Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's earnings call for the third quarter of 2020. This conference call is being recorded. There will be a question- and- answer session at the end of the call. I would now like to introduce Keurig Dr Pepper's Vice President of Investor Relations, Mr. Tyson Seely. Mr. Seely, please go ahead.
Thank you, hello everyone. Thanks for joining us. Earlier this morning, we issued our press release for the third quarter of 2020. If you need a copy, you can get one on our website at keurigdrpepper.com in the investors section. Consistent with previous quarters, today we will be discussing our performance on an adjusted basis excluding items affecting comparability. The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trends. While the exclusion of items affecting comparability is not in accordance with GAAP, we believe that the adjusted pro forma basis provides meaningful comparisons and an appropriate basis for discussion of our performance. Details of the excluded items are included in the reconciliation tables included in our press release and our 10-Q, which will be filed later today.
Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance. Here with me virtually today to discuss our third quarter 2020 results are KDP Chairman and CEO, Bob Gamgort, our CFO, Ozan Dokmecioglu, and our Chief Corporate Affairs Officer, Maria Sceppaguercio. Finally, our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. The company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. With that, I'll hand it over to Bob.
Thanks, Tyson, and good morning, everyone. I hope everyone participating on this call continues to be well. The last few months have been extremely volatile given the COVID crisis. While consumer mobility has increased and the economy has opened up somewhat, the coming months are likely to remain unpredictable as rates of infection in North America appear to be on the rise. As we'll discuss today, KDP continues to navigate well through the pandemic by anticipating and adjusting to trends in consumer behavior, driving brands, categories, and channels with growth potential in order to offset other areas that are challenged. As we've said over the past seven months, the pandemic does not represent a short-term windfall for us. Instead, this is a day-to-day mix management effort across both channels and products, which is enabled by the flexibility of our business model and the outstanding executional capabilities of our team.
We monitor consumer mobility trends on a near-daily basis to adjust our product mix, channel focus, and production planning, and continue to view this metric as a reliable leading indicator for running our business. Most of all, we continue to be thankful to our team members who have driven the results we reported today, and the work our organization has done to give back to our communities when they are in need. Ozan will take you through the specifics of our third quarter results in a few minutes. I will tell you that in summary, they were outstanding. Nearly 6% revenue growth, 16% adjusted operating income growth, and 22% adjusted diluted EPS growth with continued de-leveraging. We gained market share of total liquid refreshment beverages in over 90% of our retail base, driven by gains in the majority of category segments in which we compete.
With a number of highlights worth mentioning, such as the 1.4 share point increase in CSDs, driven by growth in the great majority of our CSD brands, strength in the Snapple brand, which delivered a 1.5 share point increase in ready-to-drink tea and nearly a one share point increase in juice drinks, and CORE being the fastest-growing premium water brand over the quarter. Our beverage concentrate segment saw substantial quarter-over-quarter improvement as restaurants experienced improved traffic. In single-serve coffee, we delivered 10% growth in at-home consumption, driven by increases in both household penetration and an elevated attachment rate, which was partially offset during the quarter by our Away-F rom-H ome coffee business, which continues to be negatively impacted by persistently low return to work trends in large offices, which is our area of strength, and the timing of some partner shipments.
In the fourth quarter, we expect total pod shipments to return to their more normalized mid to high single-digit growth rates, despite our expectations that weakness in the away- from- home channel will continue. The exceptional growth in brewer sales in advance of the fourth quarter speaks to the enthusiasm retailers have for Keurig in the holiday season, which is upcoming. With one quarter to go, our guidance for this year remains intact.
Now at the high end of what we said we would accomplish in 2020, which means that we continue to meet or exceed the long-term merger targets we communicated over two years ago. Before I turn it over to Ozan, I'd like to take a few minutes to put our quarterly results and several pieces of news that we communicated this week into a longer-term strategic context, all supporting the evolution of KDP to a modern beverage company. We focused much of our past earnings call content on how we are expanding the consumer reach of our brand portfolio, which is a critical driver of long-term profitable growth.
That conversation typically focuses on new brands and M&A, but it's very important to point out that the broad share growth we've experienced on existing brands, both before and during the pandemic, has been driven by increased household penetration in both our hot and cold portfolios, which we expect will stick going forward. This is a result of impactful innovation and renovation, as well as strong marketing programming that's attracting new consumers into our brands. Growth in existing brands provides the foundation upon which to add new ones.
We continue to pursue opportunities to fill white space in our portfolio through national partnerships, such as our recent agreement with Polar, and smaller bets, such as investments that we made last year in A SHOC energy drink with Lance Collins, our recently announced Don't Quit! adult nutrition protein drink with Jake Steinfeld, and our recent investment in Revive, a Kombucha with Peet's Coffee. With regard to the Keurig brand, we consistently expanded household penetration year in and out, and 2020 is turning out to be an especially strong year for system adoption. Rather than growing household penetration by 2 million households, which is consistent with our recent run rates, we now expect to add approximately 3 million new households in 2020.
While attachment rates may move up and down and potentially back up again during another wave of the COVID-19 pandemic, converting new households into the Keurig system represents a long-term annuity stream that endures well into the future. While portfolio expansion has taken center stage since the merger, we've also been building our unique and valuable distribution platforms, although we haven't discussed them until recently. On our last earnings call, we quantified how important e-commerce has become for us, representing more than 10% of total KDP sales and a larger portion of coffee sales. Yesterday, we announced news regarding our direct store delivery system that is worth placing into a broader strategic context. Since our merger, we have invested in people, technology, and assets to improve the effectiveness of our DSD network.
We've also focused on consolidating key independent distributor systems into our company-owned DSD operations where territories overlap in order to drive scale and efficiency. Yesterday, we jointly announced with The Honickman Companies an agreement that provides KDP with long-term sales and distribution for key brands, including Canada Dry, Sunkist, 7UP, and A&W across 18 counties in New York and New Jersey, reaching 17 million consumers. This follows a string of DSD territory moves and acquisitions across the country over the past two years, including California, New York, and the Midwest. To be clear, our objective is not to control every market with our trucks, but rather to ensure that each market in which we sell our brands has a competitive route to market, regardless of who owns the territory. For example, in late 2019, we partnered with Honickman to facilitate their acquisition of a sub-scale independent distributor in Virginia.
In Alabama, we agreed with our partner, Buffalo Rock, to allow our brands to ride on the same truck with competitive brands in order to improve frequency and drop size across their system. Whether we operate our trucks in the market or we partner with a local player of scale, every one of these moves ensures better reach, in-stocks, and merchandising for our brand portfolio, which builds our platform for long-term growth. Our strong in-market performance this year demonstrates the value of these system improvements, and we believe we have significant opportunity remaining. Important to a modern beverage company is a strong sustainability culture and continuously pushing forward to meet new and more aspirational goals. Earlier this week, we announced that we have begun the transition of our Snapple and CORE bottles to 100% recycled PET, or rPET, as it's commonly called.
We will continue to expand rPET across our portfolio going forward. Consistent with our goal to build KDP for the long term, we also announced changes earlier this week to our senior leadership team, designed to further improve speed to market and place decision-making closer to our consumers and our customers. Two and a half years into our merger, and with the benefit of learning what has worked so well during the pandemic, this is a decision made from strength, and we're fortunate to have the talent on our leadership team to assume broader operating roles with increased levels of responsibility. Let me now hand it over to Ozan for more details on the quarter
Thanks, Bob, and good morning, everyone. Continuing on an adjusted basis, I will briefly review our performance for the third quarter, which our press release discusses in significant detail. The third quarter was another good one for us. As Bob discussed, we believe that we struck the right balance of continuing to invest in areas such as innovation, technology, and sustainability that provide competitive advantage while continuing to deliver our financial commitments. Constant currency net sales increased 5.8%, with growth in three of our four segments, led by packaged beverages and coffee systems, combined with sequential improvement in beverage concentrates. On a constant currency basis, adjusted operating income increased 16.3% in the quarter, driven by strong revenue growth, productivity and merger synergies, as well as a reduction in discretionary overhead expenses, including marketing.
These drivers were partially offset by higher operating costs associated with increased consumer demand for our products and inflation in logistics. In the third quarter, pre-tax operating expenses directly related to COVID-19 totaled $49 million, and consistent with previous quarters, were recognized as items affecting comparability. These expenses consisted of temporary and unusual compensation increases and incentives for frontline employees, as well as incremental safety and sanitation expenses across our business. Adjusted diluted EPS advanced 22% in the quarter, fueled by the growth in adjusted operating income, lower interest expense as a result of continued deleveraging, and a lower effective tax rate. Turning to our segment performance for the quarter. In coffee systems, constant currency net sales growth of 3.2% was driven by strong volume mix growth of 6%, partially offset by lower net pricing of 2.8%.
The volume mix performance reflected a 34% increase in brewer shipments, incremental net sales from McCafé, and higher shipments of K-Cup pods for at-home consumption. Significantly offsetting these growth drivers were the continued drop off in the office coffee and hospitality businesses. While the segment's operating margin declined slightly in the quarter due to primarily to mix, which includes the stronger brewer performance, constant currency adjusted operating income increased 1.6% to $373 million. As mentioned on our second quarter call, we are excited about the upcoming launch of our first connected brewer. Demand for Keurig brewers remains extremely strong heading into the holiday season, in part driven by our new K-Supreme platform.
We have decided to wait until 2021 to launch the new connected brewer to enable us to focus our marketing efforts in the balance of the year behind K-Supreme and our existing brewer line, given the unprecedented demand we are experiencing. In packaged beverages, constant currency net sales grew 10.7% due to strong volume mix growth of 11.4%, partially offset by slightly lower net pricing of 0.7%. This performance reflected strong growth in both our company-owned DSD and warehouse direct businesses. In the quarter, we grew both our carbonated and non-carbonated brand portfolios due to increased at-home consumption and continued market share growth resulting from strong in-market execution. This growth was partially offset by the decline in convenience and product channel. The decline moderated as compared to the second quarter of this year as consumer mobility improved.
Constant currency adjusted operating income increased 51.2% in the quarter to $304 million, primarily reflecting the sales growth and discretionary spending reductions. As Bob mentioned earlier, we are thrilled with the agreement announced yesterday with Honickman, which will drive significant value creation for KDP over time. The long-term sales and distribution access for our key brands that we are gaining through this transaction is being done through a unique asset-light structure. Specifically, Honickman is selling these rights to a third party funded by Prudential Capital, and KDP entered into a simultaneous transaction with the third party to gain long-term access to the rights. There were various ways we could have structured this deal, including a straight-up acquisition.
Instead, we chose to use a third party and pay a small annual fee. Given that we already have a sales and distribution presence in the area and didn't need any of other assets from the transaction. The arrangement provides us with control of our brands for which we can maximize the economics, and it will also provide scale to our existing brands currently being distributed in the area through our company-owned DSD network and dedicated independent operators. In beverage concentrates, we experienced a meaningful sequential quarterly improvement. Specifically, constant currency net sales versus year ago declined a modest 2.2% versus the double-digit decline during the height of the shelter in place directives in quarter two. This modest decline in quarter three was due to lower volume mix of 4.8%, partially offset by higher net price realization of 2.6%.
This sequential improvement reflected a moderating decline in the fountain food service business as consumer mobility increased and restaurant traffic picked up. Constant currency adjusted operating income increased 8.6% in the quarter to $265 million, primarily reflecting lower discretionary spending. Finally, in Latin America Beverages, constant currency net sales grew 0.7%, reflecting strong pricing of 5.2%, partially offset by lower volume mix of 4.5% due to limited consumer mobility in Mexico. Operating income was flat to the year ago period. On a constant currency basis, operating income increased 12% to $25 million in the quarter due to the strong net sales growth as well as continued productivity and lower marketing expense. The drivers were partially offset by the unfavorable impact of foreign currency transaction expense. While the current environment has proven the power of our brands, it has also made evident the importance of simplification.
To meet heightened demand and drive efficiency, we have continued to focus our production and delivery on the highest priority brands and products with great success. Through this process, we have performed a detailed review of the offerings in our system to ensure we deliver on our customers' needs while also ensuring we are efficient. This will continue to be a focus of ours going forward. In terms of our ongoing productivity and merger synergies, we continue to focus and execute on these opportunities. We remain committed to delivering our value capture commitments through both productivity and merger synergies, and fully expect to deliver our planned merger synergies of $600 million by the end of 2021. Now, moving to cash flow and liquidity. Free cash flow in the quarter was again strong at $525 million, and our year-to-date free cash flow conversion rate was approximately 105%.
In the quarter, we reduced bank debt by $225 million and structural payables by $21 million. We ended the quarter with over $190 million of unrestricted cash on hand. In terms of leverage, our bank debt to adjusted EBITDA ratio, which we refer to as our management leverage ratio, improved to 3.8x compared to 4.8x at the end of the third quarter of 2019. This improvement was driven by continued reductions in outstanding debt balances and continued growth in adjusted EBITDA. Since the merger close, we have reduced our leverage ratio by over two full turns. Turning now to CapEx. We continue to support the business with necessary CapEx investment to drive future growth and efficiency. As we discussed last quarter, our new Spartanburg pod production facility has been delayed approximately six months, resulting from equipment supplier delays.
Our new cold beverages production facility in Allentown is also delayed about three months for similar reasons. We have always expected both of these facilities to primarily be contributors to our business in 2021. Our expectations regarding these minor delays have not changed. Which brings us to our guidance. We continue to have confidence in our ability to manage through what is likely to be a bumpy road in the balance of the year, much as we have done to date. Our outlook for the full- year adjusted diluted EPS growth remains unchanged at 13%-15%, with delivery likely at the high end of this range. This outlook reflects our expectation for constant currency net sales growth at the high end of the range of 3%-4%.
Continued strong management of discretionary costs across the business while maintaining investment in innovation, technology, and sustainability. Expected higher marketing investment in the fourth quarter of the year relative to the third quarter, giving the expectation for an environment in which consumer receptivity to marketing and marketing return on investment continues to improve. It is important to note that we plan to reinvest any over-delivery we may generate in the fourth quarter into incremental brand investment to further drive top-line growth while still delivering our adjusted EPS guidance for 2020. We also have confidence in our deleveraging targets and now expect our management leverage ratio to be in the middle of our 3.5x -3.8x range at the end of the year. Let me now turn the call back to the operator for your questions.
At this time if anybody has a question, please press star one on your telephone keypad. Again, that would be star one on your telephone keypad. Your first question comes from Bonnie Herzog from Goldman Sachs. Your line is open.
My question this morning is, I guess I wanted to drill down a little bit more on your brewer shipment volumes, which were obviously much better than anyone would have expected in the quarter. I was trying to understand, how much of that will be reversed next quarter, essentially how much of your brewer volumes in Q3 really reflected a pull forward in demand from Q4. Bob, maybe you could touch on this. For instance, are you already seeing a step down in brewer orders during October versus the year ago period? Then in terms of innovation, you did call out that you're now shifting some of this to next year. I just really wanted to verify that there are no plans for any more brewer innovation in 2020. Thank you.
Yeah. Good morning, Bonnie. First is on brewer shipments. As we've talked about over the past couple of years, brewer shipments, especially quarter-to-quarter, aren't a great measurement of what's going on with household penetration. What I would suggest is that every third quarter has shipments built into it that are for the holiday season. What you're seeing is a little bit of a pull forward this year, meaning some of those holiday shipments that would have gone in October, November are going into the third quarter because of the pandemic, retailers are trying to get ahead of everything. The most important thing to take away from that is the confidence that retailers have in Keurig for holiday gifting, in part driven by the innovation and the strong marketing support that we have in place.
The feedback that we're getting on all of the brewers that we've introduced in the past year or so, but especially the K-Supreme and the K-Supreme Plus, which is really the featured item for this holiday, has them leaning forward and really in a position to push Keurig for the holidays. The single most important metric we gave you on this call, though, is our outlook on household penetration, because as we've said before, shipments can be up and down in a quarter. They're somewhat useful to look over a longer period of time. The most important metric we talked about today was the fact that we believe that instead of our typical run rate of 2 million households being added into the Keurig system in the year, we expect that now to be 3 million.
As we said before, attachment rates move up and down, shipments move from quarter to quarter. It's kind of interesting during the quarter, but it really doesn't mean much over the long haul. An additional million households is something that stays in the system for a very long time. The question about the balance of the quarter and what we're seeing here, I think we're in a position where we've now given visibility on household penetration. We gave you an indication of how we see pod volume growth delivering in the fourth quarter, which shows that is now smoothing out. We've also been really clear that our guidance is at the high end, or our latest estimates are at the high end of our guidance for the year, and that we're going to reinvest everything else back into marketing and innovation.
There's no new innovation being launched in the fourth quarter because we have a huge lineup on our cold side as well as our hot side that we're now implementing in the fourth quarter. The investments that we can make to get a head start on 2021 we think are the right thing to do to ensure that we get off to a good start next year as well. Remember, we've committed to a three-year target of total shareholder return that goes all the way back to 2018 and ends in 2021. As we're confident in finishing out 2020 strong, we are shifting our sights to 2021 to make sure that's a good year as well. Thanks for those questions.
Thank you.
Your next question will come from Kevin Grundy from Jefferies. Your line is open.
Hi, congrats on the quarter. Ozan, I was hoping we could drill down a little bit on margins. Remarkably good for beverage concentrate and packaged beverages, both multi-year highs. Of course, I understand that synergies contributed there. Can you talk about marketing levels in the quarter, how that stood year-over-year and the other key drivers that drove the strong margin performance? Longer- term, you kind of touched on this a little bit, but the company's done a fantastic job in terms of synergy realization, which you'll complete by the end of next year. Maybe talk a little bit about productivity longer- term, if that's something you will kind of formalize and put out a new program at the appropriate time for the street. Thanks for that.
Sure. Good morning, Kevin. First of all, let me touch to two margin lines that we have. One is the gross margin. As we have just spoken on the call, there was a small 120 basis points of decline in our gross margin, while at the same time our OI margin has expanded 260 basis points. On the gross margin, while the third quarter was strong, as we spoke, with 5.8% constant currency net sales growth and 22% EPS growth, it was by no means a windfall for us, which required extraordinary effort to deliver these results in the midst of the crisis. The gross margin small decline is a challenge due to a long and complex list of puts and takes. Clearly unfavorable mix was one of them or the bigger piece, which included the brewers.
Given that brewers did not make much money, yet the volume was extraordinarily high. We also had a little bit higher operating costs with the increase in order to meet the increased consumer demand and some inflation that we have experienced in our logistics expenses. We also delivered a substantial reduction in our overhead base that includes overall sales, marketing, and general administrative overheads via a series of the base productivity programs and merger synergies that came in a very substantial manner that help us to reduce our overall cost structure. In that SG&A number, we also include and categorize our advertisement and promotion investments. Whenever the return on investment in advertisement and promotion didn't make sense, we also reduced that spend due to the COVID-19 environment.
You see, it's a combination of the factors and the themes, and mostly on the positive side that helped us to drive and further expand our OI margin by 260 basis points, which is quite substantial. On the productivities, as we just spoke as well, we affirmed our merger synergy target of $600 million to be delivered by end of 2021, and we are exactly on that trajectory. We also have our base productivity programs that we have been running and executing very successfully. The productivity programs and our laser focus and strong delivery have not changed, and we are seeing quite all benefits of improving our margins as well as profitability in the third quarter as well. As we spoke previously, our base productivity programs and merger synergies will continue into 2021.
We have several programs still focusing on our manufacturing footprint, our logistics footprint, including further improvement in our overheads cost reductions. We have several facilities that we have been building. For example, the Spartanburg, the state-of-the-art K-Cup facility in South Carolina that will be operational mostly in 2021 and will give us continued productivity as well as the volume mix that we need in coffee. We are building the packaged beverage plant in Allentown that will contribute to our productivity programs, including at the end of the year, the beverage concentrate facility that we have been building in Ireland. We are very pleased with all of our either base productivity or the merger synergy programs that have been working very nicely.
Hey, Kevin, just to add to that. You could tell from Ozan's answer here that we are very focused on making sure that we run a highly efficient business, and we have a lot of programming going on for that. In terms of your question about beyond 2021, our focus has been, first of all, navigating through this crisis, which continues. I don't ever want to talk about it as if it's over because it's far from that. Delivering 2020, setting ourselves up for 2021. At the right time in 2021, we will have a conversation with you guys about what does the post-2021 world look like for KDP, and part of that will clearly be a strong productivity and efficiency program which we'll take you through at that time.
That's great. Thanks for the color, guys. Good luck.
All right. Thanks.
Thanks.
Your next question will come from Nik Modi from RBC Capital Markets. Your line is open.
Thanks. Excuse me. Good morning, everyone. Just two quick questions if I could. Ozan, maybe on the COVID-19-related costs. Of course, I'm not asking for 2021 guidance or anything, just wanted to understand how much of what you've spent this year, what you expect to spend this year, do you think will be permanent? That's the first question. The second question, I guess for you, Bob, is it's becoming increasingly clear, at least in this environment, and I suspect even as we move forward, that the purchase decision is going to increasingly migrate away from the traditional kind of brick and mortar and into the home, right? Whether it be e-commerce or people bringing more stuff at home because they're staying at home longer. That was certainly a trend we were even seeing before COVID-19 started.
You at KDP have created a very advantaged business model with your go-to-market portfolio, and so I'm just trying to get a sense of how you're thinking of building on that competitive advantage as we move forward in what I would characterize as a more stay-at-home environment. Thanks.
Sure. Ozan, you want to kick us off?
Yes. I will. Good morning, Nik, thanks for the question. First of all, let me give a little bit further context with regards to the COVID-19 expenses that we have been adding back. We have been consistently in Q1, Q2, as well as Q3. The costs we excluded from adjusted results are unique and temporary impacts resulting from the crisis. They are not normal ongoing cost of business. This is consistent with our long-standing treatment of the extraordinary and one-time costs here. These costs are clearly and narrowly defined as the significant expenses to provide temporary financial incentives to our frontline employees, which represented more than 80% of the costs that we have been adding back. The balance for the extraordinary measures we undertook to protect employee health and safety, including enhanced benefits for them and their families.
As you have noted, our run rate in Q3 was lower than Q2, and we do expect our quarter four run rate to be substantially lower than quarter three as well. By nature of this makeup, we never said these are sustained costs or increased cost base in our profit and loss statement. It is the contrary, and I think our quarterly trend is proving, and again, in Q4, we expect to see a substantially lower number.
Nik, with regard to your point about at-home and how we're thinking about our portfolio and our go-to-market strategy on here, we reference mobility data, and it's something that we look at very carefully, and we can get it down to a very granular level. At the highest level, we think about people spending time at home, people spending time at work, and then other. Other is a whole host of recreation activities, et cetera, and we can get more detailed on that. We've really built a portfolio that has the optionality to drive that at-home business. It's not like we are 100% at-home business. Far from it. You see the negative impacts on our fountain and food service business. You see the negative impacts on our away- from- home business.
We keep saying it's not like this was a windfall for us, but we do have the options to pivot towards that changing consumer behavior. If it shifts, to pivot back. I would point out before I get into coffee, which is an obvious answer, even on our cold portfolio, we have made significant shifts in where we focus our selling efforts and what we're selling. What you're seeing more is large outlets, planned purchase, and stock-ups are continuing to grow. Impulse, while improving sequentially, is still down versus where it was before. We focus a lot of our effort on the cold side of our portfolio on multi-packs, take-home packs, larger pack sizes, for example.
Some of the growth that you're seeing even outside of our CSD business is because we've been able to shift over the past couple of months from businesses that were more heavily focused on single bottles into multi-packs, and it's helping drive growth in our business. Obviously, when I shift over to the coffee side, the Keurig system was designed for at-home consumption. We said year in and year out, that don't worry about attachment rate. All we're focused on is household penetration, where we're seeing improvement in attachment rate as people spend more time at home. More importantly, we're seeing an acceleration in household penetration. As I said a couple of times, it's really a lasting benefit. That's as people think about their homes differently, both living at home as well as working from home.
They're upgrading across the board. We're seeing a combination of new people coming into our system at a higher rate. We're also seeing upgrades in brewers of existing consumers. That may not drive growth in the short- term, but it's a reconfirmation or a recommitment that they're in the system for the long- term. The away- from- home business, which is offices, has been a negative, and I want to offer two points of perspective. If you look at traffic in large offices, it's down 60%. We've never quantified the size of our away- from- home business, but even if it was very small, a - 60% trend on even a modest business has a major impact on us. Here's the good news. That really can only impact us now through, call it February, and then it becomes actually a tailwind instead of a headwind.
The risk of that, which I know some people focus on, is pretty well capped, and we've already given you some visibility on the fourth quarter anyway. That really sets us up for strong at home. The last point I would make on your overall conclusion, which is 100% right about where consumers are going, is our investment in e-com and our capabilities in e-com are paying off really well. When we launched this new company in 2018 and we talked about e-com and the legacy Keurig business and how we could apply it across the portfolio, I think most people were skeptical at best about what would e-com and beverage look like. Nobody's skeptical about it anymore, and it's an area that we're really focused.
If you saw the management changes that we made this week, embedded in that at a level below that is also an increased focus and commitment to e-com because we think that's really the future.
Very helpful, guys. Thank you.
All right, Nik. Thanks.
Thanks.
Your next question will come from Peter Grom from JPMorgan. Your line is open.
I think there's kind of been a view in the investment community that this step up in households was going to quickly drive an acceleration in organic revenue growth. When I look at the year-to-date performance in coffee, it's pretty similar to last year, and there seems to be kind of a disconnect between that and the penetration you mentioned. I know you just mentioned that a lot of this is a result of the away- from- home business and that you will cycle that in February. Is that kind of the right timeframe where we should think about this higher penetration driving stronger organic revenue growth in coffee? How does the step up in households frame your view on what the business can grow longer- term?
Yeah. I think the longer-term view is always the best way to view this business. We talked about the year in and year out household penetration increases the system has seen. There's been a lot of debate and a lot of analysis quarter- by- quarter. Sometimes we look at the IRI data month- by- month, and it doesn't serve anybody really well. When you step back and look at it, you see this nice steady increase. One of the comments that we made on an investor conference that we attended fairly recently was, we do expect household penetration to accelerate. That's why we quantified that for you today to give you some perspective. You have to always remember that we're operating off of an install base of already 30 million households in the U.S. and 3 million households in Canada.
Even an additional 1 million households, which is significant growth and profit generator for the long- term, you're putting that on top of an installed base of 30 million. It's such a solid business right now that it's not one that can be moved up or down quickly by any type of action. It just speaks to the longer-term potential. When we launched the business or the combined company in 2018, we put some information on our investor day that is 100% relevant today as it was then, and that is, we believe that household penetration for the Keurig system would go north of 50% over time. At the rate that we're growing, that's 10 years out before we even have a conversation of what happens beyond 50%.
You're looking at 10 years of solid growth, and all that this proves is that as people think about spending time at home, they just step up their interest in the Keurig system, increase household penetration, and the dividends or the growth that you get of that plays out over the next couple of years. It's not an instant boost that you see. My last point is, you can look at the IRI data and see that we have been growing at home consumption by north of 10% over the past six months or so. In the latest period, it was plus 10%. That tells you what's going on in home.
If you look at that number and then you compare it to what you're seeing on some of the shipment numbers, as we've been totally transparent, that is 100% driven by an away-from-home business, which is primarily large offices, where we're seeing traffic, attendance might be the better word, in large offices down 60%. Again, that's been a significant drain on us, but there's a limit to that, because as soon as we start hitting the month of March and we go into April, that becomes all opportunity and not risk. It's really that simple to explain the disconnect between what you're seeing at home versus what you're seeing in total.
Thank you for that. It's helpful.
Your next question will come from Peter Galbo. Your line is open.
Hey, good morning, Bob and Ozan. Thanks for taking the question.
Sure.
Just two quick kind of clarifying questions on beverage concentrate. It looks like just given the shipment volume versus bottler case volume you guys have reported, the shipment volume's been running 250-350 basis points below kind of the bottler case volume, and understanding that there's obviously a food service component there. Just over time, how should we think about the cadence of that kind of correcting maybe into fiscal 2021? Then just the second part, for beverage concentrate, has your guidance taken into account some of the renewed lockdowns in some major U.S. cities that have come out in the past couple of days? Thanks very much.
Peter, your comment is right about the disconnect sometimes and the timing of it. It's really hard to forecast when they get aligned. Your statement that over time they align is 100% correct. That's some of the nuances we get quarter to quarter on beverage concentrates, but we don't spend a lot of energy on that because we know over time they align, and it's just difficult to try to predict that. The biggest takeaway from the beverage concentrates segment is the fact that we've seen sequential improvement in restaurants. I would point out that when you look at the KDP businesses in fountain and food service, that's our business that we talk about that services restaurants and hospitality. It is heavily concentrated towards quick serve restaurants.
As we've talked about a number of times, Dr Pepper brand is the most available brand in quick serve restaurants. They have done a really good job of navigating towards drive-through and takeout. Even if there is a resurgence, as we look at what may happen in the next couple of months, we're really confident that segment in particular will not only hang in there, but may actually do better, although that's not in our forecast. It may actually do better, as traditional sit-down restaurants could become more challenged and people shift even more towards takeaway and drive-through.
That's the way that we're thinking about it going forward, but we were encouraged to see at least a sequential rebound in that business, and we're watching and partnering with those restaurant partners to try to help them grow their business, and they're doing an excellent job of navigating to the new world.
Your next question will come from Lauren Lieberman. Your line is open.
Great, thanks. Good morning. I want to talk a little bit about packaged beverages and the share gains that you've seen. I know in the script you talked about conviction in some of the household penetration gains, in particular for these brands sticking. I was also curious about the degree to which some of the performance has benefited from some of your competitors narrowing SKU counts, while in crisis mode, particularly in flavors, right? Flavors aren't really core to the other players. I was just wondering to what degree you think that and kind of can shortages may be benefiting you guys. What you're doing beyond the innovation to try to hold onto those gains when the situation does ultimately normalize.
Sure. Yep. Thanks for your question, Lauren. Good morning.
Sure.
I think there are a number of factors that are driving our performance and we've dug into that, and we pulled it apart to make sure that we understand that we can continue to drive those things that are working. It is primarily driven by a combination of marketing, strength, innovation, which on across our portfolio, not just on our CSD brands with Dr Pepper and Cream in Canada Dry Bold, but we've introduced new Bai items and a whole host of items across the board in Snapple, for example. They're playing out really well, and as I talked about on one of the earlier questions, we've also shifted our brands into the right pack sizes and formats and into the right channels. That's not underperformance by anyone else. That's just us moving quickly towards the consumer.
I have every confidence that if the consumer were to shift again, we'd get ahead of it, and we'd move back over there. The household penetration gains that we're seeing, the great majority of are driven by marketing innovation and good execution on our part, and it's not really driven by thoughts about can shortages or executional missteps by anyone else. Therefore it's driving household penetration, which we believe will stick. The other subtle point that I would point out is a number of our brands, the Dr Pepper brand in particular, but other brands are well, a good portion of those are actually manufactured and distributed by other independent companies, and some of our peers. I know that gets confusing when we talk about it, but those who really dig into the business understand that.
Just as we're gaining from good execution on our end, we actually get hurt by performance on the other end when there are can shortages or difficulty getting the product out there. As strong as our results are, they're actually positives from our system being offset in some cases by negatives in other systems. It's not all a windfall, as I keep saying. The results you're seeing are the net of positives and negatives, and we've been able to move through it really quickly. It's not all positives that then become a headwind as you think about next year.
Right. Bob, I feel like I do understand the distribution network.
No, I know you do. I'm talking about the broader audience.
Okay. I just actually, I thought that contractually there might be some element of Dr Pepper brand needing to be prioritized when the distribution and manufacturing is through large companies, not independents. That was sort of what I was referring to. Separately, I'm also curious, it was great in the script when you guys shared detail on a lot of the optimization work that's been underway for some time, right? This didn't just start with the Honickman or the Buffalo Rock announcements. To what degree is that already starting to show up, and that we're seeing it in terms of operating leverage? I know there's so many moving parts right now because of COVID, but I was just wondering how immediate those benefits can be in terms of the better scale on your distribution assets.
Yeah. Before I answer, I want to go back to your point, though, about the contractual pieces or whatever.
Sure.
If you look at social media and you look at some of the news stories that were popping up about shortages of some of our brands, that's all you need to know is what's actually happening out in the marketplace. If you take a look at where that's coming from, it speaks to the broader challenge in the industry that has been well-documented. My point, again, is there's no complaints. We never even brought it up as an excuse. If you really think about now flipping it to next year, I don't want anyone to take away from this is, we got all positives next year that all become negatives this year, that all become negatives next year. It's a mix.
There are some things that will be more challenging to lap in 2021, but I have a long list of things that are negatives this year that flip to the positive as well. It's really important to understand this is a balance between the two, and this isn't a weather report. We actually control the outcome in many cases. A lot of the positives are driven by the fact that we got ahead of things quickly, and we were able to pivot our business to do so, and it's a flexible business model. We can pivot again next year. To your point about the distribution pieces, as we talked about in the script, this partnership with Honickman that we talked about today is by far the single biggest move that we've made in this optimization.
We also talked about, there have been a string of smaller but very important moves that we've been putting in place over the past two years. You're starting to see some of that effect in the strong performance in the marketplace in 2020. Big moves like the one that we just talked about today, as well as other partnerships with our independent distributors like the Polar deal, those are mainly 2021 and beyond. I would suggest that the investments that we're making in our distribution infrastructure is part of the conversation we'll have about, what does KDP look like beyond 2021? You can see clearly, we believe distribution is a critical asset with a lot of upside.
Okay. That's super helpful. Thank you so much.
All right, thanks.
Your next question comes from Bill Chappell. Your line is open.
Thanks. Good morning.
Good morning.
Hey, Bob, just help us understand, I guess, or just respond to the thought of, on the brewer side, the thought that anybody who ever thought about getting a brewer now owns one because they've been working from home or staying from home, and if they've even considered it, they've bought it. While it's great that you've had a jump from of a normal 2 million- 3 million households, that's a big pull forward, and it's going to be much less in future years and less and less people. Help us understand how you grow household penetration after such a big jump this year and why that wouldn't be the case.
Sure. Bill, good morning, and good to hear from you this morning. I'm smiling. You can't see that I'm smiling because I remember when we took KGM private. We actually had some dinners and some meetings at that time with previous KGM investors and analysts and just to talk about the business and what we were thinking about doing over time, because we knew at some point it would be public again. Household penetration at that point was, round numbers, 15%. That was the exact same question we got at 15% household penetration, and people were using the words like saturation. We talked at that time about, we have every indication of household penetration over time will be north of 50%. There is no sign of slowing down or saturation. We talked about what were the barriers to entry.
If we really believe the number is that big, why isn't it happening now? Doesn't everybody know about Keurig already? Our answer at that point was, we still have a lot of work to do in terms of marketing, innovation, price points, features, improving sustainability. It's a long list of things that we have the benefit of working on every single day, and then sometimes it just takes time. The number one reason why somebody moves to a Keurig machine is when they replace their coffee maker that breaks, and that just takes time. I understand the concept, and we get this all the time, but we got that question millions and millions of households ago, and I expect we'll continue to get that question going forward.
Again, every indication is that we'll be north of 50% if we keep going on our game. That's 10 years out of strong growth, and I think that this latest quarter is just yet one more quarter on top of many that preceded it to show that that's the right way to think about our business.
Okay, you don't worry about, I guess, a meaningful or in-line household penetration increase next year?
I think it's the same trend going on year- after- year. I mean, if we will look at it in absolute numbers and how may that compare to 2020, I don't know yet because I don't know what the world's going to look like in 2021. The best way to look at this business is over time. Every time you lengthen the time period from a quarter to six months to a year beyond that, the business makes total sense, and it does exactly what we just described. There are some quarter-to-quarter fluctuations and month-to-month ones, but as we look at 2021, solid innovation, lots of interest in the business, great marketing plans still in front of us. We're not worried about lapping a 2020. We just think this is all part of the long-term growth in the system.
Got it. Thank you. On the pod side, one quick question.
What's the current promotional environment, both from you and the competitors, and what are you expecting? I would think with such strong demand, people could dial back some of the price cuts or discounting and couponing. I didn't know if you were seeing that or expect to see that.
You see it in the IRI numbers where you see the average price going up. That's been a combination of some reduction in promotion, as well as a shift, interestingly, a shift towards more premium brands. We talked about before, I think as people move from coffee out of the home than in-home, they take their favorite coffee shop brands with them, which tend to be priced higher. Hard to say what it's going to be in the fourth quarter. It really depends on what the consumer dynamics are and behaviors are. I mean, I would expect over time, promotional levels will return more towards normal. That's not something that we don't have lack of promotion baked into any of our plans.
In the short- term, if there's strong demand and there's some supply or stock issues at retail, if there's another stay-at-home type behavior, I think that they pull back on promotions across the board. That's potential to happen.
Great. Thanks for the color.
Okay. All right, Bill.
This brings us to the end of our Q&A session today. I turn the call back over to management for closing remarks.
Thank you, and thank you, everyone. This is Tyson. Thanks for dialing in today. I know it's a very busy day for many of you. The IR team is around, so please feel free to reach out to myself or Steve for any follow-ups. Thanks, everyone. Bye.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.