In early February, Coca-Cola (NYSE:KO) announced that it entered into a 10-year agreement to collaborate with Green Mountain Coffee Roasters (NASDAQ:GMCR) on the development of its global brand portfolio for use in Green Mountain's upcoming Keurig Cold at-home beverage system. Coca-Cola will also be taking a 10% stake in Green Mountain. This strategic partnership between Coca-Cola and Green Mountain will undoubtedly pose a threat to SodaStream (NASDAQ:SODA). But the winners and losers of this battle will be largely determined by the strategic actions of the various parties involved.
One of the key benefits of the strategic partnership is that Green Mountain will be able to work with Coca-Cola to enter Europe. While SodaStream derives close to half of its revenue and two-thirds of its operating profits from Western Europe, Green Mountain has a minimal presence in Europe, with a substantial portion of its sales generated from the U.S. and Canada.
Based on SodaStream's internal estimates, its household penetration rates range from as high as 25% in Finland to 3.4% in Germany. SodaStream also sees growth potential in the U.K., where consumers favor flavored drinks; while Italy is also on the target list because of high consumption levels of sparkling water. Green Mountain won't want to miss out on all the action and growth opportunities in Europe.
Capitalizing on Coca-Cola brand recognition
Notwithstanding the fact that the sales of carbonated soft drinks (CSDs) are on an overall downward trend, those consumers who have remained soda drinkers, they have been incredibly loyal to their favorite brands. Coca-Cola's market share has been remarkably stable over the past decades; it was 36%, 40%, and 42% in 1977, 1986, and 2012, respectively.
Private-label beverage company Cott had a market share below 5% in 2012, indicating that soda drinkers are extremely faithful to their loved brands and familiar taste. Similarly, it isn't possible to discount the contribution of Nestle's branding to the success of its Nespresso coffee makers. As a result, Green Mountain's Keurig Cold at-home beverage system offering Coca-Cola branded flavors will be a huge attraction for soda drinkers.
Leveraging first-mover advantage
In the years to come, it is essentially a battle between Coca-Cola's brand loyalty and SodaStream's razor and razor profit model. However, SodaStream has an edge here.
There is a shift of bargaining power between buyer and seller before and after a purchase of a SodaStream soda maker. Prior to the purchase, a consumer can buy any beverage off the shelf or choose among the different soda machines on the market. However, when one decides to buy SodaStream's soda maker, he is locked into the seller's follow-on products and consumables, and bargaining power shifts to SodaStream. In contrast, while off-the-shelf sodas are habitual purchases, there are little switching costs.
Therefore, SodaStream has to take advantage of the time between now and the introduction of the Keurig Cold at-home beverage system to add rapidly to its installed base in both the U.S. and Europe. SodaStream is currently only in about 1% of U.S. households, so it has leverage on the first-mover advantage to 'lock-in' more potential customers before they turn to the branded flavors offered by Green Mountain.
Buying insurance against potential disruption
While this purchase of a stake in Green Mountain is essentially a drop in the ocean for Coca-Cola at less than 1% of its market capitalization, it is a classic case of hedging your bets to fend off potential disruption. Although CSD sales continue falling, there is no clear indication where these former soda buyers will end up. They might choose to swear off sodas altogether or simply decide to make healthier soda versions in the comfort of their own homes. Coca-Cola wants to make sure that it doesn't lose out, no matter which scenario pans out.
Foolish final thoughts
Green Mountain is the greatest beneficiary of this collaboration, as it is able to leverage Coca-Cola's branding and global presence. SodaStream will have to work extra hard to expand its installed base as fast as possible if it is to retain its market leadership in the face of competition. For Coca-Cola, the impact is mildly positive, as it gets the necessary insurance to protect its weakening core business and a minority stake in a growing company.
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Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and SodaStream. The Motley Fool owns shares of Coca-Cola and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.