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[19 comments]

Will DIY Coke change the soft drink market?

February 7, 2014

People who know have told me that the whole K-cup/drink pods thing has really revolutionized the retail coffee business. Consumers like the convenience and variety these machines offer. Now, Green Mountain Coffee Roasters (GMCR), which makes Keurig machines, is looking to do the same thing with cold beverages. The company took at big step in that direction this week when it announced that Coca-Cola had taken a 10 percent stake and signed a 10-year deal with the soft drink giant to develop products for the upcoming Keurig Cold system release.

"This agreement demonstrates our creative approach to partnerships and ability to identify and stay at the forefront of consumer trends driving the industry," said Muhtar Kent, chairman and CEO of Coca-Cola, in a statement. "By pairing The Coca-Cola Company's brand leadership and global footprint with GMCR's innovative technology, together we will be able to capitalize on the many exciting growth opportunities in the single-serve, pod-based segment of the cold beverage industry."

Carbonated soft drink sales in retail stores have been challenged in recent years by changing consumer tastes and public education on the health risks associated with the consumption of sugary drinks.

Coca-Cola's deal with GMCR comes as another DIY soda company, SodaStream, has been making a big marketing push here in the U.S. The company gained notice for having its "Sorry, Coke and Pepsi" Super Bowl commercials starring actress Scarlett Johnansson rejected by the Fox Network. The commercial's message was that SodaStream offered better drink options and was more earth-friendly than the soft drink giants.

One purported advantage of Keurig Cold over SodaStream is that it will not require CO2 cylinders for carbonation. Apparently, one of the drawbacks to the current options on the market is that cylinders need to be replaced.

FINANCIALS:     [NYSE:KO] [ NASDAQ:GMCR]

Discussion Questions:

Do you think DIY soda systems will change the way Americans consume cold beverages? What benefits should the manufacturers of these products stress?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How likely is it that Green Mountain Coffee Roasters will achieve the same type of success with Keurig Cold as it has with hot drinks?

Comments:

Upfront disclosure ... as a big Keurig fan, I'm addicted to both the convenience and amazing choice that Keurig provides at your finger tips.

One of the challenges of SodaStream is the CO2 cartridges. Perhaps they are necessary to fulfill their promise that it is like having "real soda" in your home for pennies a glass.

If Keurig can eliminate the CO2 cylinders that will be a big plus, even if the Keurig cold drinks do not taste like Coca-Cola or other soda. In fact, Keurig would be wise to focus on other key benefits that differentiate it from traditional soda:

-Low/no sugar = Healthy
-Both the convenience and more choice of cold flavors
-Environmentally friendly

Coca-Cola's 10% stake in GMCR got my attention. That's a huge signal that the world's largest soda brand sees shifts in consumer behavior and choices.

The key just might be that Keurig cold is NOT about a soda system at all ... but more of a DIY alternative cold beverage system, offering convenient choices to more health conscious consumers.

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Chris Petersen, PhD, President, Integrated Marketing Solutions

If GMCR and Coca Cola can keep the cost reasonable, than they will have some appeal to consumers. Pretty tough to take to the ballpark, or picnic, but they will sell for sure.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

A decent niche, I would expect, if the product tastes good, offers increased variety, is inexpensive and healthy, and if the machine doesn't cost too much or break down too often. If all those ifs are met, enough consumers may be drawn to this if these advantages are promoted with credibility. But I hardly expect we'll see much impact in the size of the carbonated beverage aisles in supermarkets in the next few years, if at all.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

I think they are reflective of the changes already taking place - an actual realization of the idea of "mass customization" by letting consumers do it for themselves. In fact, Coke and Pepsi both have created the mass customization concept in QSR with Coke leading the way using their Freestyle machines. This is just bringing that same concept into the home.

But as a Keurig owner who has struggled with an unreliable machine, I have to say that they're going to have to do some education and some standing behind their products to convince me as a consumer that it's going to be worth it. I like the idea of not having to have a refrigerator full of cans, and definitely like the idea of not having to drag said cans home from the store, but I have no interest in having to "descale" my machine every month, or being told that the machine is only expected to work well if you use distilled water instead of tap water, or that I have to have a pin on hand to unclog the blasted thing every week, or run twice as much water through it (wastefully dumping it down the drain) in order to clear clogs....

If the soda machines work as "well" as the K-cup machines, count me out. Sure, the hot drink machines have been wildly successful, but if you spend 5 minutes scrolling through reviews, you'll see a lot of issues under the covers. It hasn't all been smooth sailing.

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Nikki Baird, Managing Partner, RSR Research

DIY Coke is great! Will it overtake the mass bottled soft drink market? Not in the immediate future.

Breaking old habits isn't easy; establishing new ones isn't either. But - the move opens the door to some interesting possibilities for home habits and unique formulations. Look for bartenders, home hobbyists and foodies to be the first to jump on board.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Nikki is totally correct on the Keurig machines. High-maintenance, and not reliable over the long haul. We are on our fourth at our house, and there may not be a fifth.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

This idea should appeal to some households, but not all. One or two person households will like the concept to get variety without having to keep a large inventory in the pantry. For larger households, this is not really an issue, they are more concerned about keeping in stock and buying on deal.

It will be interesting to see how they get carbonation without a CO2 cartridge. Changes to the industry will be minor. The soft drink category has been active with new items, where coffee has had little change until K-cups came out.

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W. Frank Dell II, CMC, President, Dellmart & Company

This could have a major impact on the way the world consumes cold beverages. Besides being ecologically friendly, DIY soda systems allow consumers to save space in their pantries and refrigerators...no more space-hogging bottles. Also, the soda systems offer a wider variety of beverages than most consumers currently have on hand, satisfying a desire for convenience and variety.

I wonder how the DIY systems will impact Coke's financial relationships with its bottlers. Since all they are selling is syrup, will the bottlers share in the revenues or will they all flow to Coke?

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Max Goldberg, President, Max Goldberg & Associates

This will work as I have great confidence in GMCR and Coke to make this work. We use the machines at the office for coffee and the convenience and selection is great. My only concern and worry is that the garbage is filled with the pods by the end of the day and this needs to be addressed in order to make this sustainable long term.

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Zel Bianco, President, founder and CEO, Interactive Edge

There are consequences for the big soft drink companies bubbling beneath the surface if they go strongly down the "fizz-at-home" (FAH) path. A few thoughts:

It will be way cheaper to ship 24 capsules of FAH flavoring than 24 cans of water: lighter, more compact, takes up less space on the shelf. The product might ride along on the DSD trucks at negligible incremental cost. But new manufacturing lines will also be required, which means CAPEX.

If FAH takes off, it will have an impact on the assortment, shelf space and pricing formula in supermarkets around the country. FAH packages will present smaller "billboards" compared with 12-pack cans. Dollar density on the shelf will be greater. Some existing items may need to be cut from the category mix to open up the space.

There is already some controversy surrounding the environmental friendliness of coffee capsules. I'd expect a similar benefit-versus-cost discussion to crop up in social media surrounding the use of FAH capsules. At least aluminum cans and PET bottles are theoretically recyclable.

In the near term, FAH innovation may well stimulate a wave of advertising and promotional excitement across the soft drink industry. This will be fun to track, good for the media and the agency business.

In closing I can only channel the immortal words of the Ramones: "FAH-FAH-FAH-FAH-FAH-FAH-FAH-FAH-FAH-FAH."

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James Tenser, Principal, VSN Strategies

This seems like a natural evolution of what Coke has been striving for recently. The Freestyle custom drink vending machine and a trial I heard where you could create your own custom 12 pack of mixed variety Coke brands in the store beverage isle reflects consumers' desire for more custom and personal product experiences. Moving the custom option to in-home is a natural next step and if, like Sodastream, Coke can develop healthy options with less sugar or more natural ingredients, it could be a home run. I say that because the people who tend to spend $100 or more on an in-home system probably skew demographically toward those you might lump into the "health and wellness" segment. Of course there are plenty of pure Coke enthusiasts who will be excited, I'm just hypothesizing.

Aside the machine expense, it's possible the per-serving cost ensures little competition with traditional volume retail channels for the packaged beverages. That mix and effect on retail channels will be interesting to see play out as the machine's cost declines over time. Another interesting idea is that the Coke machine becomes a platform for other manufacturers' cold drinks, and Coke licenses access to an official compatibility label or something. That would be a really innovative way of growing the business.

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Gib Bassett, Global Program Director for Consumer Goods, Teradata Corp.

This beverage format will allow soda manufacturers to benefit from the explosive growth in eCommerce, which, until now, was inaccessible due to difficulties with shipping efficiently or affordably. Expect to see this trend ripple across all manufacturers as they race to keep pace with consumer expectations.

Daniel Silverman, Vice President, Business Consulting Services, Clavis Insight

The short answer is yes! If you don't believe it to be so, just take a look at the coffee category or just visit a Costco and see the pallets of K-Cups that fill the area on the sales floor.

The coffee market is changing. The soft drink market is changing. If it works out for soft drink consumers as it has worked out for me as a Keurig user, it will be a huge success. I was a reluctant user to start, but an avid fan now.

I consume much less coffee and enjoy it more. Consumers will have less waste. They can better manage their intake through better portioning. Of course, that will make Mr. Bloomberg happy! K-Cup options are now available in bio-degradable forms for those that are green conscious. The marketing benefits are numerous. Even the storage space for both the refrigerator and the pantry is less!

If either Coke or Pepsi don't see the change and jump in they'll be left behind. Coke is getting in. Pepsi will follow, just as every major coffee brand has in that category.

'Scanner'

PS - I should also have mentioned that fizz-at-home is tailor-made for the online order and home delivery process. The capsules are far lighter, smaller and therefore far cheaper and easier to ship compared with blocks of aluminum cans.

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James Tenser, Principal, VSN Strategies

Not a Keurig user, but I understand its appeal to some users. With over 200 varieties for sale on its website I can understand the popularity because of the variety it offers and its ease of use.

However, Coke does not offer the same very broad number of products. This limits that element of appeal for a cold dispensed system for its products.

Unlike brewed coffee soft drinks don't have the same short "shelf life." Coffee has to be consumed shortly after being brewed. True there are commercial holding systems that extend holding times to a few hours, but in the home most coffee is consumed with an hour or less of being brewed. This helps support the appeal of a just-in-time cup-by-cup brewing practice.

Carbonated soft drinks have far, far longer shelf lives. This is why Coke and Pepsi have such huge sales peaks around certain holidays. Consumers take advantage of the TPRs to pantry load.

Bottom line - it will appeal to some but unless they find a way to differentiate the products from those they already sell, I don't foresee any significant impact on the bottle and can business.

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Steve Montgomery, President, b2b Solutions, LLC

Another electronic toy for the house? You bet! If they can manage variety and convenience, I think they'll win.

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Peter J. Charness, SVP America, Global CMO, TXT Group

I think it will have an impact. As a former Coca-Cola employee and a Sodastream owner, I may be able to provide some insight. First of all Coke products are of excellent quality and consistently and available everywhere and in my opinion, are reasonably priced.

Sodastream is a nifty system that has several chinks in its armor. It's not as cheap as advertised in that CO2 is very expensive. The flavors are fine but ANY FLAVOR from any source is useable, which means that Sodastream may not capture the flavor sales and this could compromise quality.

Sodastream, is, in my opinion, a novelty, that will find a place on the kitchen counter for a while and fall into disuse after the novelty wears off.

Green Mountain may have a solution if they can develop a system that self generated carbonation. Their K-Cup can be modified and patented so as to keep Mio and others from selling flavors that are compatible. When you can control the process you can control the quality, which would make the Green Mountain system very viable.

I think Green Mountain should stress freshness and variety and not dwell on cost. Their K-Cup has worked well and it has not been a success because of price. With all that said, convenience is still a huge part of the beverage industry. The goal at Coca-Cola was to have product within an arms reach of the consumer at all times and this goal built the largest, most efficient distribution system the world has ever seen.

Ed Dennis, Sales, Dennis Enterprises

OK, a couple of points -- following the obvious -- of course it will change the way we consume beverages. Stress control -- DIYB.

1) Yes, this will cause possible headaches with bottler network/other syrup distributors.
2) Will c-stores and restaurants have "create own" stations in FOH or BOH?
3) Remember, Coke brands globally will potentially be available.
4) This might not be "fizzy," Coke has other brands without the fizz (can could develop or buy others)
5) Will they be wired to the "internet of things" to let Coke know exactly when and what you are drinking and have auto fulfill?

We have a Sodastream and don't use it nearly enough. Still has not displaced soda, but in summer a nice option -- a squirt of lime or lemon, fizz with minimal calories.

'Stanaggie'

In the '50s-'60s at the soda fountain in my dad's drugstore, we made Coca Cola from Coke syrup with carbonated water prepared on site. My dad liked to crank up the carbonation - everyone thought it was better than coke from the bottle. The syrup was chilled too as I remember. It was poured out of the dispenser over crushed ice. Five cents for a 6 oz serving, 10 cents for a 12 oz. serving. If you wanted a cherry Coke, vanilla Coke, lemon coke - or even a chocolate Coke - we could make that by adding a little flavored syrup. Ah - truly the good old days.

'schindler'

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