According to Calcalist, a daily business newspaper in Israel, SodaStream might be looking to sell-off 10%-16% stake to a large beverage manufacturer. PepsiCo (NYSE:PEP), Dr Pepper Snapple (NYSE:DPS) and Starbucks (NASDAQ:SBUX) are rumored to be in talks to buy stake in the company for $52 per share, 30% more than the closing price on April 17, thereby valuing the soda-systems maker at $1.1 billion.  SodaStream, the pioneer of at-home carbonation systems, saw its revenues surge nearly 30% to $563 million last year.  The company sold around 4.4 million soda maker kits worldwide, with around 40% sales coming from the Americas. Although SodaStream has a wide consumer base, the entry of Keurig Green Mountain (NASDAQ:GMCR) in in-house cold beverage consumption could cause a serious dent in its sales going forward. Keurig has partnered with the beverage behemoth, The Coca-Cola Company (NYSE:KO), to launch the Keurig Cold system in the U.S. later this year. On the other hand, PepsiCo will also launch its beverage offerings with the Bevyz multi-drink system in the domestic market in May this year.
With sodas forming 43% of the U.S. beverage market and over 40% of the global beverage market, the absence of a strong soft drink partner for SodaStream might weigh on its financials, following the launch of the Keurig Cold and Bevyz Fresh machines. Although the company has partnered with well known beverage companies such as Sunny Delight, Kool-Aid, Crystal Light, Welch, Ocean Spray and Country Time Lemonade, it doesn’t have an established carbonated soft drinks (CSD) partner. Sodastream’s flavor packs just say “soda mix” on the side. In this article, we will discuss the company’s possible tie-up with PepsiCo or Dr. Pepper. A strong CSD-partner could add valued brands to SodaStream’s portfolio, especially sugary sodas, as well as boost sales for the beverage manufacturers.
We estimate a $87.13 price for PepsiCo, around 2% above the current market price. For Dr. Pepper Snapple, we have a price estimate of $49.88, around 5% lower than the current market price.
The At-Home Carbonation Market Could Be Big In Future
At-home carbonation has emerged as an additional platform for soft drink consumption. This market might not be able to bring back consumers to CSDs, but due to the ease of carrying compact flavor sachets and the convenience of in-house consumption, the intake-rate of avid customers could increase. Sales of home soda machines rose 30% in 2013, with mixes and syrups witnessing a whopping 83% increase in dollar sales.  According to SodaStream, the global market for at-home beverage systems has the potential to grow to $260 billion, while the market in the U.S. could generate a cumulative $40 billion.  This estimate uses the aggressive assumption that these systems will penetrate about 87% of the domestic households. However, even if around 30% of the domestic households purchase at-home beverage systems, the U.S. market could grow to $14 billion.
Additional Platform For PepsiCo, Higher Brand Appeal For SodaStream
PepsiCo will be the first major CSD producer to enter the at-home carbonation market, with the launch of its flavor pods with the Bevyz Fresh Machine in May. The advantage for PepsiCo with Bevyz over Keurig and SodaStream is that the Fresh Machine is multi-purpose, compatible with both hot and cold beverages such as sodas, frappes, juices, teas, energy drinks, and coffee. An all-in-one machine relegates the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization. However, the downside for PepsiCo is that Bevyz is a relatively less known player in the at-home consumption market. This limits the reach and availability of PepsiCo’s concentrate sachets in this market.
This is where SodaStream comes in. A partnership with the sodamaker could add meaningful growth to PepsiCo’s beverage sales, in both the domestic and international markets. Sales of consumables (flavor pods) for SodaStream topped $317 million in 2013. Gross margins for SodaStream fell more than ten percentage points in the fourth quarter ending December, hurt by large-scale year end discounts and higher costs of transporting product between markets. SodaStream could not only leverage PepsiCo’s global brand appeal, but also its strong distribution channels and marketing muscle to increase profitability and further sales of soda maker starter kits, reducing the growing threat from Keurig Green Mountain.
Enhanced Reach For Dr. Pepper, Strong CSD Partner For SodaStream
Dr. Pepper is a far third in the domestic CSD market, behind Coca-Cola and PepsiCo, with a 17% share.  However, unlike the flagship drinks Coca-Cola and Pepsi, which are the highest selling sodas for the respective companies, the drink Dr. Pepper has gained both volume and value share in the domestic market in each of the last four years. In a mature market that carbonates is, more than any difference in soft drink quality, what has kept Dr. Pepper’s sales lower than its chief competitors is lesser brand recognition and availability.
- Relatively Lower Advertising Spend
Dr. Pepper has suffered due to much larger global presence and appeal of its counterparts. In fact, both Coca-Cola and PepsiCo are recognized in the world’s 25 most valued brands, with Coca-Cola taking the third spot in the list.  Coca-Cola’s advertising and marketing spend last year was almost seven times that of Dr. Pepper’s, even though the latter spent a relatively higher proportion of net sales on advertising. In 2013, while Coca-Cola and PepsiCo invested 7% and 3.6% of their respective net sales on advertising, the figure for Dr. Pepper topped 8% of its net revenues. Fewer media and marketing initiatives leading to comparatively lower brand awareness might be the primary reason for Dr. Pepper’s fewer volumes, rather than lower consumer demand.
- Lesser Reach And Availability
Concentrates for both Coca-Cola and PepsiCo are largely bottled by the companies themselves. This means that the beverage giants control bottling operations and consequently direct store delivery systems, ensuring top-shelf positioning of their beverages in convenience stores. In contrast, around 63% volumes of the drink Dr. Pepper are distributed by bottlers affiliated with Coca-Cola and PepsiCo. Both these companies constituted nearly half of Dr. Pepper’s beverage concentrate sales in 2013.  This means that unlike Coca-Cola and PepsiCo, Dr. Pepper doesn’t posses as much control over shipments to ensure optimum store placement, somewhat hampering its reach and availability.
A deal with SodaStream could address these problems for Dr. Pepper. As SodaStream already has a large consumer base, partnering with it could give Dr. Pepper a viable consumption platform. With over 1.5 million sodamakers sold annually in the U.S. itself, Dr. Pepper could add incremental concentrate sales. On the other hand, SodaStream could use an established CSD partner on its side. Seeing how the flavored drink Dr. Pepper has witnessed rising volumes, positive customer perception for this drink could also have a significant impact on SodaStream’s business.
International Expansion Might Be On The Cards
Another notable development following a Dr.Pepper-SodaStream partnership could be international expansion for the former. Presently, Dr. Pepper only operates in North America, Mexico and the Caribbean. With SodaStream selling 60% of its soda maker kits outside the Americas last year, Dr. Pepper could leverage this opportunity to expand its business. However, Cadbury Schweppes had sold the rights to many Dr. Pepper brands, including trademarks and formulas, to other companies in several countries outside the U.S., Canada and Mexico over a decade ago. It remains unclear if Dr. Pepper would be able to distribute its beverages in those countries if the company does end up partnering SodaStream.Notes:
- “SodaStream stock jumps on Calcalist report of stake-sale talks“, April 2014, bloomberg.com [↩]
- “SodaStream 6-k“ [↩]
- “US home soda machine sales grew 30% last year“, March 2014, bevindustry.com [↩]
- “PepsiCo enters at-home carbonation market before Coca-Cola and Keurig Green Mountain“, March 2014, fool.com [↩]
- “US beverage results for 2013“, March 2014, beverage-digest.com [↩]
- “World’s most valuable brands“, forbes.com [↩]
- “Dr. Pepper 10-K“ [↩]