2 Stocks To Watch in Beverages

By Markets Fool.com

The beverage world has gotten very difficult to predict,with longtime leaderCoca-Cola experiencing its share of problems. Americans drink less soda than they once did, and that has dragged on a brand that despite a widely diverse portfolio still counts its titular product as a key sales driver.

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Coke has struggled for many of the same reasonsMcDonald's has had its problems in recent months. Americans have embraced at least the perception of eating healthy. They have also become enamored with customization -- something Coca-Cola has embraced with its Freestyle machines which allow customers in a restaurant or retail setting to have their drink exactly as they want.

Customization is also at the core of one way the company plans to grow its business. Coke owns a stake in Keurig Green Mountain, and the two companies are partnering on the Keurig Kold, a $300 single-serve cold-beverage brewer scheduled to launch later this summer.

It's fair to say Keurig stock's short-term growth prospects are heavily tied to whether customers purchase the new machine. Coca-Cola is too big for any one deal or investment to impact its stock in that fashion, but a successful launch of Kold will give it several strategic advantages.

The Coca-Cola Freestyle machine allows users to create customized beverages. Source: Coca-Cola.

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Coca-Cola needs to not be a soda company
Americans have been reducing their soda consumption for the last decade, according to The Wall Street Journal.Those declines are largely driven by Americans becoming more health conscious, but the drop has now affected diet soda due to concerns over"the healthiness of artificial zero-calorie sweeteners such as aspartame," the paper reported.

Coke CEOMuhtar Kent acknowledged the company is in a transitional period in the most recent earnings release, which highlighted Coca-Cola's growth in nonsoda areas. The company acknowledged that its U.S. growth in nonalcoholic ready-to-drink beverages was driven at least in part by products that are not soda.

We gained value share in total NARTD beverages for the 20th consecutive quarter driven by an increase in both the quality and quantity of our marketing investments and our continued rational approach to pricing and disciplined price/pack strategies. We also gained value share in sparkling beverages, still beverages, juice and juice drinks, ready-to-drink tea and packaged water. Still beverage volume growth was driven by strong double-digit growth in Gold Peak tea and smartwater.

Muhtar knows that huge growth won't come -- at least in the U.S. -- from soda sales. Instead, the company has diversified into all manner of beverages and has the ability to leverage its distribution and marketing muscle to sell those alternative drinks.

Kold and the Keurig relationship bring Coke a twofold advantage. First, the machine will push soda sales in a way that makes drinking a Coke or other carbonated beverage more of an event. That could remove some stigma from the brand and lead to more sales. Second, it will offer an in-home platform for all of the company's other cold products -- everything from glacausmartwaterto Odwalla to and NOS Energy Drink. That could do the same thing for cold drinks that K-Cups did for coffee.

Keurig must prove it's not a one-hit wonder
Keurig dominates the single-serve coffee market in the United States with its K-Cup brewers, but it has been unsuccessful in launching a second platform. Customers have largely ignored its Vue machines, which make cappuccinos and lattes. They have also been slow to adopt its next-generation Keurig 2.0 brewers, which use K-Cups as well as larger coffee pods that can be used to brew carafes.

That leaves the company almost entirely dependent on K-Cup sales to drive revenue. In the most recent quarter, Keurig made $956 million of its $1.12 billion in total revenue by selling pods (almost entirely K-Cups). Without a second successful beverage machine on the market, the company's entire future is staked to people continuing to consume K-Cups.

Successfully launching Kold would bring the brand security and strengthen its hold on the kitchen. Much like its coffee brewers, the cold-beverage maker uses single-serving pods to make everything from Coca-Cola to sparkling water and even alcoholic drink mixers. Once the company gets a consumer to shell out $300 for the machine, it essentially has put a little store into the buyer's kitchen.

Each brewer sold -- assuming consumers use them in the fashion they do the coffeemakers -- becomes an annuity for the company.

Two companies with an intertwined future
Keurig needs the Kold to be a hit more than Coca-Cola does, but the platform's success could be key for both companies. It's a huge task to capture as much market share as the coffee company has with its K-Cup machines. If it can repeat the success with Kold, then Keurig has the potential for huge growth.

For Coke, the opportunity is pretty large as well. With its K-Cup brewers Keurig has partnered with hundreds of brands, including major rivals includingStarbucksandDunkin' Donuts. If Kold hits, Coca-Cola will be in the enviable position of having a strong say in whether it locks its competitors out of the platform or makes licensing deals with them.

It's really a question of whether Coke will make more money from selling more of its own Kold pods, or if the market would grow by having PepsiCoor Dr Pepper Snapplepods for sale. Either way, if Kold hits, it's very good for both partners in the cold-beverage brewing system.

The article 2 Stocks To Watch in Beverages originally appeared on Fool.com.

Daniel Kline owns shares of Apple. He rarely drinks soda, but wants a Keurig Kold. The Motley Fool recommends Apple, Coca-Cola, Keurig Green Mountain, PepsiCo, and Starbucks. The Motley Fool owns shares of Apple, PepsiCo, and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.