The latest battleground in the cola wars between soft drink giants PepsiCo Inc. (NYSE: PEP) and the Coca-Cola Company is the kitchen countertops of consumers. Spurred on by the success of Keurig Green Mountain Inc. in the retail coffee market, Pepsi has crafted a partnership with SodaStream International Ltd. (NASDAQ: SODA), the maker of in-home carbonation machines. Coke has, naturally, countered with a partnership agreement with Keurig, although it's presently a bit behind the curve since Keurig won't be unveiling its home carbonation machine, to be named Kold, until late 2015; the machine won't be widely available in stores until 2016.
The Motivation Behind the Pepsi/SodaStream Partnership
Pepsi's motivation is clear enough – to stop the free fall in carbonated soda revenues that has been going on for a decade or more. Pepsi has lost considerable market share to its rival, Coca-Cola. According to the trade publication Beverage Digest, sales of Pepsi-brand sodas in the United States declined almost 35% in the period between 2005 and 2014, compared to only an 18% drop in U.S. sales for Coca-Cola brands. Both companies have suffered substantial declines in revenue in their core product brands, and both are actively looking for ways to turn around the downtrend. Both Pepsi and Coke have been hurt by the shifting buying preferences of increasingly health-conscious consumers, especially in the U.S. market, and the rise in health and energy drink consumption that accounts for the bulk of the lost market share and revenue for both companies.
In addition to its partnership with SodaStream, Pepsi has made other significant moves to respond to consumers' changing preferences. Many health-conscious consumers have begun to revolt against aspartame, the substitute sweetener that has become commonplace in both Pepsi and Coke-brand carbonated beverages. In response to consumer concerns regarding aspartame, Pepsi recently introduced a new formulation for its basic diet soda, Diet Pepsi, using a new substitute sweetener made of sucralose and acesulfame potassium. In addition, the company has also introduced real sugar Pepsi, an alternate version of its name-brand soda that casts aside substitute sweeteners altogether in favor of a return to plain old-fashioned sugar.
The Nature of the Partnership
Pepsi's partnership agreement with SodaStream is an expansion of its already existing distribution arrangement with the home carbonation machine manufacturer, one that will make premixed caps of Pepsi products. Pepsi Wild Cherry and Sierra Mist for the SodaStream machines are available through SodaStream’s website and at a number of Bed Bath & Beyond retail stores where the machines are sold.
A World of Problems
The list of potential major problems facing Pepsi in making the strategic joint venture arrangement with SodaStream profitable is considerable. Pepsi appears to have partnered with a company that itself may be falling down in the marketplace rather than rising up. The period between the second quarter of 2011 and the third quarter of 2014 has seen a decline in sales at SodaStream all across the board, in sales of new machines, the carbon dioxide canisters that provide the carbonation and in flavor caps.
Secondly, there's a flavor problem. Pepsi freely admits that it hasn't been able to create premixed caps that match the flavor of Pepsi as it is commonly sold in bottles, cans or as fountain drinks. This is a major cause for concern. One need only recall the disastrous results when Coke briefly tried to replace its namesake brand with a new formula that didn't taste the same. Consumers of both soda giants' products want the familiar taste that they are accustomed to, not some variation.
An additional problem arises from a question about whether the basic business model of homebrewed soft drinks is even viable. Keurig was able to successfully enter the home coffee brewing market in large part because it offered time-saving convenience – a cup of coffee in less than a minute as opposed to waiting several minutes for a traditional coffeemaker to brew a pot. Home carbonation of soft drinks, however, is not a time saver over the traditional delivery method. It's questionable whether consumers will ever opt in large numbers for the home brewing option that takes about 45 seconds when they can just pop the cap off a bottle or open a can for instant thirst quenching.