Last Friday, Keurig announced a licensing, manufacturing, and distribution agreement with Kraft to make the Maxwell House, Gevalia, Yuban, and McCafe brands available as licensed single-serve portion packs for use in the Keurig brewing system.
As part of the multiyear agreement, both Kraft and Keurig will manufacture the single-serve pods beginning this fall—using coffee sourced, roasted, and blended by Kraft—before eventually transitioning production over to Keurig. As typical, financial terms were not disclosed, although we expect them to be largely in line with Keurig’s other similar licensing arrangements.
By adding the last remaining large-scale coffee brand to the K-Cup portfolio, the Kraft agreement marks an important step in Keurig’s efforts to recapture unlicensed share following the K-Cup patent expiration in September 2012. As a result of the conversion, Keurig will now have ownership of brands, or licensing agreements with players, which collectively represent more than 90% of the K-Cup market.
The prospect of quality and consistency, coupled with attractive economics, provided incentives for coffee companies such as Kraft (and others) to partner with Keurig. In addition, these licensed players will benefit from the Keurig innovation stream; that is, new features and functions integrated into the system over time. And at the same time, it strengthens and broadens the appeal of the Keurig platform, which now offers more than 50 brands and 290 beverage varieties.
Separately, Keurig recently announced a 9% price increase on its portion pack, bagged, and bulk coffee offerings, effective November 3. This follows announced price increases taken to help offset significant green coffee cost inflation by traditional bagged coffee manufacturers earlier in the year, including Smucker (9%, June 3), Kraft (10%, June 6), and Starbucks (8%, June 21). It is interesting to note that the conversion of formerly unlicensed players likely enhances the ability of Keurig to implement, and the stickiness of, such a price increase, as it is easier to maintain relative price points in a category in which the vast majority of participants are owned or licensed (partner) K-Cup brands.
To reflect the combined impact of these aforementioned items, we increased our fiscal 2015 sales estimate by approximately $400 million, to $5.4 billion, and raised our corresponding EPS estimate by $0.25, to $4.25. Given the timing of the price increase and expected transition period with Kraft, our fiscal 2014 sales and EPS estimates remain unchanged at $4.7 billion (up 7%) and $3.80 (up 12%), respectively.
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