Coca-Cola Strikes First in Next Round of the Soda Wars

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For years, the soft drink market has been highly competitive but not terribly innovative. Coca-Cola (NYSE: KO  ) and PepsiCo (NYSE: PEP  ) have dominated the global soda market, while smaller companies such as Dr Pepper Snapple (NYSE: DPS  ) and Monster Beverage have much smaller market share. 

This relatively static competitive environment saw the first signs of disruption when SodaStream International (NASDAQ: SODA  )  successfully rolled out its home soda carbonation system. Whether it was the three dimensional advertising (shown below) that resulted in a lawsuit from Coca-Cola or the commercial featuring Scarlett Johansson during the most recent Super Bowl, SodaStream certainly caught the attention of Coca-Cola.

Source: SodaStream via Forbes

Coca-Cola and Green Mountain partner on Karbon
SodaStream's success around the world made it clear that home soda carbonation is not a fad. This week, Coca-Cola officially legitimized in-home carbonation by entering into a strategic partnership with Green Mountain Coffee Roasters (NASDAQ: GMCR  ) . Green Mountain, which is best known for its single-serve Keurig coffee makers, has trademarked the name "Karbon" for a line of home carbonation appliances that it intends to launch in the next couple of years.

As part of the partnership, Coca-Cola will invest $1.25 billion for a 10% ownership stake in Green Mountain and a will create a 10-year relationship during which Green Mountain will be the "exclusive partner for the production and sale of The Coca-Cola Company-branded single-serve, pod-based cold beverages." 

This deal is a game changer for the entire industry and a win-win for both Coca-Cola and Green Mountain. The power of Coca-Cola's brand, the third most valuable in the world according to Forbes, instantly makes Karbon a front-runner in home soda making even without any known details regarding price, features, and technology.

The end for SodaStream?
SodaStream's revenue of $528 million over the past year is dwarfed by Coca-Cola's revenue of $47 billion. So, the sudden reality that a market giant like Coca-Cola is partnering with a competitor presents a significant risk for investors to monitor.

However, it isn't time to write SodaStream off just yet. Shares actually rose the day following the Coca-Cola and Green Mountain announcement. Aside from decisively putting an end to the argument that home carbonation is a fad, this deal highlights the attractiveness of SodaStream in a number of ways.

SodaStream is a well-established and profitable business with a significant network of distributors already in place. In contrast, the Karbon is not expected to be rolled out for at least a year. This first-mover advantage provides a significant competitive edge to SodaStream; the company's products are selling while Karbon is still in the process of being designed.

Additionally, a large base of loyal SodaStream users will continue to prefer SodaStream's healthier flavors, the option to make larger batches of soda, and the ease of making sparkling water. All signs point to SodaStream continuing to have this differentiation compared to Karbon, since it is unlikely that Coca-Cola would alter its recipes to lower sodium, eliminate aspartame, or use natural sweeteners.

Pepsi's response
Coca-Cola's move to partner with Green Mountain forces the remaining players in the soft drink industry to react quickly. Given SodaStream's well-established business, the company is the most logical option for Pepsi. A market capitalization of just $800 million makes SodaStream an affordable acquisition target for Pepsi as a response to Coca-Cola's agreement. Rumors of a Pepsi acquisition of SodaStream swirled around the market last year, but now there is far more reason for Pepsi to pursue the company than ever before. With no known competitive alternative in the pipeline, Pepsi will be highly motivated to respond.

Be a pepper?
While most investors are immediately jumping to the conclusion that Pepsi and SodaStream will join forces to combat Coca-Cola and Green Mountain, there are other alternatives. For example, this situation presents an excellent opportunity for one of the smaller beverage companies like Dr Pepper Snapple to make a move. With a market capitalization of almost $10 billion and a manageable $2.5 billion in debt, Dr Pepper has a capital structure that is sufficiently large and flexible to make a move. 

Alternatively, a partnership between SodaStream and Dr Pepper Snapple would create a complete array of soda flavors that would compliment SodaStream's existing partnerships with brands including Ocean Spray, Crystal Light, Country Time, and Kool Aid.

Watch the story unfold
At this point, all that is really known is that Coca-Cola and Green Mountain are going to partner to leverage Coca-Cola's brand to ensure that home carbonation is here to stay. How this impacts Pepsi, SodaStream, Dr Pepper Snapple, and others is yet to be seen. It is unlikely that there will be just one winner in the transition to home soda making, but it is also unlikely that every competitor will be able to launch and maintain a successful home carbonation platform.

Investors must stay tuned over the next few months for additional developments that will help predict how this latest iteration of the soda wars will play out.

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2014, at 8:45 PM, stockanal45 wrote:

    "Additionally, a large base of loyal SodaStream users will continue to prefer SodaStream's healthier flavors, the option to make larger batches of soda, and the ease of making sparkling water. All signs point to SodaStream continuing to have this differentiation compared to Karbon, since it is unlikely that Coca-Cola would alter its recipes to lower sodium, eliminate aspartame, or use natural sweeteners."

    Possibly the dumbest statement from MF so far in 2014.

    1. The number of loyal SodaStream uses dwarfs the number of Coca-Cola users.

    2. What the hell are "healthier flavors"? REAL fruits in the syrup?

    3. Soda drinkers do not take sodium content into consideration.

    The bottom line: SodaStream will be bankrupt within a few years after Karbon is marketed.

  • Report this Comment On February 09, 2014, at 8:48 PM, stockanal45 wrote:

    LOL and I bet SODA is one of those stocks Motley Fool pumps in those "special video presentations".

  • Report this Comment On February 10, 2014, at 9:04 AM, TMFBrewCrew wrote:

    You definitely misread my statement. I wasn't comparing SodaStream's users to Coca-Cola customers at all; instead, I was posing the question of how many SodaStream customers would rather switch to a Green Mountain / Coca-Cola Keurig Cold system. So yes, there are a thousand times more Coca-Cola customers than SodaStream customers, but that isn't the point.

    As for #2 and #3, I think you are rushing to judgment without looking at any facts. SodaStream's cola flavor has one-third the calories, carbs, sugars, and sodium of Coca-Cola. Which of those is important may vary from customer to customer, but they are indeed important factors. SodaStream does not use high fructose corn syrup or aspartame either, and some of their flavors are naturally flavored, use real sugar, and do not use any of the artificial colors and flavors that other brands do. So, SodaStream DOES have healthier options.

    I respect your conclusion that you think SODA may not survive. Care to back it up with a CAPS underperform pick? I'll keep my outperform pick open and we can both learn something from this dialog as more facts emerge.

  • Report this Comment On February 10, 2014, at 12:42 PM, profitalert wrote:

    KO's first strike is scheduled in 2015, which indicates Karbon is in the infancy stage and has not come out of the concept phase yet.

  • Report this Comment On February 10, 2014, at 1:58 PM, anindakumars wrote:

    well said TMFBrewCrew ... thumbs up

  • Report this Comment On February 10, 2014, at 6:03 PM, EvanBuck wrote:

    I agree with anindakumars...VERY well said TMFBrewCrew. My take on the Coca-Cola/Green Mountain deal:

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Brian Shaw

Brian is a contributor to The Motley Fool that seeks to translate the investing wisdom of Peter Lynch and other investing legends into timely coverage of consumer goods companies.

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