PepsiCo Purchased SodaStream

PepsiCo’s purchase of in-home soda maker SodaStream will significantly expand opportunities for tea and herbal concentrates, a promising niche as consumers accelerate their flight from sugary-drinks.

Sparkling beverages are some of the brightest brands in the portfolios of traditional carbonated soda makers. Coca-Cola and PepsiCo both saw big gains in their respective sparkling waters this year. Both are following a profitable path blazed by La Croix, a brand nearing the $1 billion mark in annual sales.

The sparkling water category saw a year-over-year revenue increase of 16.1 percent in 2017, according to IRI data*. Category sales grew 38 percent in the U.S. compared to 7 percent growth for packaged water overall, according to The Wall Street Journal. Sales of carbonated soda, meanwhile, are at a 30-year low. More telling is the fact that in 1995 Americans consumed 263 calories of liquid refreshment beverage (non-alcohol) per capita, per day, a statistic that declined to 198 calories in 2017, according to the Beverage Marketing Corp.**

Sparkling tea, and tea made to sparkle, are significant contributors to the sparkling category’s success, prompting big players to dive in. Nestle Waters, last spring, launched Pellegrino sparkling tea and Teavana, owned by Starbucks and brewed by Anheuser-Busch INBev will introduce a line of sparkling tea for sale in grocery early in 2019.

The SodaStream International acquisition for $3.2 billion establishes PepsiCo as a major player in the in-home sparkling segment concentrated in Western Europe where market penetration is 20 percent in Sweden and 16.5 percent in Germany. In the US market penetration is estimated at 1 percent but likely to grow given PepsiCo’s combination of brands, commitment to R&D, marketing power, and extensive distribution network. PepsiCo earned $62 billion in 2017 and owns 22 brands that earn at least $1 billion annually.

Ramon Laguarta, CEO-Elect and President, PepsiCo said, “SodaStream is highly complementary and incremental to our business, adding to our growing water portfolio, while catalyzing our ability to offer personalized in-home beverage solutions around the world.”

The Israeli-based SodaStream permits users to determine their choice in syrups and the level of carbonization for fresh, custom drinks made in reusable 850 milliliter bottles. The company sells around 3 million machines annually, earning $543 million in 2017 and growing revenue 14.1 percent year-over-year. SodaStream competes with bottled beverages that are viewed as environmentally unsustainable. Its latest machine is called the Aqua Fizz Sparkling Water Maker, a reflection of the fact that 90 percent of the volume made on the machines is turning plain water into sparkling.

During its lifespan a single refillable SodaStream bottle can prevent a family from using and discarding 3,700 cans and plastic bottles. A 440 milliliter bottle of syrup sells for between $3.99 and $5.99 and makes 7 liters of sparkling water. While 8.3 percent of the company’s growth in revenue is from syrup, revenue from refillable CO2 cylinders grew 16.8 percent last year, an indication that consumers are creating their own sparkling beverages, some of which is tea.

“It took a year or two to finally get some traction. By 2016, things started to look up from the depths. In the past 12 months, SodaStream is on a roll – up more than 80 percent,” writes Investor Place contributor Luis Navellier. The reason is SodaStream’s focus on water and the company’s ability to reduce the global ecological footprint, he writes.

Per capital consumption of packaged water exceeded carbonated soda in 2015 when the average consumer downed 31.6 litres of packaged water versus 31 litres of CSDs, according to GlobalData. Since most packaged water is in small containers there are literally billions consumed daily.

PepsiCo paid a 32 percent premium, $144 per share, for SodaStream largely based on its potential to disrupt the plastic and can conundrum. In a press release Laguarta explains that “from breakthrough innovations like Drinkfinity to beverage dispensing technologies like Spire for foodservice and Aquafina water stations for workplaces and colleges, PepsiCo is finding new ways to reach consumers beyond the bottle.” Acquiring SodaStream “is fully in line with that strategy,” he said.

Club soda is the standby overseas but enhanced waters and cola, root beer, orange, tonic, lemon-lime and other flavors, including a line of enhanced-water flavorings enable consumers to make a variety of drinks.

Branded syrups such as PepsiCo’s Pepsi and Mountain Dew are one option but unlikely to appeal to consumers seeking to reduce their soda consumption. A more likely trend will lead to teas, herbals, and enhanced waters made with concentrates like PepsiCo’s Drinkfinity brand, an all-natural flavoring. SodaStream currently partners with Kool-Aid, Crystal Light, Country Time, and Ocean Spray to make sparkling kid’s drinks, lemonade, and juice. Tea is a logical expansion of those offerings with Lipton an obvious choice but also Pukka herbals.

There are several new sparkling tea brands in the market including Sound sparkling rose tea (with lime and cardamom), green tea (with mint and grapefruit) and white tea (with peach and ginger). Founders Salim Jajjar and Tommy Kelly attribute the development of the brand to experimentation with a SodaStream.

Kelly told Bon Appetit, “We found that most unsweetened teas were really watered down and sparkling waters were just flavored water. We wanted something like a soda—a refreshing drink with bubbles and caffeine—but without the sugar. So, I started carbonating chilled tea in my SodaStream.”

The brand is sold in Whole Foods, Dean & Deluca, Amazon and Jet.

Fruit2O is another example of a natural flavored juice and tea concentrate in 502 milliliter bottles. The sparkling tea blends apple juice, peach juice and black tea (sweetened with sucralose). Other flavors include raspberry and pomegranate. Tempo Sparkling tea is another example. B.W. Cooper’s sparkling teas sold at 7-Eleven are made with cane sugar and natural flavors and fresh brewed black teas. The new B.W. Cooper cold brewed tea concentrates open the possibility of making these sparkling teas at home.

Petal is an example of sparkling botanical blend made with rose water imported from Turkey. The RTD is zero-calories, certified organic by USDA and sweetened with erythritol and stevia. It debuted in May. Flavors include lychee rose and mint rose. Founder Candice Crane told Food-Navigator USA the drink is a diet soda replacement and alternative to sparkling tea marketed to women.

Retailers selling loose leaf and sachets do not need to bottle their tea to offer sparkling options. Steven Smith Teamaker recommends brewing a concentrated Big Hibiscus Iced Tea or Exceptional Iced Tea to be blended with freshly middle blood orange or grapefruit and lemon. Add an ounce of simple syrup topped with sparkling water – fresh from your kitchen.

Source: PepsiCo, SodaStream

*Information Resources Inc. (IRI) US Multi-outlet, 52 weeks ending 5/14/2017
**Consumers are decreasing calorie-heavy brands (~45 fewer calories per “refreshment beverage” per day since 2005) and drinking less soda (~1 billion fewer gallons by U.S. consumers since 2012) in lieu of “value-added water,” which includes brands like La Croix. Almost 574 million gallons of non-alcoholic sparkling water worth about $6.1 billion was sold in the U.S. in 2016, which increased to 790 million gallons and $8.5 billion last year. – Sightlines