Mike Coppola/Getty Images for SodaStream Making carbonated beverages at home continues to grow in popularity, and SodaStream (SODA) has been the big beneficiary, reporting a 26 percent surge in sales for the holiday quarter. Unfortunately the story doesn’t end there, as poor inventory moves and retailer markdowns crushed the Israeli company’s profitability during the period.
SodaStream messed up. It shipped too many soda makers to U.S. retailers at a time when chains were discounting aggressively to make the most of the shortened holiday shopping season. This led bricks-and-mortar chains to request discounting, and SodaStream reasoned that gaining market share ahead of a major rival’s product launch was more important than commanding a large markup now.
When that still wasn’t enough, it chose to transfer 20,000 starter kits to Canada — a costly move that involves repackaging — and transfer another 100,000 to direct channels that command lower margins, including a stint on HSN that cleared 40,000 soda makers in a single day.
In the end, the sales showed up. Earnings growth didn’t.
Have a Coke and a Smile
Things won’t get any easier next year when Green Mountain Coffee Roasters (GMCR) teams up with Coca-Cola (KO) to try to make a dent in the U.S. market with Keurig Cold.
Green Mountain has dominated the single-serve coffee market. Its Keurig machines are the undisputed champs of the one-cup java servings with nearly every major bean grinder out there putting out signature brews in the form of K-Cup portion packs.
The move to hit the cold beverage market at some point in the fiscal year that begins in October of this year and ends next September is as bold as some of its rich flavored coffees. Can a company known for its hot coffee, tea, and cocoa generate buzz for a machine that cranks out refreshing cold and carbonated beverages? However, Coca-Cola was even more bold earlier this year in announcing that it would take a 10 percent stake in Green Mountain and make its flavors available for Keurig Cold.
One of the knocks on SodaStream is that it doesn’t have any popular brands of soda on its side. It has been able to team up with companies known for their non-carbonated beverages to put out syrups for fizzed up variations. Crystal Light, Kool-Aid, and Welch’s all have deals in place to offer their flavors through SodaStream. However, it was widely believed that the cola giants wanted to stay away to protect their lucrative canned and bottled soft drinks.
That naturally changes the moment that someone can make a Coke at home with a Keurig Cold.
Pop Goes the World
Shares of SodaStream actually rose on the news of Keurig Cold partnering with the world’s largest beverage company. The market figures that PepsiCo (PEP) will either team up with SodaStream or just acquire it entirely. It’s all speculation, of course, but it’s interesting to note that SodaStream shares rallied last June when sources told a popular Israeli business publication that PepsiCo was in talks to buy SodaStream. It didn’t make sense at the time, but now it certainly does.
SodaStream will probably be just fine on its own. During Wednesday morning’s earnings call, CEO Daniel Birnbaum closed by recalling where Green Mountain was several years ago when it was just getting Keurig off the ground. Many of the biggest names in coffee jumped into the market with rival single-cup platforms. They validated the market, but Keurig was the one that was ultimately rewarded as the initial leader.
SodaStream sees itself as the Green Mountain of soda, apparently. It sees sales growth slowing to 15 percent this year, and there will be margin challenges early on as it fixes its operational miscues. However, as long as folks keep buying the machines, CO2 refills, and flavors it’s hard to bet against SodaStream.
Motley Fool contributor Rick Munarriz owns shares of Green Mountain Coffee Roasters and SodaStream. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. Try any of our newsletter services free for 30 days.