It's no secret that consumers are becoming more health conscious, and sales of carbonated soft drinks (CSDs) are falling as a result. However, beverage companies aren't ready to roll over and admit defeat, going by recent news flow.
Beverage giant adapting to changing consumer preferences
Coca-Cola (NYSE:KO) simply can't afford to rest on its laurels, not when consumers are switching away from sodas to healthier beverage choices. While the market focused its attention on the Coca-Cola/Green Mountain Coffee Roasters partnership for at-home carbonated-beverage systems, another piece of less exciting news caught my eye. Coca-Cola's Minute Maid brand is selling a new liquid water enhancer that allows consumers to add fruit flavors to their water. The strategic intent behind both investments is exactly the same for Coca-Cola, in my opinion.
Consumers value convenience more than ever before. When they desire a drink at home or on the go, they aren't willing to run to the nearest stores to buy. Instead, they either want to make their own sodas at home or drink whatever they like whenever they want. While the investments in home soda makers and liquid water enhancers are small compared to the core CSD business, it is essential that Coca-Cola buys insurance against the beverage industry's uncertain future.
Private-label leader exploring options
While private label has gained significant market share in many product categories, such as tissue paper, the same penetration rates aren't happening with sodas. Since importing Cott soda to Quebec, Canada in 1952 and winning the contract for President's Choice Cola in 1990, Cott (NYSE:PRMW) hasn't managed to give the branded soda players a run for their money. In 2012, Cott had a mere 4.7% share of the CSD market compared, compared with a combined 70% market share for Coca-Cola and PepsiCo. Falling soda sales do not change the fact that soda drinkers (who still remain soda drinkers) are incredibly loyal to their chosen brands.
In fact, Cott is suffering to a greater extent than its branded soda peers from declining CSD sales. In third-quarter data, the rate of decline for U.S. private-label CSDs was twice that for the overall U.S. CSD market. A key contributing factor could be that of more intense promotional activity from branded soda players. According to management's comments during their most recent earnings conference call, the price gap between national brands and private labels fell from 35%-40% to 15%-16% in August and September.
Hence, it isn't surprising that Cott released a press release in early February stating that it has engaged Credit Suisse to assist in evaluating certain strategic alternatives. Cott further added that these strategic alternatives could be either organic or inorganic in nature. One possibility is further portfolio rationalization. Since late 2012, it has been shifting away from lower-margin case-pack products to higher-margin products like apple juice.
Soda maker leveraging on recent media hype
SodaStream (NASDAQ:SODA) is enjoying the free advertisement that the recent Coca-Cola/Green Mountain partnership provides. According to an article in The Wall Street Journal,, SodaStream spokesman Yonah Lloyd said that the deal between Coca-Cola and Green Mountain shows "further recognition that custom carbonation is the future of the $260 billion at-home carbonated-beverage industry."
The keyword in the above-mentioned quote is 'future.' While many are predicting the shift of market share from off-the-shelf sodas to homemade sodas, take-up rates are still low. SodaStream has a minimum 10% market penetration target in each of the countries it operates in. While one in four Swedish households has a SodaStream soda maker at home, SodaStream's household penetration is as low as 1% in countries like the U.S., U.K., and Italy.
According to the results of an April 2013 survey quoted by SodaStream, 39% of home soda-maker buyers made the purchase decision after watching a TV commercial; while the purchase trigger for 28% of them was reading about home soda makers on the Internet or the newspaper. The recent media coverage of the Coca-Cola/Green Mountain partnership will have a positive spin-off effect for SodaStream, especially since the Keurig Cold beverage system isn't out in the market yet.
Furthermore, the SodaStream model is a classic razor and razor-blade profit model, where customers are more likely to stay with a vendor once they buy the original machine. Since SodaStream buyers already spend at least a hundred bucks for the initial purchase, they are incentivized to stick with SodaStream for follow-on consumables, such as syrups. Therefore, it makes sense for SodaStream to capitalize on the recent publicity by stepping up marketing activities to add to its installed base as quickly as possible.
Foolish final thoughts
Investors are always quick to call the death of an industry when prospects seem bleak. The soda industry is their new target. But executives of beverage companies are proactively responding to such threats by buying insurance, exploring alternative strategic options, and capitalizing on competitors' moves to their advantage. The jury is still out on the results of these initiatives, but I won't discount them.