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Keurig (KDP) Looks Poised on Brand Strength Amid Supply Woes

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Keurig Dr Pepper Inc. (KDP - Free Report) has been showing resilience on solid demand for its brand portfolio, robust market share gains, and in-market performances across categories and brands. The company remains poised to benefit from strength in the Packaged Beverages, Beverage Concentrates and Latin America Beverages segments. Volume/mix benefits and improved net price realization also bode well.

However, we cannot ignore the headwinds arising from supply-chain disruptions, which have been plaguing the industry. Input cost inflation, labor shortages, rising transportation and logistics costs, and supply-chain disruptions have been threatening the margins. These are likely to keep affecting the company in the near term.

Factors Aiding Growth

Keurig has been experiencing continued strength in the Packaged Beverages segment. It delivered robust top-line growth in the fourth quarter mainly due to solid volume/mix benefits from the Packaged Beverages segment. The segment reported sales growth of 17.1% in the fourth quarter. Segment sales rose 17% at cc, gaining from a favorable volume/mix of 10.3% and a higher net price realization of 6.7%. The segment benefitted from growth in CSDs, particularly Dr Pepper, Canada Dry, Sunkist, A&W, 7UP, CORE Hydration, Vita Coco, Clamato, Yoo-Hoo, and Bai and Squirt, as well as growth in Polar, Snapple and Mott's.

KDP also witnessed a strong in-market performance in the fourth quarter. The company witnessed a dollar consumption increase of 12.6% across the cold beverage retail base, including growth in categories such as CSDs, premium unflavored water, apple juice, apple sauce, and coconut water. The key brands aiding growth were Dr Pepper, Sunkist, Canada Dry, A&W and Squirt CSDs, CORE Hydration and Evian, Vita Coco, Polar, and Mott's apple juice and apple sauce. On a two-year basis, the consumption of KDP’s cold beverages grew 27%.

The company's Sunkist brand remained one of the leading fruit-flavored CSD brands, with double-digit consumption growth, followed by the solid performance in zero-sugar CSDs. The Dr Pepper brand is also performing well on robust consumption growth. The company's manufactured pods and tracked channels witnessed year-over-year market share growth of 3.4% in the quarter, driven by strength in partner brands, and KDP-owned and licensed brands. This somewhat offset sluggishness in private label pods.

The dollar market share for pods manufactured by KDP advanced 83.5% in the fourth quarter. The company witnessed improvement in the away-from-home channel’s performance in the quarter. The retail consumption of single-serve pods manufactured by KDP rose 11.2% in IRi-tracked channels on a two-year basis.

Driven by these, the company reported a strong fourth-quarter 2021, wherein the bottom line was in line with the Zacks Consensus Estimate, while sales surpassed the same. Both metrics improved year over year. Results gained from a solid portfolio demand.

Management also issued an encouraging 2022 view. The company expects net sales and bottom-line growth in the mid-single-digit range. Adjusted earnings are likely to be in the high-single digits in the second half of 2022.

Near-Term Headwinds

Like others in the industry, Keurig continues to witness headwinds related to input cost inflation, labor shortages, rising transportation and logistics costs, and supply-chain disruptions, which are likely to persist in the near term. These, along with the adverse impacts of rising Omicron cases in the fourth quarter, acted as deterrents. Also, product unavailability due to supply-chain headwinds led to higher inventory.

Management expects supply-chain challenges to be more pronounced in the first quarter of 2022 and improve in the other three quarters. Inflation is expected to hurt margins for most of 2022, with chances of a slight improvement in late 2022.

Other Stocks Showing Resilience

We have highlighted three other resilient companies in the beverage industry, namely The Coca-Cola Company (KO - Free Report) , Fomento Economico Mexicano (FMX - Free Report) and PepsiCo Inc. (PEP - Free Report) .

Coca-Cola, the Atlanta, GA-based global beverage giant, has been benefiting from its strategic transformation and ongoing recovery worldwide. Revenues gains from the investments and ongoing recovery in markets, where the pandemic-led disruptions are subsiding, have been key drivers.

Strength across the majority of the markets, investments in marketplace, recovery in certain markets and the cycling of last year’s pandemic-led impacts have been aiding Coca-Cola’s volumes. KO provided an upbeat 2022 view. It is poised to gain from innovations and accelerating digital investments. However, pressures from higher supply-chain costs, including transportation and input costs, remain concerning. Higher marketing spends are also worrisome.

Fomento Economico Mexicano, alias FEMSA, has exposure in various industries, including beverage, beer and retail, which gives it an edge over its competitors. FEMSA participates in the beverage industry through Coca-Cola FEMSA, the world’s largest franchise bottler for Coca-Cola products. In the beer industry, it enjoys a notable position with its 14.76% stake in Heineken, a leading brewer, with operations in 70 countries. The company operates in the retail space through the FEMSA Comercio subsidiary.

FEMSA focuses on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations. It is also on track with its strategy of creating a national distribution platform in the United States through the expansion of its footprint in the specialized distribution industry.

PepsiCo, one of the leading global food and beverage companies, has an edge over other beverage companies due to its exposure to the convenient food business. The company is benefiting from broad-based growth across categories and geographies. Volume growth and robust pricing gains, driven by strong realized prices across all segments, have been the key drivers.

PepsiCo continues to benefit from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities to build competitive advantages. It is also gaining from the resilience and strength of global beverage and convenient food businesses. Looking into 2022, PEP expects to retain the strength and momentum witnessed in 2021.