recyclable in 2020. It also plans to launch its first bottle made entirely from recycled plastic in 2020.
In addition, the business is launching innovative new products to increase their appeal to a broader range of consumers. For instance, it plans to release a greater range of flavors of its Dr Pepper beverage in upcoming quarters, as well as mini cans across its brands. They could resonate with consumers who wish to limit their calorie intake when they are consuming carbonated beverages.
Outlook
Market analysts forecast that the company will record a 12.9% increase in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 19 suggests that it offers good value for the money given its growth plans.
Disclosure: The author has no position in any stocks mentioned.
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