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The Capsule Is Giving Caffeinated Drinks a Jolt

23 May 2014 in Trading Ideas

One doesn’t often expect a Next Big Thing to hatch from the food and beverage sector, but the coffee capsule has both earned its hoopla while highlighting a range of possibilities across the food industry.

As the Financial Times pointed out last week, sales of coffee in capsule form have tripled over the past five years to $10.8 billion, according to Euromonitor. That’s against a rise of 35% for the total coffee market. Richard Rawlinson, a partner at consultancy firm Strategy&, told the FT that the new delivery system has “rejuvenated” the coffee market.1

The success has spurred interest in other drinks, as well as food that can be prepared from a pod with the push of a button.

Keurig Green Coffee, which Euromonitor says has 85% of the $2.7 billion is teaming up with Campbell’s to sell soup capsules that fit its hot drinks machine.

Meanwhile, Nestle, which dominates the coffee capsule market in Europe with Nespresso, is using its technology for tea.

 

Now, soft drinks seem to be getting into the act, as the world’s biggest beverage companies seek to diversify in the face of declining sales. Coca-Cola announced recently that it intended to boost its stake in Keurig to 16% from 10%, following its February deal to invest $1.25 billion in the capsule maker that included a 10-year deal to put its brands in Keurig’s forthcoming cold drinks maker expected this year, the FT noted.

Coke’s big stake has certainly helped shares of Keurig, which are up 15% in the past month.

Keurig also comprises a 25% weighting in the Caffeine Fix motif, which is up 3.6% in the past month. The S&P 500 has gained 0.3% in that same time frame. In 2014, the motif has increased 8.2%; the S&P 500 has risen 3%.

Coke’s main rival (and fellow motif component) PepsiCo isn’t exactly standing pat, however. The FT reported that the company has a 7% stake in Bevyz Global, a European maker of at-home drinks machines that is also set to launch in the US this year, although it’s unclear whether Pepsi brands will be available. (Interestingly, Keurig also holds a minority stake in Bevyz).

As the FT noted, Keurig’s deal with Coke is in line with the company’s strategy of offering a vast range of drinks, building its dominant position among at-home brewers by offering brands from Starbucks and Folgers coffee to Snapple iced teas and Ghirardelli cocoa.

While market-share tussles are perhaps inevitable, the industry appears to be benefitting from giving consumers a convenient way to keep their caffeine addictions alive at home.

1Shannon Bond and Scheherazade Daneshkhu, “Coffee capsules revive the market,” FT.com, May 16, 2014.

Historical performance data provided as of May 22, 2014.

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