Pepsi, Coke, Dr Pepper and the At-Home Carbonation Market: Let The Games Begin!

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Competition in the U.S. at-home carbonation market is about to take off. PepsiCo (NYSE:PEP) is extending its distribution deal with the pioneer of at-home carbonation systems, SodaStream, and The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS) are about to launch their products with the Keurig Kold. As sales of carbonated soft drinks (CSD) continue to fizz out, at-home carbonation emerged as an additional platform for soft drink consumption. This market might not be able to bring back consumers to the 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.

beverage tug of war

 

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Basically, beverage makers might be relying on increasing reach and availability of their sodas, to spark a rise in sales, which have, in fact, declined for ten consecutive years in the U.S. CSDs still form around 41% of the country’s liquid refreshment beverage market, so the demand is there. It’s just waning. Customers have become more health and calorie conscious and have looked to boycott these sugary sodas. As an effect, categories such as sparkling water, ready-to-drink teas, and sports drinks have witnessed a huge boost in recent times. Nonetheless, CSDs are still the mainstay for Coca-Cola, PepsiCo, and Dr Pepper Snapple. According to our estimates, CSDs form approximately 65% and 15% of the net valuations for Coca-Cola and PepsiCo, respectively. On the other hand, 80% of Dr Pepper’s volumes are contributed by soft drinks. In this scenario, finding a way to keep the flame alive in the CSD market becomes imperative.

We estimate a $98 price for PepsiCo, which is above the current market price.

See Our Complete Analysis For PepsiCo

The do-it-yourself category could be one such way. SodaStream had said some time back that 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. Of course this estimate used the aggressive assumption that these systems will penetrate about 87% of the domestic households, which seems improbable. SodaStream has struggled this year, with its revenue in the first half of the year falling 27% year-over-year to $190.2 million, with a steeper decline in the U.S. [1] The company’s penetration in the U.S. household remains below 2%, hurt by the absence of large beverage partners. Now SodaStream is set to sell caps of Pepsi, Pepsi Wild Cherry, and Sierra Mist flavors, which will make half a liter of soda on SodaStream machines. These will be available on its website and also at around 50 Bed Bath & Beyond (NASDAQ:BBBY) stores. This news has gone down well with investors, with SodaStream’s stock witnessing a spike in trading activity at the tail-end of last week. The stock has declined by over 50% in the last 52 weeks, so SodaStream could most definitely use a big-time partnership to fuel sales growth.

It’s probably safe to say that the distribution deal is more crucial for SodaStream than it is for the food and beverage giant PepsiCo. But what does this mean for PepsiCo? The company could also use a boost in sales of its CSDs. The company’s market share in the U.S. soft drink market has consistently declined, while its competition has fared better. Coca-Cola, which has a considerably larger share, has managed to still further its market share in an already somewhat saturated U.S. CSD market.  So PepsiCo might be looking to buck up.

volume share in U.S. CSD marketIn a bid to bring customers back to the diet soda category, which has continuously underperformed the entire CSD segment, PepsiCo has removed aspartame from Diet Pepsi, and replaced it with sucralose, better known as splenda, which has a slightly better customer perception than aspartame. And now by teaming up with SodaStream, PepsiCo will hope to make its sodas even more readily available. Considering that soft drinks are typically an impulsive buy, and that large beverage companies mostly carry a similar customer perception, higher reach and availability becomes important to grab sales. This is how Coca-Cola has been able to command a massive lead in U.S. CSDs– through strategic marketing and media investments, and by making itself almost omnipresent. Now, PepsiCo, along with SodaStream, will hope to lure-in customers to the do-it-yourself hydration category, and further their sales.

We have a price estimate of $81 for Dr Pepper Snapple, which is above the current market price.

See Our Complete Analysis For Dr Pepper Snapple

But on the other hand, as the PepsiCo-SodaStream partnership deepens, Coca-Cola and Dr Pepper are readying their own attack on the at-home carbonation market. Keurig Green Mountain, which makes novelty coffee and owns Keurig brewers, is coming out with its much-awaited at-home carbonation system called the Keurig Kold within the next month. Last year, Coca-Cola bought a 10% stake in Keurig Green Mountain, and raised it to 16% in May. Later, Dr Pepper Snapple announced its own distribution deal with Keurig. Coca-Cola and Dr. Pepper will introduce some of their beverage offerings with the Keurig Kold Machine, penetrating the do-it-yourself hydration category themselves.

…So who might win this tug of war?

It might be too soon to say this, but the Keurig systems might have an edge. Firstly, unlike the SodaStream systems that use carbon dioxide cylinders and allow customization of fizzy drinks, Keurig Cold systems will use precisely formulated single-serve pods to prepare the familiar tasting and valued Coca-Cola and Dr Pepper soft drinks. Keurig systems aim to relegate refilling of carbon dioxide cylinders, and also provide a quicker, cleaner, and precise creation process. Secondly, Keurig Kold probably has a heavier hand with both Coca-Cola and Dr Pepper on its side. The two companies have a combined share of ~60% in the U.S. CSD market. More options might persuade customers to purchase the Keurig Kold over the SodaStream machine. Keurig expects its dispenser to be on shelves nationwide by next year’s holiday season.

We estimate a $42 stock price for Coca-Cola, which is above the current market price.

See our full analysis for Coca-Cola

Keurig Kold will be more expensive than the SodaStream machine, but the former is banking on its relationship with strong beverage makers and superior technology, including flash-chilling, to give it an advantage. SodaStream has been trying to re-brand itself as a dispenser of sparkling water, which carries a more positive customer perception, rather than a soda-maker, and will hope to leverage PepsiCo’s strong brand name to reverse the trend of falling sales in the early part of this year.

It remains to be seen how the beverage war in the at-home carbonation market plays out. Let the games begin!

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Notes:
  1. PepsiCo Expands Soda Partnership With Home Carbonation Maker SodaStream, wsj.com []