Maybe SodaStream International (NASDAQ:SODA) was right all along. The DIY soda maker-cum-sparkling-water company has essentially said that, as consumer attitudes change, there is no future for sugary carbonated beverages. It's why it changed its tag line from "set the bubbles free" to "water made exciting."
While I've long harbored doubts about SodaStream's viability as an investment, there just may be something to what the sparkling-water seller has been saying. It might not change my outlook on its future any time soon, but it shows SodaStream is actually heading in the right direction, and Coca-Cola (NYSE:KO) may have just proven that.
Water, water everywhere
The soda giant recently announced it was scrapping its Glaceau division's fruitwater brand of flavored sparkling water in favor of one that will appear under the Minute Maid brand. This seems inconsequential, until you realize that it represents yet another example of the soda giant's major miscalculations of consumer sentiment. Maybe it's not on the scale of the infamous and disastrous New Coke campaign, or even the misjudgment made in investing $2 billion in Keurig Green Mountain (UNKNOWN:GMCR.DL) for a chance to develop an at-home cold-beverage appliance; but for a billion-dollar market opportunity, it's a serious misstep.
According to the International Bottled Water Association, annual U.S. consumption of bottled water grew by almost 11 gallons between 2004 and 2015, growing from 23.2 gallons per person to 34 gallons. At the same time, carbonated soft drinks saw per-capita consumption drop by more than 12 gallons. Bottled water now holds a 17.8% "share of stomach" compared to 20.9% for carbonated soft drinks, suggesting that, if current trends continue, bottled water could become the biggest beverage category by the end of the decade.
Driving the change is the growth of sparkling water, which saw a 22% increase in dollar sales last year on top of a 32% increase in 2013. Because one of still water's primary purposes is hydration, it is sparkling water that is the key competitive alternative to carbonated soft drinks.
Euromonitor International says sparkling water sales have doubled in the U.S. during the past five years, and is now a $1.5 billion industry.
Coke launched fruitwater two years ago as a way to "appeal to a broader audience and bring younger consumers into the category." But even then, soda consumption was in the midst of a decade-long secular decline due to a backlash against artificial sweeteners like aspartame and high-fructose corn syrup. Yet Coke still thought it was a good idea to bring to market a carbonated beverage that contained no fruit or fruit juice whatsoever (despite its name) that was instead sweetened with sucralose. Why? Because "adding fruit or fruit juice to the product would add calories."
It was operating under the mistaken assumption that consumers wanted low-calorie drinks above all else; but what they're really looking for is more healthful alternatives. Sucralose, which is better known by its brand name Splenda, is hardly seen in that same light, so not even a reboot last year with new marketing, and a partnership with actress Christina Applegate, gave it any traction.
For this reason, Coca-Cola is killing the product now, and according to industry news site FoodNavigator, replacing it this coming March with Minute Maid Sparkling, which will have 6% fruit juice.
About to pop
SodaStream International predicted there would be a sea change in consumption habits, which was behind its own rebranding efforts. It's also why it has devoted more attention to developing fruit flavors, sales of which it says are accelerating as it rolled them out to new partners like Kroger and Bed Bath & Beyond. Sell-in increased to 11% in the third quarter, and it expects similar growth when they hit Target and Wal-Mart too.
While Coca-Cola has proved SodaStream's point, that doesn't mean the sparkling-water company is a good investment yet, as it still needs to prove that switching from soda to water is a smart move globally. Soda sales actually remain strong elsewhere around the globe, even for Coke; but because it was able to read consumer trends well ahead of even the premier beverage company, SodaStream International may have a better chance than ever to come out ahead.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Bed Bath & Beyond, Coca-Cola, and Keurig Green Mountain. 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.