With PepsiCo (PEP 1.60%) expanding its partnership with in-home beverage maker SodaStream International (SODA), consumers can now make a two-liter bottle of soda for $3.49 instead of buying it at the store for half that price. Tell me again how this is supposed to benefit either company?
The DIY beverage maker has been struggling through a global reorganization as consumer demand for soda has fizzled. It's gone so far as to rebrand itself from an at-home soda company to a sparkling-water maker to capitalize on growing water consumption. The International Bottled Water Association says U.S. consumption alone grew 7% last year, to 34 gallons of bottle water per person.
Yet SodaStream is still having trouble convincing anyone they should buy their own water makers. Starter kit sales plunged another 35% in the second quarter, and consumables -- the CO2 canisters that power the fizz, as well as flavors to add to it -- tumbled 25%.
That seems to validate the concerns Pepsi CEO Indra Nooyi has expressed that consumers viewed the amount of time it took to make their own beverage as wasted. She's also been careful to put to bed the notion the soda giant would be buying out SodaStream, or even taking a significant stake in the company like Coca-Cola did with its near-17% position in Keurig Green Mountain. The big concerns about the rollout of its Kold system make Nooyi's concerns seem prescient.
For that reason, the Pepsi/SodaStream expansion could be seen as a curious development. According to reports, Pepsi will market flavor caps for use in the SodaStream system that contain its namesake soda as well as Sierra Mist. They'll be available on SodaStream's website and in some 50 Bed Bath & Beyond stores retailing at $3.49 for a four-pack, with a single cap making a half-liter of soda.
While SodaStream's stock gained about 9% on the news, it's since lost about half of that, no doubt as people realize that's a pricey amount to pay for a bottle of soda. Sure there are some supposed health benefits to making your own -- The Wall Street Journal reports the homemade version is made with sugar and stevia and comes with about half the calories of store-bought drinks -- but it's not certain that's going to trump the convenience of buying it from the store for less.
There's also the problem of consistency in flavor; when you're making your own at home, taste could vary widely. Consumers thinking they're getting a "Pepsi" may be in for a not-so-pleasant surprise when what they end up drinking doesn't taste like what they're expecting. Just ask Coke about what happens when you change the recipe.
So, why is Pepsi wasting its time with this partnership? Because it's probably not risking all that much to do so -- certainly nothing along the lines of Coke's $2 billion investment in Keurig, which, when you consider that GMCR stock has cratered and lost more than half of its value so far this year, has revealed itself to be a really bad investment decision. Pepsi has likely diverted just a small part of its R&D budget to developing the caps, and if they're a hit, great; if not, it's not stuck with a lingering investment albatross.
Both it and Coca-Cola are trying to stem hemorrhaging soda sales as consumers opt for more healthy alternatives like juices, teas, and water. If they can convince consumers to make soda at home, it might halt and perhaps even reverse the loss of market share that soda has experienced.
For SodaStream, though, this is a life-and-death struggle. After bursting onto the scene and rapidly expanding -- a period that saw its shares soar to more than $70 a stub -- it's since run into the brick wall of changing consumer tastes.
Today, SodaStream International's stock trades hands at around $15 per share, and it's doubtful they'll bubble up much higher because of Pepsi's dabbling in the at-home market.