Keurig Dr. Pepper makes premium water play with $525m acquisition of CORE Nutrition

27-Sep-2018 - Last updated on 27-Sep-2018 at 19:30 GMT

CORE, a premium water with a pH of 7.4, has been acquired by Keurig Dr. Pepper for $525m.

Keurig Dr. Pepper’s (KDP) acquisition of CORE Nutrition for $525m will give KDP a solid play into the premium water category where it is currently not as active, says Nick McCoy, co-founder and managing director of Whipstitch Capital, an advisor to CORE on the deal.

Bottled water is the #1 beverage product in the US (by volume) overtaking soft drink consumption with sales totaling $18.4bn in 2017, according to data from the International Bottled Water Association (IBWA) and the Beverage Marketing Corporation (BMC).

And the premiumization trend of bottled water where consumers are seeking out added value – whether it be packaging, nutrients, or flavor – in their hydration purchases has presented manufacturers with further growth opportunities.

"The premium water category is very competitive," Michael Burgmaier, managing director of Whipstitch Capital, said. "This deal solidifies the future for CORE; we are excited to see where the brand can go with KDP."

According to McCoy, the decision to acquire CORE was an obvious one given the brand’s exponential growth and KDP’s gap in its portfolio for a premium bottled water brand.

“The health of the way that product is selling is so strong. Not only is it growing really rapidly but the velocity numbers are increasing really well and it’s very difficult to grow velocity when you’re growing that quickly,” McCoy said.

CORE has grown at an annualized rate of approximately 115% over the past three years with current retail sales across both measured and unmeasured challenges estimated in excess of $200m in last 52 weeks, according to a KDP press release.

“It’s an obvious choice [for KDP]. I think it definitely fills a gap and gives them an opportunity.”

The company’s current water portfolio includes Deja Blue purified drinking water, Penafiel mineral spring water, and antioxidant-enhanced, flavored water brand, Bai.

“…I am certain that, under its ownership, CORE will continue to see tremendous long-term success. I am a strong supporter of the KDP strategy and business model and am looking forward to being a shareholder in the company," Lance Collins, founder of CORE, commented.

Alexander Esposito, research analyst at Euromonitor International, added: “KDP’s move to purchase CORE Nutrition is a sign the company sees flavored and functional waters as categories that will provide growth in coming years."

‘Consumers buy the brand, more than they buy the science’

CORE markets itself as a performance water with a 7.4 pH (the body’s natural pH level), "a feature that health conscious consumers are increasingly looking for when choosing beverages," Esposito said.

According to McCoy, it’s the branding and easy-to-hold curvy bottles that consumers are attaching themselves to.

"We created CORE to meet the increasing desires for innovative, enhanced water offerings with functional benefits for today's modern consumer,” Collins said.

“Consumers buy the brand, more than they buy the science. I think core has done a really really good job with the branding,” McCoy added.

CORE_Organic — CORE rolled out its flavored organic line in April 2016.

“People are looking for something that is just cold spring water. It becomes an obvious choice whether they understand everything about it or not.”

"On the flavored side of its lineup, CORE provides waters which could attract juice and soda drinkers who are looking to cut down on sugar. These low-sugar flavored waters are also organic and use plant-based sweeteners instead of the unpopular aspartame for sweetness," Esposito added.

Wells Fargo: Allied brands are ‘re-evaluating’ relationship with KDP

According to a note from Wells Fargo analysts, KDP’s acquisition of CORE is an unsurprising move given past departures of KDP’s allied brands since the Keurig/DPS merger.

As an allied brand since 2016, Keurig Dr. Pepper currently manages about two-thirds of CORE’s US distribution.

“We believe that some allied brands are still re-evaluating their relationship with KDP following the close of the Keurig/DPS merger and believe that KDP may have no choice but to acquire some of them in order to avoid losing them to new distribution partners,” Bonnie Herzog, Wells Fargo managing director of equity research, said.

This has been the case already with FIJI and BODYARMOR, which exited distribution agreements with KDP following the merger.

Following the closing of the acquisition, both CORE Hydration and CORE Organic will continue to be distributed primarily through KDP's company-owned direct store delivery network and independent distributor network, while certain select existing CORE Nutrition distribution partners are expected to maintain their channel coverage.

“However, it’s not fully clear what role CORE current management team will play following the acquisition, and we are cognizant that without their direct day-to-day oversight, the brand’s momentum might moderate,” added Wells Fargo.

“All-in, given our concerns about continued allied brand defections (as well as continued pricing pressures across legacy Keurig’s K-cup portfolio), we maintain our market perform rating on KDP.”

The deal, which is projected to close by the end of 2018, is likely to be accretive to EPS (earnings per share) in 2020 and beyond, Wells Fargo projected.