Will SodaStream’s Re-Focus Finally Expand Sales?

After a third-quarter earnings call revealed a net income decline of 42%, SodaStream acknowledged the error in positioning its line of machines and syrups as “home soda makers”. Amidst the fast decline of carbonate sales in the US, the company is instead aligning itself to the growth of bottled water, hoping to entice consumers with healthier and more natural products. This change in strategic direction could pay major dividends as consumers continue to look beyond carbonates and beyond the big brands for their soft drink purchases. While SodaStream’s line of Sparkling Naturals is a good start, embracing less sweet and more complex flavours popularised by small brands like Sparkling Ice and LaCroix could finally see the Wall Street darling justify its high initial stock prices with robust sales.

Early Comparisons to Keurig Created False Expectations

When SodaStream first burst onto the scene, many investment analysts became enamoured with the company’s potential to disrupt the soft drinks industry. With the popularity of the Keurig single-serve home coffee brewer growing at such a fast rate, these analysts overvalued SodaStream stock. Comparisons between Keurig and SodaStream were unfounded for two reasons. First, demand for at-home soda makers cannot be equated to demand for coffee brewers. Americans have been using coffee machines for decades – Keurig merely changed the format and made the process more convenient. For soft drinks, however, most Americans had fully embraced packaged beverages for at-home consumption, creating a much smaller market for at home soda machines. Secondly, Keurig used its early success to secure licensing deals with many of the top coffee brands in the US, like Starbucks and Folgers, assuring consumers of receiving the same quality of coffee (if not better) than they were used to brewing at home. SodaStream, until its recent announcement of partnering with Pepsi for a very small test launch, had failed to reach agreements with any of the large beverage companies, partnering instead with small brands like Countrytime Lemonade and Kool-Aid. Without brands like Pepsi, Coca-Cola or Dr Pepper in the company’s stable, it relied on its own mixes of syrups to mimic the taste of the major brands. This also limited the company’s ability to expand into retail locations with 2013 marking the first time the brand reached nationwide distribution in many big box stores.

SodaStream to change direction moving forward

Despite this expanded distribution, poor sales in the US (which saw revenue fall by 41% per SodaStream’s third quarter earnings report), has the company changing its focus. During the earnings call, CEO Daniel Birnbaum stated “We will never have a cola that is better than Coca-Cola or Pepsi Cola. I will say that loud and clear. That is not where we come from and that’s not where we’re going”. The company then announced its new slogan “Water made exciting” to replace the more soda-focused “Set the bubble free”, and changed the branding to refer to the machine as a “sparkling water maker” rather than a “home soda maker”.

SodaStream

Source: SodaStream

This change in focus is more than a reaction to the inability to recreate popular brands on the SodaStream platform. With the decline of carbonate sales in the US, and the subsequent rise of bottled waters, SodaStream is re-positioning itself as a product with the future in mind, rather than attempting to recreate the past.

Brands like LaCroix (64% increase in off-trade value sales since 2010) and Sparkling ice (US$408 absolute off-trade value growth from 2010-2013) provide the model for SodaStream’s new initiative. These brands use a variety of flavours to attract consumers seeking substitutes for carbonates. LaCroix is an unsweetened 100% natural sparkling water with “a hint of natural flavour essences derived from fruit”. It comes in flavours like peach pear, lemon, orange and passionfruit. Sparkling Ice is a “naturally flavoured sparkling mountain spring water” with added “vitamins and antioxidants” and sweetened with artificial sweeteners. It also features a bevy of flavour varieties including black raspberry, cherry limeade and kiwi strawberry. The close association of these products with bottled water, despite the added flavours and sweeteners, make them more attractive choices for consumers seeking to move away from carbonates. To align itself with this growing category, SodaStream is positioning itself as a machine capable of creating new and unique flavours, a stronger sell than a machine that  can create poor replicas of favoured carbonate brands.

SodaStream’s price point must also be re-evaluated

This decision by SodaStream to focus on the faster growing sparkling water category is a major step in revitalising sales across the US as well as Western Europe. The market for carbonates is on the decline, and it is unclear if home systems are in demand. Furthermore, Keurig’s own at-home soda maker, Keurig Cold, is likely to create fierce competition in 2015 – and already has a powerful partner in Coca-Cola.

But for SodaStream to truly become a household staple, the company also needs to address its business model. With a retail price ranging from US$79.99 for its base “fountain jet starter kit” to US$199.99 for its exclusive Penguin machine, the product is limited to higher income consumers. While this is similar in price to the Keurig single-serve coffee machines, the demand for home carbonation systems is much less than home coffee brewers. Furthermore, the physical characteristics of the SodaStream “machine”, with its CO2 tanks, plastic housing and lack of electrical input, hardly resembles an electronic marvel, limiting its aesthetic beauty to those consumers seeking to accent their kitchen countertops with its artistic design. While the company could turn a profit catering solely to these high end consumers, it misses out on expanding its line of syrups to a broader consumer base. If the company is serious about truly disrupting the soft drinks industry with a bevy of flavour syrups that highlight the variety of SodaStream products, adopting something closer to the Amazon model for its Kindle tablets may be the better route: offering the hardware near cost and making up the difference on high margins for its syrups or capsules. Regardless, SodaStream is taking the first steps toward reinventing its image – embracing bubbles instead of poorly replicating packaged brands.

 

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