Why KDP’s CEO decided to forge a coffee colossus with the $18 billion acquisition of Peet’s—then spin it off and separate the soda business

The combo thrived during the COVID lockdown as the new Keurig Dr Pepper deployed AI to parse data flowing from in- brewers to detect early on that families were rushing to stockpile K-Pods in the stay-at- economy

That detective work hinted that the trend would soon spread to soft drinks

So KDP stockpiled cans and ramped duction of its best-selling Dr Pepper and Canada Dry brands while rivals were short of packaging and capacity

Sales soared when folks rushed to load their garages with twelve-packs of their favorite thirst-quenchers

But since that triumph, the highly-original concept of combining hot and cold—based on the conviction that the best strategy meant covering every category of non-alcoholic beverage on a customer’s shopping list—has ven more blematic

While KDP’s sales of refreshment beverages are thriving, the coffee side is ving a drag, and even a distraction for management

The reason for coffee downer: A big jump in the price of beans is hiking K-Pod prices and depressing volumes as customers shift to cheaper bagged ground and instant options

On August 25, KDP announced that it’s en route to splitting the coffee and soft drink franchises, and it appears the main reason isn’t the former’s financial underperformance, which may well reverse given the gigantic global demand for the rich black brew, but an admission that the two es aren’t the great synergistic fit originally envisaged

Then, KDP will spin off the coffee franchise to its holders as an independent enterprise

KDP’s CEO Tim Cofer, who I filed this spring for Fortune, also stated that he’s highly bullish on the coffee side, noting that it’s a $400 billion a year duct, and the one beverage most people most say they can’t without

He adds that retail coffee sales have rebounded this year, marking what he views as a turnaround

He also he emphasizes the powerhouse scale that that the new combined coffee companies will enjoy, and that they will bridge the U.S. and European

The deal’s the handiwork of veteran marketer and dealmaker Tim Cofer The deal’s architect appears to be Gamgort’s successor, CEO Tim Cofer

Cofer learned dealmaking under the mentorship of former Mondelez chief Irene Rosenfeld

After Rosenfeld masterminded the merger of Kraft Foods and Europe’s Cadbury, it was Cofer who managed the thorny but successful trans-Atlantic integration of the two chocolate kings that enabled the split of the Kraft Foods into the Kraft grocery and Mondelez snack es

Then as chief of Asia for Mondelez, Cofer greatly expanded its foot in the region by purchasing Vietnam’s largest seller of snacks

Cofer then led Mondelez in North America and though he was the leading internal candidate to succeed Rosenfeld, lost to Belgian-born Dirk Van de Put

During interviews for an in-depth Fortune story on KDP published in June, Cofer detailed his strategy for expanding margins and achieving high growth in soft drinks, a field that overall, just trudges forward

Hence, he’s pushing hard into such premium territory as energy, sports hydration, and refreshers to lift margins

Cofer’s also scored by offering the first canned “dirty sodas” to capitalize on a social media phenomenon where teens experiment mixing Dr Pepper with the s of dairy creamers

But despite investors’ initial harsh reaction, Cofer’s big strategic shift makes sense for KDP. “At the time the Keurig-Dr Pepper merger was announced, it attracted a lot of skepticism,” says Connor Rattigan, an analyst at global data vider Consumer Edge. “Now, we have a tacit admission that the market speculation at the time has ven correct.” Rattigan explains that the coffee and soft drink es are so different that it’s hard to find areas where melding the two ves more efficient than operating them separately

In fact, the opposite may be true

For example, the refreshment beverage side benefits greatly from KDP’s direct-store-dery system where it runs a web of warehouses and operates its own trucks for shipment to retailers

The DSD advantage, says Rattigan, is that KDP can reach all manner of small stores, not just the Walmarts, and that KDP has its own employees physically walking into the stores, and at the same time building strong ties with retailers

But K-Pods, he notes, aren’t sold in local outlets such as 7-11s and delis, they’re shipped mainly to the megastores

Hence, the advantage of DSD for coffee isn’t nearly as great as for soft drinks

Rattigan adds that KDP’s already thriving in refreshment drinks “while management’s spending a significant portion of its time on a totally different .” He believes a full concentration on the refreshment world of liquids would yield big benefits, especially since KDP enjoys plenty of what he calls “white space,” or scope, for expansion—and not energy and sports drinks. “They have lots of room to grow in restaurants, where Coke and Pepsi are extremely dominant,” he says

Gaining in fast food and other eateries should be highly doable, given that regular Dr Pepper recently surpassed classic Pepsi as America’s best-selling soft drink behind Coke

Cofer helped lift KDP to that milestone

It will take all this master’s dealmaking and marketing skills to ve the market’s wrong, and that the mise of going all-in on one of America’s best panoply of brands can overcome the headwind of a lofty price

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