It's barely a week into the closing of the mega-merger that created Keurig Dr Pepper and already the beverage industry has seen a defection, an acquisition and a further jolt in the coffee wars.
The deal, which closed Monday, creates a beverage giant with $11 billion in revenue that combines Dr Pepper Snapple's drink and distribution network with Keurig' Green Mountain's coffee business. The giant is backed by JAB Holding, the investment firm that has put together a coffee-fueled empire that already includes Krispy Kreme and Panera Bread.
This week's shake-up, though, is among brands far smaller than the iconic drinks for which both companies are named. Instead, it's within the collection of trendy beverages Keurig Dr Pepper distributes through its "Allied Brands" network. A sizable chunk of the company's revenue comes from distributing drinks made by other companies, including brands like Fiji Water, BodyArmor and Vita Coco. The more they distribute, the greater the profits. Those beverages are comparatively tiny against the country's biggest sellers — yet yield inordinate power as sales of the largest legacy drinks lag.
That might was tested when Dr Pepper Snapple's merger with Keurig triggered an opportunity for some of Dr Pepper Snapple's Allied Brands brands to renegotiate or leave the network all together. Fiji this week announced it was defecting to build its own distribution system. Another Allied Brand, Big Red, this week signed an agreement to sell to Keurig Dr Pepper, a spokeswoman for the beverage giant told CNBC.
The deal valued Big Red, described as "a deliciously different red soda," at more than $200 million, a source familiar with the situation tells CNBC, requesting anonymity because the terms of the deal are confidential.
A spokeswoman for Keurig Dr Pepper told CNBC, "We currently expect to maintain many of our existing Allied Brand partners and add new ones, while also expecting that we may choose to exit others, where doing so makes strategic sense for Keurig Dr Pepper."
The loss of Fiji, while minuscule to Keurig Dr Pepper's bottom line, is a bruise nonetheless.
Fiji is one of the best sellers in the Allied Brands collection, sources familiar with the situation tell CNBC, requesting anonymity because the information is confidential. When Dr Pepper Snapple was still a stand-alone company, it said Fiji's sales were roughly 2 percent of its total revenue.
The premium water brand is owned by privately held The Wonderful Co., the $4 billion owner of POM Wonderful pomegranate juices, Landmark Wines, Wonderful Almonds, and other trendy drinks and snacks.
Premium water is among the beverage industry's fastest-growing categories as consumers eschew sweeteners and artificial ingredients. It provided a balance to Dr Pepper Snapple's legacy portfolio of drinks dominated by sugary soda brands, like 7UP, A&W Root Beer and Crush.
Fiji therefore gave Dr Pepper Snapple an opportunity to tap into its growth and the halo effect of displaying it alongside its older brands like Snapple in grocery stores.
"Allied brands are how Dr Pepper Snapple accesses innovation in emerging and high-growth categories, both rapidly and for a low cost of capital," noted Keurig Dr Pepper CEO Bob Gamgort earlier this year in an investor presentation.
Dr Pepper Snapple has demonstrated how seriously it considered the risk of losing one of its larger Allied Brands. It forked over $1.7 billion to buy fruity antioxidant drink Bai Brands last year after it put itself up for sale.
"We had been in discussion with Fiji for some time and were unable to reach an agreement that was in the best interests of Keurig Dr Pepper," a spokeswoman for the company said.
Fiji did not respond to requests for comment.
The Fiji news casts uncertainty on whether other crown jewels may likewise leave or seek to sell themselves to one of Keurig Dr Pepper's competitors.
About 18 percent of Dr Pepper Snapple's 2017 revenue came from distribution deals with beverage companies it doesn't own, like its Allied Brand partners, according to a regulatory filing from 2017. The same filing said that growth for those brands were driven primarily by water brands BodyArmor, Core and Fiji.
VitaCoco plans to stay with Keurig Dr Pepper, its CEO told CNBC through a spokeswoman. BodyArmor and Core did not respond to requests for comment.
The decision to leave behind Keurig Dr Pepper's distribution network would not be made lightly. Creating a distribution network from scratch is challenging and expensive. Beverage distribution in the U.S. is dominated by its three largest players, Keurig Dr Pepper, Coca-Cola and PepsiCo.
Dr Pepper Snapple's distribution network was a large part of the appeal to Keurig in their merger.
Meantime, brands that look to tap distribution by selling to Atlanta-based Coca-Cola or PepsiCo in Purchase, New York may also face challenges. The soft drink giants have both bought upstart brands over the past few years. They have also been cautious about paying a lot for large drink brands that may fall out of favor.
And Keurig Dr Pepper has plans to continue to support partnership with brands, even if it does not own them.
"We are very committed to the partnership model," said a Keurig Dr Pepper spokeswoman. Keurig Green Mountain had its own partnership relationships prior to its deal with Dr Pepper Snapple.
As Keurig Dr Pepper has lost an Allied Brand, its has also added some.
Keurig Dr Pepper's acquisition of Big Red comes after Dr Pepper Snapple had a minority stake in the soda brand for a decade and a distribution partnership with it for more than 30 years.
Austin, Texas-based Big Red was founded 1937 and also owns Hydrive energy water and Xyience energy drink. Its following is strong, though regional.
Keurig Dr Pepper also signed agreements to add two coffee drinks to the Allied Brands network, Forto Coffee Energy Shots and Peet’s Ready-to-Drink Iced Expresso, a spokeswoman told CNBC.
It will distribute Forto throughout its network and Peet's primarily through its network of convenience stores.
Those additions highlight the opportunity Keurig Dr Pepper has been touting to combine Dr Pepper Snapple's retail distribution with the brands and restaurants that JAB owns. Keurig is a minority investor in Forto. JAB owns Peet's Coffee & Tea.
"Access to the JAB-owned brands, like Peet’s Coffee, will facilitate our expansion into the high-growth, ready-to-drink coffee segment," noted Gamgort in the same presentation. "Plugging [Forto] into the [Dr Pepper Snapple] small outlet distribution machine will accelerate its growth trajectory by reaching retail outlets it could not access on its own," he added.
Still, industry sources note that distribution is only half the puzzle. The other is ensuring demand.
Shares of Keurig Dr Pepper, which began trading Tuesday, were down 2.8 percent in morning trading.
Correction: An earlier version of this story misidentified the wine brand The Wonderful Co. owns. It is Landmark Wines.