Do-it-yourself soda company SodaStream (NASDAQ:SODA) recently announced that earnings took a 41% year-over-year nosedive for the third quarter of 2014. And this wasn't a one-off incident, but an escalating and unsettling trend for investors.
As growth continues to subside, SodaStream's management team has realized that it needs to shake things up. And at this point, the Israel-based manufacturer requires much more than a tune-up -- it needs to rebuild its CO2-powered engine.
In a 38-page presentation titled "SodaStream Growth Plan," CEO Daniel Birnbaum outlined exactly how the company plans to pull off a top-to-bottom overhaul of the currently sputtering soda maker. Here are the five key points from that late October presentation that SodaStream investors need to know.
No. 1: Rethink the overall mission and focus on water
Incremental changes aren't working at SodaStream. Everything from inventory issues to an overcrowded and heavily discounted product line-up have led the company to post one miserable quarter after another throughout 2014.
And SodaStream's fourth consecutive quarterly slump in the American market proved to be the wake-up call the company desperately needed. As sales of sugary colas continue to decline in the U.S., Birnbaum has decided to distance the brand from this sinking market. SodaStream, which was once the upstart that aimed to take down PepsiCo and Coca-Cola, is now rebranding itself as a sparkling-water company instead.
Yes, it sounds contradictory, but Birnbaum sees the writing on the wall for the high-calorie beverage industry: Healthy options are in, while fructose-laden syrups are on the way out.
As he pointed out on the conference call, this isn't a subtle shift -- it's a transformational one:
The $200 billion carbonated soft-drink market is going through a rapid transformation, led by the United States, where consumers are abandoning traditional soda for more natural, less caloric, water-based beverages, in step with the megatrend shift toward health and wellness.
In response, SodaStream has a new mission and revamped slogan to boot. Gone is the tag line "Set the bubbles free," which urged consumers to ditch plastic bottles. In its place is a new catchphrase: "SodaStream. Water made exciting."
This move makes sense, given that the sparkling-water market in the U.S. grew by 34% in 2012, according to Trefis, while soda sales were down 3% in 2013, reaching a 26-year low. Yes, the two markets are a world apart in terms of absolute size, but it's probably better to get behind a trend that could snowball into something larger than one that's melting away slowly.
No. 2: Find the right talent for top positions
Now that SodaStream has its sight set on a new horizon, the next step is to have the right people at the steering wheel. In the presentation, SodaStream pointed out that priority No. 1 is to "Invest in Human Capital" by hiring additional talented leaders.
While some turnover at the top will inevitably rock the boat, it's good to see that Birnbaum recognizes the importance of investing in the right people. This move takes a page from Yahoo!'s current turnaround strategy, which also focuses on an initial step of getting the right talent in the right place within the company.
In addition, SodaStream believes that reorganizing in terms of "regional clusters" will better position the company to develop the appropriate message and marketing strategy for different countries around the world. As it has found in the past, the messaging that actually resonates with customers can vary widely across continents and cultures.
No. 3: Rebrand everything
Another priority for SodaStream is to appeal to customers in a different way. As I've pointed out before, SodaStream might have already reached most of the U.S. market for homemade craft soda makers. But management believes there's an untapped audience that wants to jazz up their unflavored tap-water routine.
To make that point crystal clear, SodaStream's marketing execs are revamping the product packaging to emphasize sparkling water over soda. As shown in the following slide, the SodaStream "Play" machine is being renamed SodaStream "Splash." The brand name "SodaStream," meanwhile, has been de-emphasized by reducing its font size so much that it's almost invisible. And, finally, if you look closely, you'll see that the word "stream" is now bolded rather than "soda" in the company's name.
It's an interesting move that basically takes the company's brand out of the picture in terms of packaging. But perhaps that's a good thing for the time being.
As long as customers think of "soda" when they see the product, they probably tend to think of it in terms of a substitute for a beverage like Coca-Cola, Pepsi, or Dr. Pepper. And that's not what SodaStream wants, at least not right now. It can't compete with those goliaths of the soda industry, so it might as well save some money on marketing and position itself as a premium water offering instead of an also-ran soda company.
No. 4: Get rid of clunky products
This initiative might be the most important, and it goes hand-in-hand with No. 3. SodaStream's product lineup was a mess, but going forward the company plans to clean it up.
In this category, SodaStream had enlisted the help of Yves Behar, one of the world's most famous product designers, to simplify and beautify its soda machines. Still, it continued to unload clunky, infomercial-style products across its retail partner locations and online. This was an embarrassment for the brand. And it was confusing for customers. In the near future, SodaStream aims to embrace the Behar-styled Splash, Source, and brand-new Power machines while saying goodbye to yesterday's hodgepodge collection:
Further, SodaStream acknowledged another misstep by admitting that its flavorings containers resembled "detergent" bottles, so it revealed a new-and-improved design for its "SodaStream Waters" line of syrups:
No. 5: Go where the customers are
Finally, SodaStream plans to place an emphasis on different markets and sales channels going forward. Rather than expanding to new areas of the world, it's going to focus on the ones where it sees the most promise. Within those geographies, SodaStream aims to increase customer enthusiasm through better displays, more in-store demonstrations, and optimized product placement for the appropriate customer demographic.
At the same time, SodaStream aims to press on the pedal in the e-commerce space, where it can potentially conduct more targeted advertising and offer a more robust online store. In the past, it's leaned heavily on Amazon.com while dabbling in sales through the Home Shopping Network at HSN.com.
The Foolish takeaway
Without a question, SodaStream envisions a radical overhaul of its brand. But it's a much-needed one at this juncture.
It's true that SodaStream spent years making significant investments in Super Bowl commercials and ad campaigns that characterized it as the rebellious DIY alternative to Coke and Pepsi. So perhaps this seems a little out of step. But SodaStream's ignoring the critics and making some bold moves at a time a new game plan is a must. And I think a dramatic step forward is a good one for shareholders.
The sparkling-water market might not be SodaStream's saving grace, but that's why it's concurrently reaching out to Pepsi to test a more natural line of colas in select markets. Overall, it's reassuring to see the company has not abandoned its goal of introducing healthier sparkling beverages to consumers in a convenient fashion. Each of these "fixes" could cause more short-term pain, but sticking with the status quo would be a much more costly scenario for investors in the long run.