Keurig Dr. Pepper (KDP) announced on Wednesday that it invested $50 million in Athletic Brewing Company, America’s leading non-alcoholic craft beer maker.
The minority equity stake in the Connecticut-based company was part of Athletic Brewing’s $75 million Series D funding round. KDP made the largest investment in Series D. Others putting their capital to work include the NFL’s J.J. Watt, restaurateur David Chang, and tennis star Naomi Osaka.
The nonalcoholic beverage category is one of the hottest going. Keurig Dr Pepper’s move into the category makes total sense. Here’s why.
There Is Slow and Fast Growth
KDP reported healthy sales growth in the third quarter ended Sept. 30. On an adjusted basis, the top line grew 11.8% in Q3 2022 to $3.62 billion. As a result, the company reaffirmed its full-year guidance in 2022 for double-digit sales growth.
“The third quarter was another strong one for KDP, as we again demonstrated the advantages of our all-weather business model, which has proven adept at performing well in an evolving macro environment to meet the needs of consumers,” stated CEO Ozan Dokmecioglu in its quarterly press release.
Breaking down sales by segment, the company’s Coffee Systems business increased revenue by 4.7% in the quarter, accounting for 33% overall. Its Packaged Beverages business, which includes soda pop, Snapple, Hawaiian Punch, Evian, and many others, accounted for 49% of sales and increased by 13.6%, excluding foreign exchange. Its Beverage Concentrates and Latin America Beverages accounted for 18% of its overall business.
As Dokmecioglu stated, it was a strong quarter from a sales perspective. However, if you exclude price increases, volume was flat year-over-year. At some point, price increases won’t be sustainable. That’s especially true if we go into a deep job-loss recession.
The reality is that sales might have been higher, but gross profit margins were 54.7%, 170 basis points lower than a year earlier. On the bottom line, its adjusted earnings per share were $0.46, two cents better than Q3 2021.
Good, but it could be better.
It needs something generating faster growth. The nonalcoholic category is just such a beast.
Its Newest Platform Might Be Its Best
In June, Keurig Dr Pepper acquired the global rights to Atypique, a ready-to-drink cocktail brand made by Station Agro-Biotech, a Quebec-based maker of alcoholic and nonalcoholic beverages.
“Atypique is a highly unique offering in the emerging and fast-growing non-alcohol cocktail segment, providing a range of ready-to-drink cocktails, such as margaritas, gin & tonic and mojitos,” KDP’s June press release stated.
“In Canada, non-alcoholic cocktails grew more than 30 percent in retail dollar sales during the last year, and Atypique now has a 42 percent market share of that segment, where it is distributed.”
Station Agro-Biotech got a much bigger partner to take Atypique south of the border in a meaningful way, and KDP got a platform for growth.
I recently had drinks with a friend who doesn’t imbibe. He had two Libra nonalcoholic craft beers from Prince Edward Island-based Upstreet Brewing. My friend liked the taste. As nonalcoholic drinks get better tasting, the market will surely accelerate as consumers continue to worry about the health risks associated with alcoholic beverages.
Enter Athletic Brewing.
Before Keurig announced its investment in Athletic, I read an article in Inc. about its rapid growth -- the magazine named Athletic 26th in its annual Inc. 5000 list of the fastest-growing companies in America -- and how founder Bill Shufelt started his craft beer business in 2017 because non-alcoholic drinks tasted so awful.
“I'd never intended to be an entrepreneur, but I realized what a huge opportunity I had,” Shufelt told Inc. in August.
“Not only a business opportunity, but also one to positively influence the lives of tens of millions of people by giving them the option of a great beer that was better for you and could be part of your daily routine. There are nearly 15 million documented adult cases of alcohol-use disorder in the U.S. I saw it as a chance to make moderation cool.”
Make moderation cool, indeed.
Its products are in every state, Canada, Australia, and Europe. As a result of its increased footprint, revenues grew more than 13,000% over the past three years.
If you build it, says the Field of Dreams quote, they will come. That includes Keurig Dr. Pepper.
The Why to Buy
The numbers don’t lie. By every account, the nonalcoholic beer market is a winner.
NielsenIQ data suggests this sub-category grew retail dollars by 20% over the past year. Athletic controls 55% of the craft segment, offering consumers more than 40 types of nonalcoholic beer.
To date, Athletic has raised more than $173 million in funding through five rounds -- that doesn’t include the latest $75 million -- a number that suggests both the company and category is here to stay.
If my friend’s reaction is any indication, it’s no fad.
While Keurig will have to pay a pretty penny if it wants to gain control of Athletic in the future, I don’t see a downside to the company creating another significant and growing revenue stream.
KDP stock just became more attractive as a long-term investment.
More Stock Market News from Barchart
- GOOGL Stock Options Have Large Unusual Activity
- On-Line Dating Stocks Might be Poised for a Rebound
- The British Pound and UK Stock Market- Signs of Recovery
- Stocks Slip on a Slump in Disney and Higher Bond Yields
/Microsoft%20Corporation%20logo%20on%20phone-by%20rafapress%20via%20Shuterstock.jpg)
/Advanced%20Micro%20Devices%20Inc_%20office%20sign-by%20Poetra_RH%20via%20Shutterstock.jpg)
/Quantum%20Computing/Image%20by%20Funtap%20via%20Shutterstock.jpg)