Why SodaStream and Dr Pepper Snapple Group Should Partner Up

Coca-Cola and PepsiCo have already signed deals to enter the at-home carbonation space. Keurig Green Mountain and SodaStream are the top two contenders for Dr Pepper Snapple Group's entry. Here's why SodaStream is a good fit.

Apr 8, 2014 at 6:30PM

As Keurig Green Mountain (NASDAQ:GMCR) soars to new highs, SodaStream's (NASDAQ:SODA) stock price is slumping amid three straight quarters of disappointing revenue growth. Many pundits have speculated about what Keurig's partnership with Coca-Cola (NYSE:KO) could mean for SodaStream's fate.

My Foolish colleague Isaac Pino argues that SodaStream can use its lead in the at-home carbonation market and its image as an anti-establishment soda maker to carve out a defensible niche. On the other hand, KeyBanc analyst Akshay Jagdale relays the conventional wisdom in a recent research note, saying SodaStream's growth will be limited without a partnership with Coca-Cola or PepsiCo (NYSE:PEP).

Less talked about is that SodaStream could team up with Dr Pepper Snapple Group (NYSE:DPS). Longtime Fool contributor Rick Munarriz lays out the case for a Dr Pepper Snapple-SodaStream partnership, arguing that the former's brands would be a good addition to the SodaStream platform and could leverage the relationship for an overseas expansion. As a distant third in the soda wars and not yet a player on the global stage, Dr Pepper Snapple has a lot to gain from a deal with SodaStream. At the same time, SodaStream would benefit from Dr Pepper Snapple's strong beverage portfolio that also has an anti-establishment bent to it.

Why Dr Pepper Snapple needs the deal
Dr Pepper Snapple's 17% U.S. soft-drink market share trails PepsiCo's 28% share and Coca-Cola's 42% share. The company relies on its rivals' bottling systems to distribute its products throughout the country. Dr Pepper TEN, a mid-calorie line that was introduced in 2011, has not lived up to expectations. Wells Fargo beverage analyst Bonnie Herzog believes that the disappointing results are due in part to Coca-Cola's and PepsiCo's disincentives to properly manage the brand. A close relationship with SodaStream, which could even involve the acquisition of all or part of SodaStream, would give Dr Pepper Snapple a new channel with a more sympathetic distributor. Even without an equity investment, a deal that makes Dr Pepper Snapple's brands a significant part of the SodaStream platform would promote a symbiotic relationship between the two companies.

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Crush. Source: Dr Pepper Snapple.

Moreover, SodaStream can give Dr Pepper Snapple access to European markets. Dr Pepper Snapple currently has only a small international presence, with sales in Mexico and the Caribbean making up less than 5% of segment profits. Partnering with SodaStream would give it an inexpensive entryway into new markets.

Why SodaStream needs the deal
SodaStream shares initially fell on news of the Keurig Green Mountain-Coca-Cola deal. Then shares rose as investors speculated that SodaSteam would ink its own deal with PepsiCo, or at the very least because the Coca-Cola deal legitimized the channel.

Although others argue that SodaStream does not need a partner, its faltering revenue growth should concern investors. The company has failed to meet growth expectations for three straight quarters. Keurig Green Mountain's Keurig Cold is expected to hit the market within the next year; if SodaStream's sales growth is disappointing now, it may disappoint even more when it has significant competition with which to contend.

SodaStream needs to reenergize its revenue growth; introducing exciting new beverages, like Dr Pepper Snapple's A&W Root Beer, Canada Dry, and Crush, could be the key. Moreover, Dr Pepper Snapple's underdog brands would enable SodaStream to maintain its anti-establishment positioning while adding national brands to its offering.

A deal with Keurig Green Mountain makes sense, too
Dr Pepper Snapple could instead expand its partnership with Keurig Green Mountain. The two companies already partner to offer Snapple Iced Tea, so partnering on the Keurig Cold would be a natural extension of the relationship. Given that Keurig Green Mountain has been licensing brands left and right, it would not come as much of a surprise if Dr Pepper and other brands were available on Keurig Cold when it launches.

However, unlike SodaStream's platform, Keurig Green Mountain's platform has not yet proven itself. CEO Brian Kelley says Keurig Cold will not launch until sometime in fiscal 2015, which begins in October. Even if Keurig Cold comes out in the first quarter of fiscal 2015, it will still be starting out with a 0% market share. SodaStream sold a record 4.4 million soda makers in 2013; it will take Keurig Cold a few years before it achieves similar sales results. Therefore, linking up with SodaStream would give Dr Pepper Snapple more sales in the short run than if it partners with Keurig Cold.

The plus side of partnering with Keurig Cold is that the platform's focus on offering household brands could eventually attract a wider audience than SodaStream's soda maker. If Dr Pepper Snapple waits until Keurig Cold is a sure-fire hit, the company may have to settle for a less generous royalty from Keurig Green Mountain. Therefore, partnering with the best platform early -- whichever the best turns out to be -- is paramount to Dr Pepper Snapple's profitability in the channel.

Bottom line
At-home carbonation is the only bright spot in the soft-drink market. Whether it is with SodaStream, Keurig Green Mountain, or both, entering the at-home channel is a common-sense move for all soda companies. Coca-Cola and PepsiCo have already announced intentions to enter the market. Investors should expect Dr Pepper Snapple to do the same in the near future.

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Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

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