What Was Keurig Green Mountain Thinking When It Acquired Bevyz Global?

| About: Keurig Green (GMCR)
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Summary

Bevyz Global failed in all aspects of selling a product.

Company officials had better luck selling their technology than finished product.

Keurig Green Mountain's Keurig Cold investment will likely top $1bn.

In several articles in the past, which investors can search here on Seeking Alpha, I have reported on Bevyz global. I've had the distinct pleasure of following the Bevyz Global company over the last two years and reported to investors on several developments. After the closing bell on December 4th, Keurig Green Mountain (NASDAQ:GMCR) announced it was acquiring the remainder of Bevyz Global which it did not already own. It should be noted, and as I reported in the past, the remainder of the Bevyz Global assets which Keurig purchased included the portion of the investment which PepsiCo (NYSE:PEP) had decided to disconnect.

Late in 2013, Bevyz Global announced it would be launching its Bevyz Fresh product line in the United States during 2014. The company's Bevyz Fresh product line was to be produced by Cuisinart and distributed by Cuisinart in North America. If we flash forward to December 2014, obviously no Bevyz Fresh product is to be found on any retail shelves.

Bevyz Global had the opportunity to display and demonstrate its entire product line in March at the International Home Show which is fully covered by Capital Ladder Advisory Group (for whom I am employed). At the show I scheduled a meeting with the head of Business Development for Bevyz Global, Ariel Sterngold. Ariel and his father are the founders of the business and former employees of SodaStream International LTD (NASDAQ:SODA). Prior to my meeting with Ariel I had the opportunity to demonstrate and taste the Bevyz Fresh product line. Was the product good? No, not at all and by the great sample size of retail buyers who also demonstrated and tested the products, they felt a similar way as they have decided not to buy into the product line. So what was wrong with the Bevyz Fresh product line? Firstly, for those unfamiliar with the company and its product offering, let's start at the beginning and with the machine itself.

The Bevyz Fresh machine maintains patented technology that, unlike the Keurig machines, squeezes liquid flavor from a pod instead of poking a hole in a pod. The Bevyz Fresh machine can produce cold, hot and carbonated beverages. The machine uses CO2 cylinders to deliver carbonation for a desired carbonated beverage. The expected cost of the machine was to be $299.99 and designated for specialty retailers such as Williams-Sonoma (NYSE:WSM). Unfortunately and as I expected, product placement did not take hold even though I was hopeful.

When testing of the Bevyz Fresh machine was taking place at the IHH Show, I didn't immediately notice what was going on behind the booth. All I recognized at first, when a glass of carbonated orange drink was presented to me, was that the carbonation was weak, but still somewhat tasty. There is no ability to change carbonation levels with the Bevyz Fresh product, making it inferior to that of a SodaStream, but there is more to the problems with the machine than carbonation control. The Bevyz Fresh simply didn't work.

Inside every Bevyz Fresh or similar product in the product line is an electro thermic cooling system. The problem with the Bevyz Fresh electro thermic cooling system is that it doesn't work. I should more appropriately say it doesn't work well. For the first couple, and I do mean two, 6-8 oz. servings, the cooling system works fine; unfortunately it's that 3rd serving that comes out basically at room temperature or whatever temperature the water reservoir was at. This gets us back to how I discovered that the system was faulty.

Right behind the Cuisinart booth (where Bevyz Fresh product was presented) was a tub filled with ice and water. It was from this tub that the demonstrator was continuously introducing fresh water to the water reservoir of the Bevyz Fresh machine. Now I could see having to refill the tank for every 12-16 glasses which is how large the reservoir is, but for every other glass seemed out of place until I inquired with Ariel Sterngold himself as to this activity. He told me the need to operate the machine this way was due to the party mode for which the machine was operating, basically saying that the demonstrator was accommodating for the numerous people desiring to see the product perform. I pushed back against this response by Mr. Sterngold by denoting the system is supposed to be able to cool each serving and up to as many as 16 servings depending on desired beverage of choice. He then noted that the product still had some development and the product being demonstrated was not the finished product to be sold in stores later this year. So what was I going to do, keep beating a dead horse or let the issue go to ask all the other questions I had concerning the Bevyz Global company and products? Naturally, I allowed for the saving of face and moved on from the product's issues. But I certainly found out more later at the IHH show and from another vendor with a similar product, but which actually worked.

Let's find ourselves back to the Bevyz Fresh product which was to be priced at $299.99. If you want to use the product to carbonate, unfortunately it proves ineffective at best. Due to the carbonation cylinder issues and injection through the system as a whole, the carbonation can only reach a level consistent with fruity flavors. It can't carbonate at levels necessary for colas, root beers and the like as I have previously reported. Company officials did not try to hide this fact as they readily acknowledged this point. Additionally, the most problematic aspect of the carbonating performance for the system was the price for carbonation. Bevyz offers its carbonation package for a total of 30 liters of carbonated drink for $19.99. For comparison sake, SodaStream offers its carbonation for a total of 60 liters of carbonated drink for $15. The cost for carbonating with the Bevyz Fresh was more than double the cost of carbonating with a SodaStream product. You see why retailers shrugged their shoulders, so to speak, at the Bevyz Fresh machine. If a machine was actually sold to a customer, do you know where they could get their CO2 cylinders refilled; you guessed it, at Bevyz.com. Not only were retailers not willing to purchase the machine, but also they were not willing to adopt two CO2 exchanges as I also previously reported when discussing SodaStream's greatest barrier to entry against the competition. Let's move on to PepsiCo's former relationship with Bevyz Global.

PepsiCo invested in Bevyz Global a couple of years ago and even licensed its Pepsi brand to be used in Bevyz pods. The Pepsi brand logo was featured on the home page of Bevzy.com up until my original publication which discussed this relationship. Shortly after understanding that the Bevyz Fresh product line was going nowhere, and quickly, PepsiCo disbanded with its licensing agreement through Bevyz Global. Bevyz changed their website to eliminate the Pepsi logo in recognition of the failed relationship which generated little to no sales. Since that time, roughly 5 months ago, Bevyz has done exactly as I stated they would look to do and exactly what Ariel Sterngold told me their goal was to do; "Sell their technology, hopes and dreams to whoever would listen." In South America, the company has sold the rights for its technology to BBlend, a South American distributor who of course has found difficulty selling the Bevyz technology to retailers. Bevyz has also signed agreements with Whirlpool (NYSE:WHR) for South America as well. Come one, come all as Bevyz has a bridge to sell you! Let's now get back to that other vendor at the IHH Show who tipped me off to what and why Bevyz was demonstrating its product the way it was during the event.

Ever heard of Klearbar? Well you certainly have heard of Bevyz now. So go type in both company names into Google search next to the word "Amazon" (NASDAQ:AMZN). The Klearbar mini will come up with a link to its product on the amazon.com website. Keep in mind the product is no longer offered as it failed to sell through amazon.com. Unfortunately, Bevyz Fresh never even got the opportunity to sell through amazon.com. I'd like to point out that the two Klearbar products sold for more than double the price of the Bevyz Fresh. The reason the Klearbar product was able to at least get the opportunity through amazon.com was that it worked and it worked completely. No matter how many glasses were demanded of the system in succession, the cooling mechanism in the Klearbar product was up to the task. What is being identified here is that regardless of the technology used in these types of single-serve systems, if they are effective, it costs a pretty penny. Additionally, if they cost a pretty penny, they simply don't sell to the consumer and can't be commercialized, regardless of licensed backing or investor base. By the way, in the past, Klearbar was a distributor for Bevyz Global. No matter how hard and through different affiliations and partnerships, nobody has been able to commercialize a home carbonation system the way SodaStream has since initiating the category.

I had the opportunity to speak with Ron Beaver Director of Commercial Sales for Klearbar at the IHH show, and his staff demonstrated the product line for me. I asked him about the Bevyz Fresh product and that is when I discovered the faults with the electro thermic cooling system inside the Bevyz Fresh. His detailed depiction of his product's cooling system heightened my awareness of the internal components for these types of beverage systems and why Bevyz demonstrators were constantly introducing cold water to the reservoir during demonstration. Then, Mr. Beaver took his system apart for me so I could see the inner workings of the Klearbar mini in action and why his systems worked effectively when compared to that of the Bevyz Fresh. I of course took with me this base of knowledge back to the Bevyz product demonstration and asked company officials to offer me a more constructive demonstration absent refilling the reservoir with cold water constantly. My request was obliged and the machine, not surprisingly, failed to deliver a cold beverage by glass number four. And this brings us to Keurig Green Mountain's purchase of Bevyz Global, valuing the outstanding company assets worth $220mm.

To be fair, kind and honest toward the Bevyz Global leadership team, I did inform them at the IHH Show, that their product was flawed and would definitively fail to gain distribution. To be honest with myself, I did not value to the degree I would have liked to, that they had no long-term desire to see actual product sales but rather the sale of its technology… even if that meant selling the entire company.

So the question at hand now might be, why did Keurig Green Mountain buy a company with flawed technology, originally formed in 2004 after SodaStream passed on the idea of single-serve, cold carbonated beverages as a commercial product, with a major brand like Pepsi who gave up on the company's product development and distribution capability, with little international customers and distribution and with U.S. based retailers also passing on its products? In discussing this development with clients and SodaStream officials, I did have information which has been corroborated by other companies such as Sparkling Drink Systems, leading me to believe there are some misrepresentations which have been offered by Bevyz Global concerning their "assets." Does it matter, certainly not as this deal is done and the due diligence was performed by three banking institutions. You know what these banking institutions likely used to value the Bevyz Global assets; you guessed it, the SodaStream business. If they did not use the comparisons of the only company in the category, which I would find hard to believe, then they could have only utilized pure speculation and hopefulness which has been done before.

When I truly analyze the reasoning for Keurig Green Mountain to acquire Bevyz Global I come to the most logical and simple conclusion. Despite all the evidence and all the failures which have beset Bevyz Global both past and present, Keurig still believes in the technology. At the very least, Keurig has contractual rights now for product distribution which were formerly owned by Bevyz Global. If we step back for just a moment and bring the Keurig Cold investment into perspective it is… wow! By the time they build out their new manufacturing facility and production lines for their new plant in Georgia which will cost at least $337mm, purchase all materials for producing what they expect to sell when the Keurig Cold launches late next year and account for all marketing dollars designated for the Keurig Cold I believe this will have cost Keurig close to $1.2bn. That is a lot of money riding on a single product category with a limited available market and which will be restricted to North America for the next couple of years.

Unfortunately, the couple of years timeline doesn't fit with what is necessary for this product to perform at break-even profit levels by that time frame which is being offered by many GMCR analysts to fit their earnings and sales models/projections. In fact, if you transfer SodaStream's sales numbers for syrups over the last two years, increase them by 50% and offer them as potential sales for the Keurig Cold pods, Keurig has to take write downs on this product line by the end of the 2nd fiscal year. Essentially, what I'm demonstrating is that, the numbers being projected for the Keurig Cold by analysts don't work, even with increasing SodaStream's sales for flavors/pods by 50 percent. But to be fair, the analysts have only projected the capital cost to be around $500mm for the Keurig Cold product line. Even if we assume only half of this Bevyz Global acquisition is designated toward the Keurig Cold budget spending and only half of the new facility in Georgia is paid for through the designated Keurig Cold budget, Keurig Green Mountain has already invested more than $300mm to date by my estimates. This is before production and manufacturing costs which will likely equal the costs already assumed and accounted for bringing us to roughly $600mm, beyond analysts' current startup cost models, before actual marketing dollars are spent and before the final 5-year total cost of the Georgia facility. I will assume analysts will begin to adjust their models for the Keurig Cold profit contributions in the near to midterm. Oh Keurig Green Mountain, Coca-Cola (NYSE:KO) and Monster Beverage (NASDAQ:MNST) this had better work!

Disclosure: The author is long SODA.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In previous disclosures I noted my long position in GMCR at $136 and PEP at $78 per share. I have since eliminated both positions as they achieved my price targets of $150 and $100 respectively. I have moved this capital into other investment opportunities for consideration of short term and long term gains ahead of tax declaration.