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3 Wild Weeks in the Beverage Industry: What You Need to Know

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February has been a wild month for the beverage industry. Coca-Cola (NYSE: KO  ) and Green Mountain Coffee Roasters (NASDAQ: GMCR  ) announced a market-moving partnership agreement, speculation is swirling that PepsiCo (NYSE: PEP  ) and SodaStream (NASDAQ: SODA  ) could do a similar deal, and disappointing earnings from Coca-Cola and PepsiCo have investors throwing a fit. Here is a recap of the wild first three weeks in February and an attempt to make sense of it all.

At-home channel gets a boost
As Green Mountain prepares its transition to the next generation of Keurig brewers, investors are scrambling for details. The company announced that its Keurig 2.0 brewer will be able to brew an entire pot of coffee in addition to taking the single-serve packs already used by Keurig. However, few other details about the new system's features are public, which makes it difficult for investors to gauge the likelihood that consumers will upgrade to the new system.

Details are also sketchy on Keurig Cold -- Green Mountain's at-home carbonated beverage platform. Earlier this month, Coca-Cola announced that it would buy a 10% stake in Green Mountain and license its brands on the new system. Keurig Cold will be launched in fiscal 2015 and it will compete with SodaStream, which markets its own carbonated beverage maker. Coca-Cola's brand prestige will give Keurig Cold the upper hand in attaining a wide consumer base for at-home beverages, but the entire channel will receive a boost from increased consumer awareness.

As a result of Coca-Cola's deal with Green Mountain, there is speculation that PepsiCo could acquire SodaStream. PepsiCo's carbonated soft drink market share has fallen as the company concentrates on healthier products; it cannot afford to fall behind Coca-Cola in yet another channel. PepsiCo CEO Indra Nooyi says the company is looking into the at-home carbonation channel, but the company has been noncommittal and has even left open the possibility of doing a deal with Green Mountain.

SodaStream shares declined on news of the Coca-Cola-Green Mountain deal as investors feared SodaStream would lose its market leadership to Keurig Cold. However, my colleague Isaac Pino argues that SodaStream may not be desperate for a deal with PepsiCo after all. Instead, Coca-Cola's investment legitimizes and creates buzz around the at-home carbonation channel. Moreover, SodaStream can exploit its lack of established soft drink partners by building its brand around healthier beverages, niche brands, and an anti-establishment sentiment.

PepsiCo and Coca-Cola announce disappointing results
If any company is desperate for a deal, it's PepsiCo. The company announced a 2% decline in Americas beverage volume during its fourth quarter and a 3% decline for the year -- a disappointing result for the embattled beverage unit. Moreover, CEO Indra Nooyi vigorously defended the company's current course of action, opting for the status quo instead of a transformative strategy.

Nooyi's hard-line stance and the poor beverage performance led to renewed calls by activist investor Nelson Peltz to split the struggling beverage business from the strong snacks business. Peltz admonished the company's strategy, saying, "If the plan is the status quo, that's an unacceptable plan." The market seems to agree with Peltz; PepsiCo's stock price is down about 2% since the earnings call.

Coca-Cola is faring somewhat better than PepsiCo, but still managed to disappoint investors with lower-than-expected revenue and weak volume growth in North America. The United States -- the fourth-largest per capita consumer of Coca-Cola beverages -- is undergoing a secular decline in soft drink sales as health-conscious consumers drink fewer sugary beverages. Although at-home carbonation would represent only a fraction of Coca-Cola's North American sales -- up to $500 million according to one estimate, or 2.3% of North America sales -- it could be the jump start that the soft drink industry needs to recapture disillusioned consumers. However, Coca-Cola's stock is down about 4% since the earnings announcement.

Foolish takeaway
Carbonated soft drink sales continue to struggle in the United States, but the at-home channel could reenergize the category. There is little chance that the new channel will be a game-changer for Coca-Cola and PepsiCo -- which generate billions in revenue across the globe -- but Green Mountain and SodaStream are positioned to benefit enormously from increased consumer interest in the space.

So, the little guys take the win in the wild first three weeks of February. Now it's up to Coca-Cola and PepsiCo to show investors their growth stories aren't over just yet.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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9/4/2015 3:59 PM
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