While The Coca-Cola Company (NYSE:KO) and Keurig Green Mountain (NASDAQ:GMCR) ready the launch of the Keurig Cold system later this year, PepsiCo (NYSE:PEP) will be the first to enter the at-home carbonation market. Partnering with Bevyz, a European beverage system company, PepsiCo will launch its flavor sachets compatible with the Bevyz Fresh Machine, which rolls out in May in the U.S. The CEO of PepsiCo, Indra Nooyi, had signaled the company’s intent to explore the at-home beverage preparation market earlier this year, without swearing exclusivity to one specific technology. This means that along with Bevyz, PepsiCo might also consider partnering with GMCR, SodaStream or any other soft drink systems manufacturer in the future. This could bode well for the company, as it looks to target the growth potential of the at-home carbonation market by expanding its reach and availability. We estimate a $87 price for PepsiCo, which is around 6% above the current market price.
At-Home Preparation Systems Could Boost Beverage Sales
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As health and wellness concerns continue to cast a shadow over soda sales in the domestic market, in-house preparation systems aim to increase consumption of sugary drinks. Carrying small and compact flavor sachets will be more convenient, as compared to large soda bottles and cans, which might also limit the quantity purchased. In addition, beverage companies could attract consumers due to the ease of preparing beverages at home. As a result, even though consumers that have shifted beverage preferences might not return to sugary sodas, this move could raise consumption rates of avid customers.
SodaStream, which manufactures home beverage carbonation systems, sold 3.5 million soda makers worldwide and around 1.15 million units in the U.S. alone in 2012. This establishes how consumers around the world, especially in the domestic market, are keen on buying convenient at-home preparation systems. According to the company, 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 SodaStream 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. Due to the promising growth potential of these counter-top beverage machines, companies such as PepsiCo and Coca-Cola have looked to introduce their soft drink portfolios with these systems.
Bevyz Fresh Machine Is Multi-Purpose
Although relatively less known than Keurig Green Mountain, Bevyz aims to compete with the former in both the hot and cold beverage categories. While Keurig has different systems for brewing coffee and preparing cold drinks, the Bevyz Fresh Machine is a multi-drink system, compatible with both hot and cold beverages such as carbonated soft drinks (CSD), 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. The Bevyz Fresh Machine will pack drink mixes in “capsules”, with each unit carrying a recipe barcode, which will instruct the machine about the type of beverage preparation. Apart from PepsiCo, the company has also partnered with well-known brands such as Del Monte and Hero.
As sales of the Bevyz Fresh Machine gain traction, PepsiCo will also look to gather incremental sales of its soft drinks, which form consumables in this machine. What works for PepsiCo in this partnership is that the Bevyz system aims to attract a broader market base, apart from targeting soft drink consumers. This machine also works as a water cooler, which puts it in contention in the domestic water cooler market as well. Around 5.48 million water coolers were sold in the U.S. in 2013, and this figure is expected to climb to 6.1 million units by 2018.  Consumers might look to meet their chilled drinking water requirements through the Bevyz units. With a potential rise in sales of Bevyz units, the reach of PepsiCo’s flavor capsules could also increase.
Potential Link Up With GMCR And SodaStream?
Despite its partnership with Bevyz, PepsiCo has not ruled out potential agreements with Keurig Green Mountain or SodaStream. The company aims to extend its reach in the fast growing at-home preparation systems market, and might look to achieve this by partnering with more than one company. This could be beneficial for PepsiCo’s ambitions in this budding market, as both GMCR and SodaStream could provide additional growth opportunities.
- Keurig’s Established Brewers And Coke Deal Might Attract Consumers
Keurig has already revolutionized the coffee industry by introducing single-serve pods compatible with its brewers. The company dominates the single-serve industry in the U.S. at present, losing only 8% market share since its patents on the K-Cup expired in 2012. Coca-Cola bought a 10% stake in Keurig Green Mountain for $1.25 billion last month, which is now worth around $1.8 billion. Partnering with Keurig, Coca-Cola will introduce its single-serve cold beverage pods, compatible with the Keurig Cold system. Due to its established consumer base in brewers and partnership with the beverage giant Coca-Cola, customers might look to purchase the Keurig Cold system. What also works for Keurig is that unlike SodaStream and Bevyz, its systems do not require carbon dioxide cylinders and their subsequent refills, thereby providing a quicker and cleaner preparation process.
- SodaStream Has A Large Customer Base And International Penetration
SodaStream, which pioneered at-home cold beverage systems, might witness a decline in sales in the coming years due to stiff competition from Keurig and Bevyz. However, the company has the advantage of an already established large customer base, especially in international markets. SodaStream’s revenues increased by nearly 30% in 2013 to $562 million, with consumables (including flavor pods) contributing over $300 million by our estimates.   The company’s top line has more than doubled since 2010, but only 36% of the sales came from the U.S. in 2012. SodaStream has a strong reach in international markets, especially Western Europe, which contributed 47% to the net revenues in 2012. PepsiCo might look to partner with SodaStream and leverage its appeal in emerging economies to further its sales.
Unlike Bevyz and Keurig, SodaStream is looking to enter developing markets such as Mexico and India in the next few years.  Both these countries are crucial to PepsiCo’s growth prospects, as the company expects two-thirds of its top line growth to come from emerging markets this year. However, PepsiCo massively trails Coca-Cola in CSDs in both Mexico and India. While Coca-Cola holds 61% and 71% market shares in Mexico and India respectively, PepsiCo accounts for only 36% and 14% of the market volumes in these countries.  The option of partnering SodaStream could thus boost sales of PepsiCo’s CSD offerings, particularly in the emerging economies.
- “PepsiCo enters at-home carbonation market before Coca-Cola and Keurig Green Mountain“, March 2014, fool.com [↩]
- “US water cooler market up to 5.5 million units“, November 2013, zenithinternational.com [↩]
- “SodaStream press release“ [↩]
- “SodaStream 20-f“ [↩]
- “Are there any synergies within a PepsiCo, SodaStream partnership“, February 2014, seekingalpha.com [↩]
- “PepsiCo to invest $5 billion to expand in Mexico“, January 2014, latimes.com [↩]