Keurig Dr Pepper (KDP) Risk Analysis

Many of our employees that are involved in the manufacturing or distribution of our products are covered by collective bargaining agreements. Additional employees have sought and may continue to seek to be covered by collective bargaining agreements, which may be facilitated by changing labor laws and regulations. The terms and duration of these agreements vary by country and by the specific agreement. While some collective bargaining agreements may have terms of several years, others have shorter durations, and in certain jurisdictions, particular provisions may continue to apply even after expiration until a new agreement is reached. We may not be able to renew collective bargaining agreements on satisfactory terms or at all. This could result in labor disputes, strikes, or work stoppages, which could impair our ability to manufacture and distribute our products and result in a substantial loss of sales. The terms of new, existing, renewed, or expanded agreements could also significantly increase our costs or negatively affect our ability to increase operational efficiency. In addition, we have works councils in place in certain jurisdictions, and certain employment-related decisions affecting all or certain groups of employees may be implemented only with the relevant works council's consent or after consultation with it. If we fail to obtain such consent or complete required consultation, we may be unable to implement certain changes in a timely manner or at all, which could increase our costs or disrupt our operations.

We license rights to third parties to bottle and distribute our products. A portion of our income from operations is generated from sales of beverage concentrates to third-party bottling companies that we do not own. Some of these bottlers are also our direct competitors, or also bottle and distribute products for our competitors. In addition, some of the finished products we manufacture are distributed by third parties. As independent companies, these bottlers and distributors may have the right to determine whether, and to what extent, they produce and distribute our products, our competitors' products and their own products. They may devote more resources to other products, prioritize their own products, or take other actions detrimental to our brands. In most cases, they are able to terminate their bottling and distribution arrangements with us without cause. In some cases, the license agreements include buy-out rights that allow us to exit for a fee, and we may have additional limited termination rights. The termination of any material license arrangement could adversely affect our business and financial performance, and any disputes could be costly and divert management attention. We may need to increase support for our brands in certain territories to maintain our route-to-market and may not be able to pass price increases through to third-party bottlers and distributors. Deteriorating economic conditions could negatively impact the financial viability of third-party bottlers.

We have experienced, and could continue to experience, disruptions in our supply chain and our manufacturing and distribution operations, which could have a material adverse effect on our business. Some raw materials and supplies used in the production of our products, including packaging materials and green coffee, are available from a limited number of suppliers or could be in short supply when seasonal demand is at its peak or when international logistics are disrupted. Certain raw materials and supplies used in the production of our products are sourced from countries experiencing unfavorable economic conditions, civil unrest or political instability. Adverse weather conditions may affect the supply of agricultural commodities from which key ingredients for our products are derived. We may not be able to maintain favorable arrangements and relationships with suppliers, and our contingency plans may not be effective to mitigate disruptions that may arise from shortages or discontinuation of any raw materials and other supplies that we use in the manufacture and distribution of our products. In order to ensure a continuous supply of high-quality raw materials, some of our inventory purchase obligations include long-term purchase commitments for certain strategic raw materials; the timing of these may not always coincide with the period in which we need the supplies to fulfill customer demand. Any sustained or significant disruption to the manufacturing or sourcing of raw materials could increase our costs and interrupt product supply, which could adversely impact our business. Additionally, if demand increases beyond our production capabilities, we may need to expand our capacity. The raw materials and other supplies, including agricultural commodities (such as green coffee, including Arabica and Robusta beans, tea leaf, palm and coconut oil, milk, sugar, cocoa, corn and apples), fuel (crude oil, electricity and natural gas) and packaging materials (including aluminum, resins, paper products, and glass), transportation, and other supply chain inputs that we use for the manufacture, production, and distribution of our products are subject to price volatility and fluctuations in availability caused by many factors, including changes in supply and demand; supplier capacity constraints; inflation; weather conditions (including the effects of climate change); natural disasters; disease or pests; agricultural uncertainty; cost increases in farm inputs; health epidemics, pandemics, or other contagious outbreaks; labor shortages, strikes, or work stoppages; changes in or the enactment of new laws and regulations; governmental actions or controls (including import/export restrictions, such as new, increased, or retaliatory tariffs, sanctions, quotas, or trade barriers); port congestion or delays; transport capacity constraints; cybersecurity incidents or other disruptions; political uncertainties; acts of terrorism; governmental instability; speculation in global trading of commodities, such as green coffee; or fluctuations in foreign currency exchange rates. Many of these factors could also cause a significant disruption at our manufacturing and distribution facilities, or the facilities of our bottlers, contract manufacturers, or distributors, which could have a material adverse effect on our business. We have been affected by a number of these factors, led by inflationary pressures on input and other costs, which may continue. Many of our raw materials and supplies are purchased in the open market, and the prices we pay for such items are subject to fluctuation. Under many of our supply arrangements, the price we pay for raw materials fluctuates along with certain changes in underlying commodities costs. This could lead to higher and more variable inventory levels or higher raw material costs for us. The quality of the green coffee we seek tends to trade on a negotiated basis at a premium to or, at times, discount from, the underlying futures of green coffee, and can vary significantly. Single-origin, Arabica, and responsibly-sourced green coffee sell at higher prices than other green coffees, in part because producers cannot increase supply in the short run to meet rising demand. Volatility in green coffee prices can impact our ability to enter into fixed-price purchase commitments. We frequently enter into "price-to-be-fixed" supply contracts with defined quality, quantity, and other negotiated terms, but the date, and therefore price, at which the base coffee commodity price component will be fixed has not yet been established. We also enter into forward delivery contracts for physical green coffee and use futures to hedge our exposure to green coffee prices. When input prices increase unexpectedly or significantly, we may be unwilling or unable to increase our finished product prices or unable to effectively hedge against price increases to offset these increased costs without suffering reduced volume, revenue, margins, and operating results. To the extent that price increases on finished products are not sufficient to offset higher costs adequately or in a timely manner, or if they result in significant decreases in sales volume, our financial condition or results of operations may be adversely affected. For example, if the price of green coffee were to increase significantly and we are unable to increase our prices sufficiently to an equivalent degree to compensate, we may be required to take additional measures in affected markets, including ceasing advertising campaigns or temporarily halting trading in such markets. In addition, if we have previously hedged a commodity at higher price levels and that commodity's price then decreases rapidly, the resulting change in value of the derivative instruments could increase our cost of goods sold. We are also exposed to counterparty risk under our hedging and physical green coffee contracting arrangements and, because the terms of our fixed-price purchase commitments do not necessarily match the term of our agreements to sell products to customers, our hedging strategies may not effectively reduce our exposure to commodity price increases. In addition, there may be a time lag between when commodity costs increase and when we are able to increase our prices, which may compress our margins, and if commodity prices then decline before we have increased our prices, we may be unable to recover losses caused by such temporary increases in commodity costs.

We are dependent on the availability of an adequate supply of green coffee, including Arabica and Robusta green coffee, at the required volumes and quality levels from our coffee suppliers, traders, exporters, cooperatives, and growers, as well as on the availability of an adequate supply of tea. We also seek to source green coffee and tea responsibly, relying both on third-party sustainability standards or certifications and on our own human rights and environmental due diligence processes across our supply chain. We may be unable to secure green coffee and tea of the quality, in the volumes, or with the sustainability certifications we require, and any failure to do so could disrupt our supply, increase our costs, or adversely affect our ability to meet customer demand. Certain of our offerings are particularly dependent on a continued supply of premium Arabica green coffee, including single-origin coffees sourced principally from Central and South America, which cannot be readily substituted with green coffee from other origins. As a result, disruptions affecting these sourcing regions, or our inability to obtain coffee of comparable quality or origin, could disproportionately affect these offerings. In addition, evolving sustainability-related regulations may affect our ability to source coffee and tea. For example, the EUDR, which is being phased in and remains subject to ongoing implementation developments and guidance, would restrict companies from placing products on, or exporting them from, the European Union unless they conduct extensive diligence on the value chain to ensure that the products do not result from recent deforestation, forest degradation or breaches of local laws, and they have a relevant due diligence statement confirming such compliance. The scope of products subject to the EUDR may also expand over time, including through implementing or delegated measures that bring additional coffee or other products within its scope. Compliance with the EUDR and similar regulations in other jurisdictions may increase our costs and administrative burden, require enhanced traceability and diligence across our supply chain and restrict the sources from which we can obtain coffee, and any failure to comply could result in penalties, loss of market access or reputational harm, any of which could have a material adverse effect on our business.

A small number of companies co-manufacture the vast majority of our brewers, and we rely on a limited number of third party manufacturers and appliance partners for certain of our coffee machines. Our manufacturers may not be able to scale or adapt their manufacturing operations to match increasing or changing consumer demand for our brewers and machines at competitive costs. If our manufacturers or appliance partners were to cease or interrupt production or otherwise fail to supply brewers or machines to us as agreed, we would be unable to obtain them for an indeterminate period of time, which could adversely affect our product sales and operating results. The majority of the distribution of our brewers, beverage concentrates, and syrups is handled by our appliance partners and third-party order fulfillment companies, as applicable. Our appliance partners, third-party manufacturers and order fulfillment companies are subject to disruption, including as a result of health epidemics, natural disasters, information technology failures, commercial or international trade disputes, governmental regulatory and enforcement actions, labor stoppages or strikes, financial issues, or otherwise. These issues could delay importation and increase the cost of products, delay the fulfillment of the brewers, beverage concentrates, and syrups to our customers or require us to locate alternative manufacturers or order fulfillment companies to avoid disruption, which could adversely affect our product sales and operating results.

We conducted a due diligence review of JDE Peet's in connection with the JDE Peet's Acquisition. However, we cannot be sure that our diligence identified all material issues that may have been present within JDE Peet's or its business, that it was possible to uncover all material issues through a customary amount of due diligence, or that factors outside of JDE Peet's and its business, and outside of its control, will not arise. Because we have completed the JDE Peet's Acquisition, any liabilities, deficiencies, or other issues that were not identified in our due diligence, or that arise following the closing, are now our responsibility and could require us to incur unanticipated costs or charges. If any such issues materialize, they could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to a variety of continuously evolving and developing laws and regulations in numerous jurisdictions regarding privacy, data protection, cybersecurity and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security and other processing of personal data. For example, the European Union has adopted the General Data Protection Regulation, which imposes requirements regarding the processing of personal data, including its use, protection, and transfer and the ability of individuals whose data is stored to correct or delete such data, and which confers a private right of action on certain individuals and associations. As a result of our operations in California, we are also subject to the California Consumer Privacy Act, as amended by the California Privacy Rights Act. Privacy and data protection laws may be interpreted and applied differently from one jurisdiction to another and may create inconsistent or conflicting requirements. In addition, new legislation in this area may be enacted in other jurisdictions at any time. The increasing adoption of artificial intelligence technologies has led, and may continue to lead, regulators and data protection authorities to adopt new or evolving interpretations of privacy, data protection, cybersecurity and data security laws, including with respect to notices, consents, opt-outs, automated decision-making, profiling and other processing of personal data. Our efforts to comply with privacy and data protection laws may impose significant costs and challenges that are likely to increase over time, and we could experience substantial penalties, litigation, claims, legal or regulatory proceedings, inquiries or investigations, damage to our reputation, and fines or penalties related to violation of existing or future data privacy laws and regulations. Further, as a company that accepts debit and credit cards for payment in our retail and e-commerce operations, as well as other digital payment tools, we are subject to industry data protection standards and protocols such as the Payment Card Industry Data Security Standard. In certain circumstances, our contracts with payment card processors and payment card networks generally require us to adhere to payment card network rules which could make us liable to payment card issuers and others if information in connection with payment cards and payment card transactions that we process is compromised, which liabilities could be substantial.