Keurig's next big thing is looking increasingly doomed

Keurig is floundering.

The company’s share price has plunged 60% since the beginning of the year following a dramatic drop in sales of coffee brewers and accessories.

Last year’s rollout of Keurig’s latest coffee maker, the Keurig 2.0, was disappointing, and the company has been battling aggressive competition from other K-Cup makers that will force it to eventually drop prices on its coffee pods, putting pressure on profit margins, according to Morgan Stanley analysts.

Now Keurig is counting on an increasingly unlikely source of future growth: A countertop soda machine.

The Keurig Kold, as it’s called, will begin rolling out next month. The $US300 machine, built in partnership with Coca-Cola, carbonates water to make a variety of flavored sodas. It’s Keurig’s answer to the SodaStream.

There’s a lot riding on the success of this product. Coca-Cola, for example, spent $US2.4 billion last year building a 16% stake in Keurig ahead of the machine’s launch.

The soda company has lost about $US1 billion on that investment so far — and it’s looking increasingly unlikely that Coca-Cola will be getting that money back any time in the near future. Coca-Cola and Keurig didn’t respond to a request for comment on this story.

In a statement to Business Insider earlier this week, Keurig said: “We are confident in the long-term prospects of our business, as our hot system remains strong with an enviable category leading position, a growing installed base and solid cash flow generation and we look forward to the upcoming launch of our Keurig Kold system that represents another opportunity for long-term growth and value creation.”

Keurig just lowered its sales guidance for the third time this year, saying it now expects a drop in the low-to-mid-single digits for the 12 months ending in September. Previously, the company said it expected a slight increase. Sales of brewers and accessories plunged 26% and profit fell 27% to $US113.6 million.

Investors have been hoping Keurig Kold would reinvigorate the brand.

The machine does have some big advantages over SodaStream, such as the partnership with Coca-Cola that will allow customers to create Coke-branded products. The Kold machine also automatically chills beverages to 39 degrees and it doesn’t rely on a CO2 canister, a feature that SodaStream customers have complained about.

Keurig also claims that the cold beverage market is five times the size of the hot beverage market.

But there are also some big obstacles to the success of Kold. Here are just a few:

1. The machine is too expensive, according to some analysts. Kold models will debut at $US299 to $US369, compared to the starting price of $US79 for the cheapest SodaStream model. Beyond the initial cost of the machine, every soda from a Kold machine will cost $US0.99 to $US1.29. By comparison, SodaStream drinks cost between $US0.08 to $US0.20 per serving.

2. Soda consumption has been falling in the US for decades. “Keurig is rolling out Kold at a time when Americans are scaling back on soda consumption amid health concerns such as obesity and diabetes,” the Wall Street Journal reports. Per capita soda consumption last year was 41.4 gallons, down from 52.4 gallons in 2004, according to data from Beverage Digest, a trade publication.

3. If the recent performance of SodaStream is any indication of Keurig Kold’s potential, then investors should be worried. SodaStream sales fell 29% in the most recent quarter, including a 44% drop in the US. Sales began declining last year, after seven straight years of double-digit growth, and its shares are down by nearly half in the past year.

4. Keurig Kold needs to be incorporated into Keurig’s hot coffee machines. Until the two machines are combined, many customers could view Keurig Kold as just another appliance taking up valuable countertop space.

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