“Just as we experienced in 2020, the COVID recovery period in 2021 is creating significant volatility in demand, which has required us to remain nimble and flexible in managing our business,” Gamgort told investment analysts last week during the company’s second quarter earnings call.
“We also face the added challenges of input cost and labor inflation, transportation constraints, labor shortages and supply chain disruptions, making 2021 arguably more difficult in many respects than 2020,” he added, noting that he expects at least “another six to 12 months of macro volatility before a more predictable operating environment emerges.”
Gamgort explained that part of the ongoing challenge is the “mixed signals” coming from different regional responses to the pandemic, including reopening in some areas and “problems in others.”
The extreme degree of some challenges also is complicating Keurig Dr Pepper’s response, he added.
For example, he explained that while “we’ve all dealt with inflation” in commodities and input costs before now, “we’ve never seen this level of labor inflation.”
The unclear origin of the labor shortage also is hindering the company’s response to the challenge.
“I have no idea how much of it is tied to government stimulus and concern about going back to work, how much is tied to the fact that kids need to be in school in the fall to free up the labor force who are watching the children. We are going to know a lot more when September, October rolls around, but I’d say this is very much unprecedented in all of our careers,” he said.
He added the “key to stabilization will be a return to both school and the office environment, the course of the COVID virus and its variants, the impact of reduced or eliminated government subsidies, the catch-up of global supply chains to meet unprecedented demand and improvement in the labor market.”
Non-carbonated beverage portfolio hit hard by challenges
By remaining flexible, Keurig Dr Pepper has been able to manage some of the supply chain disruptions in 2021 – notably continuing to effectively supply K-Cup pods, carbonated soft drinks and overcome ship shortages and ocean transportation limitations to supply the high levels of demand for its Keurig brewing machines.
But, the company hasn’t been fully immune to these challenges.
“Our non-carb beverage portfolio has been negatively impacted by supply disruptions, especially Snapple an Core,” Gamgort said.
For example, he said, the company has struggled with the rollout and refresh of Snapple’s bottle on the West Coast, which began in November.
“The new package substitutes post-consumer recycled plastic, or rPET, for glass and nonrecycled plastic, and it also has a contemporizes the Snapple brand look and feed. The consumer reception has been very strong … However, an unexpected shortfall in committed glass bottles from our supplier required us to transition our new rPET packaging faster, which pressured material availability from our supplier or rPET and stretched the startup curve for our new production lines,” he said.
While the company is navigating through this challenge, Gamgort said he expects some sales and share pressure on key non-carb beverage brands in the third quarter.
‘We are in a position of strength’
Despite these challenges, the company closed out the second quarter on a strong note with double-digit growth in adjusted diluted EPS and high single-digit growth in constant currency net sales.
With this in mind, Gamgort said he is confident in the company’s ability to deliver on EPS guidance for 2021, while increasing revenue growth target to 6% to 7% for the full year from the previously projected 4% to 6% range. He also reaffirmed the company’s expected diluted EPS growth in the range of 13% to 15%.
“For 2021, we are in a position of strength as our sales growth momentum will help to offset inflation” along with previously announced price increases in cold beverages and owned and licensed coffee portfolios, CFO Ozan Dokmecioglu said during the company’s Q2 call.
Indeed, net sales increased 9.6% to $3.12bn in the second quarter compared to the same time last year, driven by growth in each business segment with beverage concentrates and Latin America Beverages posting strong double-digit growth.
