The sales of sugary, carbonated drinks have been dipping in North America for quite some time now. Consumption has steadily fallen from around 14.8 billion gallons in 2008 to around 14 billion gallons presently. Increasing concerns around the health aspect of carbonated soda drinks (CSDs) among consumers and increasing legal pressure from health advocacy groups have turned what was once a lucrative market into an increasingly slippery place to operate. Going forward, we expect these factors to play an increasingly dominant role in the market, causing sales to slip further.
Despite this market turmoil, some players are proving that you can never count out innovation as a sales driver. It turns out that although Americans have grown more averse to carbonated beverages off-the-shelf, they still like sparkling soda. Bridging this great divide, a company called SodaStream (NASDAQ:SODA) has stepped forward with an innovative concept of make-at-home soda. The company sells soda makers that can turn tap water into a sparkling soda drink.
Should traditional CSD giants feel uneasy? Coke and Pepsi have also been reluctant to take note of the development because it just doesn’t suit their style of play – the two have differentiated their respective brands with the help of very precise drink formulations and tastes, something which they couldn’t possibly leave open in the hands of individual consumers. There are, however, certain indicators that suggest they should take this a little more seriously.
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For one, SodaStream is already selling nearly 10,000 machines per day. Secondly, this figure is expected to rise even further as the company recently bought airtime on the Super Bowl. SodaStream ads are expected to be on air during the 2013 edition of this highly-anticipated event. Its shares have risen by around 30% over the last year compared to 13% for Coca-Cola and 8% for Pepsi. We feel that SodaStream may be more than just another blip on the radar.
Dr Pepper Snapple (NYSE:DPS), the third North American CSD behemoth, is taking things a little more seriously though. The company seems to have realized the underlying value of the concept of home-brewed drinks. The company has taken its first steps in this direction by teaming up with Green Mountain Coffee Roasters (NASDAQ:GMCR) to provide consumers with the home-brew version of Snapple iced teas. The tea can be brewed using Keurig K-cup brewing systems, owned by GMCR. Such initiatives also show how Coca-Cola and PepsiCo’s increasing focus on emerging markets might prove a handicap for them in their domestic arena, giving Dr Pepper Snapple more room to focus and maneuver.
Can home-brewed sodas provide the traction that the North American CSD market has been seeking for a long time? The answer lies in how quickly the biggest players take the concept forward. Until then, we can expect SodaStream to make steady progress, perhaps at the expense of Pepsi and Coca-Cola.
We estimate a $46 price for Dr Pepper Snapple, which is in-line with the market price.