Here's Why Keurig Green Mountain Inc.'s New Keurig Kold Could Leave Investors Cold

The maturation of the single-serve coffee market hasKeurig Green Mountain turning its attention to cold beverages and it recently unveiled its new machine for crafting sodas, teas, and sparkling waters at home.

Since the cold drinks market dwarfs hot drinks by a five-to-one margin, the coffee maker is betting the new Keurig Kold machine will capitalize on the opportunity and its partnership with Coca-Cola will reignite sales. Yet there's a flaw in the plan and it could cause all of Keurig Green Mountain's efforts to come to naught.

Running hot and coldCiting data from market research firm IRI, Keurig's presentation to Wall Street analysts earlier this month noted the addressable cold beverage market is worth some $50 billion in annual sales, or five times the size of hot beverages, which generated around $10 billion in sales last year.

Image: Keurig Green Mountain presentation at Cagny Conference, Feb. 19, 2015.

The Keurig Kold system, the newcounter-top appliance that uses the coffee maker's pod-based technology, aims to tap into that market when launched later this year by offering five key benefits:

  • Users get their beverages delivered cold immediately.
  • No CO2 canister isneeded for carbonation.
  • Portion control with one-button ease.
  • The system is sustainable.
  • It offers a vast selection of brands.

The same but differentThere do seem to be benefits to the Keurig model that could give it a competitive advantage over industry leader SodaStream International . The lack of a CO2 canister, for example, would be a big plus for those bothered by having to return carbonation units for refills, but since Keurig hasn't revealed just how the fizz will be added to its beverages, it's still an unquantifiable edge.

However, Keurig's branding with Coca-Cola, which took a 16% stake in the coffee maker last year, lends itself to giving consumers a sense of product consistency. Brands tend to want an easily replicable process so that consumers are assured of quality no matter where they go. SodaStream has called such dependability a "trap," and instead prefers variability that comes through "inexact dosing."

SodaStream is also trialing a branding partnership withPepsiCo, but early reports suggestthere remains uncertainty over how successful it is and whether it will expand beyond the three test markets it's currently in.

Personalization is important, but maybe not when you're trying to sell a machine as delivering a Coke or Pepsi at home. Still, Keurig has a number of brands now in its portfolio, and last month also signed upDrPepper Snapple Group , lending credence to the idea its pods can deliver true-to-type flavor.

A big fish in a smaller pondYet the biggest hurdle for Keurig Green Mountain to surmount before it can succeed in the cold beverage market is the DIY niche its targeting may have already been saturated by SodaStream while the overall market for soda is in decline.

SodaStream sales are in free fall with starter kits plunging 34% last quarter and flavoring sales tumbling 38%. While CO2 units posted a 17% gain year over year, that's only half the 34% rise in sales it enjoyed in the third quarter of 2013, its peak sales period.

SodaStream sales are going worse than flat. They're turning negative. Data: SodaStream International quarterly SEC filings

That could be because soda sales in general are in decline. Carbonated cola volumes in the U.S. tumbled from 28 billion liters in 2009 to 24.7 billion liters in 2013, according to the market researchers at Euromonitor, which is underscored by the continued erosion in volumes at both Coke and Pepsi. Worse has been the collapse in diet soda sales as concern escalates over the use of artificial sweeteners.

Diet soda sales are losing even more of their fizz than regular soda. Data: Beverage Digest

With soda being a market in decline, and one that's already heavily serviced by a limp SodaStream, a new machine coming to market has little apparent chance of making a big impact. Even with teas and sparkling waters, it's a very limited space.

A chilly receptionI've already said I think there's a bigger market in at-home adult beverage machines, a niche two new upstarts are trying to corner, and perhaps Keurig should considered buying one of them. But it just doesn't appear cold drinks will be heating up the coffee maker's bottom line.

For investors, this means that Keurig Green Mountain stock may not regain the record highs it hit late last year. No doubt the coffee maker has proved resilient beyond the expectations of its critics, but this foray into a new market could leave itfrozen out in the end.

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Follow Rich Duprey's coverage of all the most important news and developments in the leading brand name products you use. Hehas no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream 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.

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