Why Starbucks Might Buy a Stake in SodaStream

If the coffee giant partners with the in-home soda maker, the two companies will face off with the alliance of Keurig Green Mountain and Coca-Cola.

Apr 24, 2014 at 11:31AM

Making sodas and other cold beverages at home seems like the next great frontier for beverage companies. 

Keurig Green Mountain (NASDAQ:GMCR) has a deal with Coca-Cola (NYSE:KO) to partner on an in-home cold beverage maker, and now it looks like Starbucks (NASDAQ:SBUX) might purchase a stake in current category leader SodaStream (NASDAQ:SODA)

Israeli business publication Globes was the first to report that Starbucks is in "advanced talks" to buy a 10% stake in SodaStream in a deal that would value the company at $1.1 billion (a 30% premium on SodaStream's market cap of $844 million as of Tuesday's market close).

In February Coca-Cola announced that it would purchase a 10% stake in Keurig Green Mountain for $1.25 billion. Those companies also signed a 10-year agreement to collaborate on the development and introduction of various beverages for use in the previously announced Keurig Cold at-home beverage system. As part of the strategic collaboration, Keurig will be The Coca-Cola Company's exclusive partner for the production and sale of Coca-Cola-branded single-serve, pod-based cold beverages. The two companies also agreed to explore other future opportunities to collaborate.

The potential Starbucks deal with SodaStream is likely being considered as an answer to Keurig's attempt to enter the market with Coke as its partner.

"Despite SodaStream's clear advantages, its machines are found in only 1% of American homes, compared with 25% of homes in many European countries, such as Sweden," Globes reported. "Collaboration with Starbucks would give SodaStream a distribution platform and marketing incentives, such as sales campaigns and special flavors for Starbucks customers."

To put it simply SodaStream is the early mover in the space but it has not reached the critical mass needed to make competing with it impossible and the company needs an answer to Keurig's deal with Coke..

How big is the at-home soda market?

In an earlier article -- SodaStream vs Keurig: How Coke will Change the Home Soda Machine Market -- I looked at the size of the market for in-home single-serve soda, which consists almost entirely of SodaStream.

Home soda machine sales grew by 30% in 2013 and sales of complementary products such as CO2 carbonators, bottles, mixes, and syrups more than doubled over the previous year, according to a report from the NPD Group. Sales of CO2 carbonators, used in the soda-making process, also more than doubled in 2013, which is a good indication that consumers are actually using their machines.

Soda Sales

Though there are some knockoffs for sale and some very minor players trying to get involved, SodaStream is really the only player in the space. It had $562 million in sales in 2013, an increase from $436 million in 2012. 

Currently that is basically the entire single-serve at-home soda market. But Coca-Cola making its brands available through Keurig plus Keurig's vast retail distribution network should bring new customers in who never knew SodaStream existed. The same could be said if Starbucks buys a stake in SodaStream as the chain's enormous retail footprint allows it to demo single-serve soda in its stores. It's also possible that a SodaStream-Starbucks relationship could lead to the coffee chain introducing carbonated cold beverages in its stores made on a machine created in conjunction with its new partner.

With Coca-Cola and potentially Starbucks entering the fray it's hard to see how the market won't grow exponentially.

Could single-serve soda equal singe-serve coffee?

According to a recent survey from research company Mintel Group. U.S. coffee sales were expected to hit $11.7 billion in 2013, up 11.4% from 2012. While single-serve coffee sales account for about half the volume of regular coffee, they were forecast to rise by 213% to an estimated $3.1 billion in 2013 from 2011. Globally Keurig alone had $4.3 billion in sales with the vast majority of that (about 92%) coming from its single-serve products. Nestle's Nespresso brand -- the other major single-serve coffee player -- did $3.4 billion in capsule/pod sales outside of North America and another $330 million in the United States.

Soda sales in general have been declining but single-serve soda machines may buck that trend because the machines make it easy to make indulgence beverages (like a full-calorie cola) along with healthier choices like flavored seltzers.

Before Keurig and its K-Cup machines, single-serve coffee was not a category. The presence of Coca-Cola/Keurig in the space competing with a SodaStream/Starbucks alliance could result in single-serve soda machines and products becoming as ubiquitous as Keurig K-Cup machines. If the deal actually happens SodaStream has found a loud answer to Keurig partnering with Coke and the question of which company will emerge as the market leader will remain very much in question.

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Daniel Kline has no position in any stocks mentioned. He rarely drinks soda but prefers ginger ale when he does. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, SodaStream, and Starbucks. The Motley Fool owns shares of Coca-Cola, SodaStream, and Starbucks 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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