CASES Case 1-1: Can SodaStream Disrupt the Carbonated Soft Drink Market? "Transportation for carbonated drinks in the world utilizes 100 million barrels of oil every year. That is 20 times the BP disaster that hit the Gulf of Mexico." "I think it is criminal that the industry, led by two big companies, will do anything to protect their antiquated business model. They are generating 35 million bottles and cans every single day in the U.K. alone. World-wide it is one billion bottles and cans, most of which just go to trash, landfill, the oceans or parks. It's insane." -Daniel Birnbaum, CEO of SodaStream International, in a November 2012 interview with The Wall Street Journal. Anna Claire Butler wet her brush, slicked her hair back, and "Hmm, that is interesting, very interesting," mused checked her reflection in the mirror. "My first day on Wall Beth. "You know, SodaStream's stock has been on a roller Street!" she thought. Five minutes later, she walked briskly coaster ride in the past couple of weeks." down Broadway Avenue to the 86th Street subway station "What are you talking about?" asked Anna Claire. to catch the downtown 1-2-3 train. After a hot and cramped "I'm talking about SodaStream being in play." 20-minute subway ride, Anna Claire stepped into the lobby "Huh?" of the bank that housed the midtown Manhattan offices of "An Israeli financial newspaper printed a story about Keller & Assoc., her new employer. Pepsi being in talks to acquire SodaStream in early June. Later that day, Anna Claire pushed through the crowd The stock popped almost 8 percent in pre-market trading waiting for a table to join her best friend, Beth. After the two the day the story came out, but that was before Pepsi nixed friends exchanged hellos, Beth said, "What's wrong with the story the same afternoon. I bet that's the deal your boss you? You look like you were hit by a bus." is working on," Beth said. "My feet are killing me. I've got a run in my brand- Isn't that the end of it?" Anna Claire asked. new stockings, and I'm starving. Worse yet, I have to figure "Apparently not. Pepsi said it wasn't making any out the soda market and do a presentation to my boss in large acquisitions, but investors still bid up SodaStream two days." stock in the hopes that Coca-cola was interested. The "What do you mean, figure out the soda market? You stock hit a high of about 78 bucks on takeover rumors, just started. What do you know about it?" asked Beth. but has now plunged to about $60-well under where it "All I know is that my favorite soda is Diet Coke. was before the Pepsi rumor hit the press. It didn't help the Unfortunately, that's not gonna to be enough-not nearly stock that the New York Post ran a story last week that said enough-to keep old J. B. Parker happy," said Anna Claire. SodaStream had been shopping itself quietly for the past "Who's J. B. Parker?" asked Beth. three months*-but no one was interested in buying. I bet "Only the man who controls my destiny-the boss- your boss is trying to figure out if he should buy the stock man. He's looking into doing a deal in the carbonated soft on the pullback in the price." drink market. I don't know the details, but I am supposed to The next morning, Anna Claire arrived at the office do all his legwork in the next 48 hours. He told me to 'show at 6:00 and got to work downloading the annual reports for him the money.' By that he meant explain who makes all the Coca-Cola, PepsiCo, Dr. Pepper Snapple Group, and Soda- money in the industry and how they do it." Stream. "Yikes, this is going to be more complicated thanPC 1-2 The Tools of Strategic Analysis I thought. I bet I don't get a wink of sleep for the next two and depressed a button to add carbonation. The machine days," Anna Claire thought ruefully. As Anna Claire clicked injected CO, into the water each time the user pushed the on the file containing SodaStream's 10K, her mind was full button. Once the user had put in the desired amount of car- of questions. "Is SodaStream even in the same market as bonation, he added either liquid flavor concentrate to the Coke and Pepsi? Why would investors think Coke or Pepsi bottle to his taste or dumped in a pre-measured "cap" of fla- might want to buy the company? Is SodaStream a disruptive vor similar to the pre-measured Keurig coffee "caps" made innovator of the carbonated soft drink market? What do the by Green Mountain Coffee Roasters. bottlers have to do with Coke and Pepsi? I guess I'd better figure out what SodaStream does first and then think about the competition." U.S. Carbonated Soft Drink Market According to Beverage Digest, the top 10 carbonated soft SodaStream International and the drink (CSD) brands held just over 66 percent of the esti- SodaStream System mated $74 billion market in 2011. All of the top 10 brands belonged to Coca-Cola, PepsiCo, and Dr. Pepper Snapple SodaStream manufactures home soda drink maker Group. Table 1 below shows the distribution of market machines, flavor concentrates, and gas cylinders. Founded shares by company in the United States in 2011 as well as a in 1903 as a subsidiary of W&A Gibley gin distillers, the listing of their brands and place on the top 10 CSD brand list. original SodaStream machines were marketed to British The carbonated soft drink market was famous for its upper-class customers. The machine, dubbed, "appara- market share battles between Coca-Cola and PepsiCo. Nota- tus for aerating liquids" by inventor Guy Gibley, allowed bly, PepsiCo aggressively targeted Coke's position with the users to convert ordinary tap water into carbonated water Pepsi Challenge marketing campaign that ran from 1975 to by injecting compressed carbon dioxide gas (CO,) into a 1978. The campaign featured blind taste tests by ordinary container of water. Marketed to the upper class, the first consumers all over the United States. To their surprise, more SodaStream machine was installed at Buckingham Pal- than 50 percent of consumers preferred the taste of Pepsi ace." The company introduced flavored syrups in the 1920s in head-to-head blind taste tests. The innovative campaign along with commercial machines, followed by the intro- allowed Pepsi to build upon market share gains in the early duction of a home carbonation machine in the 1950s." The 1970s and challenge Coke's dominant position in the United modern SodaStream system is pictured below. Consumers States for the first time. After 15 consecutive years of mar- purchased a SodaStream machine along with a specially ket share losses to Pepsi in the United States, Coca-Cola designed, durable plastic bottle, flavor concentrate, and responded with the unsuccessful launch of "New Coke" in a CO, gas cylinder. After filling the bottle with tap water, 1985. A firestorm of consumer protests resulted in the intro- the user screwed the bottle into the SodaStream machine duction of the "Coke Classic" line in its signature hourglass Table 1 2011 U.S. Carbonated Soft Drink (CSD) Company Market Shares and Brands Company Market Share CSD Brands Coca-Cola Co. 41.9% Coke (#1), Diet Coke (#2), Sprite (#6), Fanta (#10), Fresca, Mr. Pibb, Barq's PepsiCo 28.5% Pepsi (#3), Mountain Dew (#4), Diet Pepsi (#7), Diet Mountain Dew (#8), Sierra Mist Dr Pepper Snapple 21.1% Dr Pepper (#5), Diet Dr Pepper (#9), Vernor's, Crush, 7Up, Group Canada Dry, Stewart's, A&W, Schweppes, Diet Rite,Case 1-1: Can SodaStream Disrupt the Carbonated Soft Drink Market? PC 1-3 plastic bottle a few months later. Interestingly, "New Coke" Clearly, ad spending signaled that competition was used a high-fructose corn syrup-sweetened version of the heating up between the major CSD makers in the United Diet Coke formula (introduced in 1982). States. Industry observers that called the end of the Capitalizing on the strength of the Coke consumer's "cola wars" in 2011 may have celebrated Coke's victory bond with the brand that became apparent after the launch prematurely. of "New Coke," Coca-Cola directed much of its efforts from the mid-1980s to 2012 to positioning its flagship brand as a "lifestyle" brand. PepsiCo famously launched a series of Retail Distribution marketing campaigns over about a 40-year span featuring popular artists such as Michael Jackson, Ray Charles, Brit- Sales of carbonated soft drinks to consumers went through ney Spears, Christina Aguilera, Mariah Carey, Beyonce, and two major distribution channels: retail stores and fountain Nicki Minaj. Although advertising expenditures remained accounts. Sales to retailers accounted for more than 75 per- cent of total CSD sales in the United States, while fountain high, industry observers in 2010 began to question Pepsi's drinks generated about 25 percent of industry sales. The determination to compete in the category, as Pepsi appeared to "concede" the category to Coke. Diet Coke overtook largest portion of retail store sales was through supermar- Pepsi for the first time to become the #2 brand in the CSD kets and discounters. The $1.2 trillion supermarket and dis- industry. Under CEO Indra Nooyi, Pepsi seemed focused on counter industry accounted for 50 percent of all carbonated its highly profitable Frito-Lay snack business rather than on soft drink sales in the United States in 2011. The top five the U.S. carbonated soft drink market. retailers in the segment-Wal-Mart, Kroger, Target, Costco, Pepsi responded aggressively to its critics with the and Safeway-generated about 49 percent of all retail 2012 launch of Pepsi Next, a mid-calorie cola. The new sales in the channel. Wal-Mart alone accounted for about product was sweetened with high-fructose corn syrup and 27 percent of retail sales in the supermarket and discounter industry. While figures were not available for individual three artificial sweeteners. Pepsi's advertising expenditures retailer sales of carbonated soft drinks, PepsiCo stated that jumped more than 44 percent (see Table 2). Moreover, the company stated publicly that it was pouring its research Wal-Mart (including Sam's Club) accounted for 11 percent efforts into developing new, natural sweeteners in order to of its sales worldwide in 2011 and 17 percent of its U.S. develop healthier alternatives to artificial sweeteners and sales. Although Costco accounted for only about 6 percent of all retail sales in the channel, the company dealt a blow support its planned new product launches in the future. Dr Pepper Snapple Group (DPS) stayed on the side- to Coca-cola in 2012 by switching all of its food courts to lines of the so-called "cola wars" by staking a claim to the Pepsi products. Convenience stores, gas stations, vending "flavor" segment of the CSD market. The company held machines, and other retailers made up the remainder of two positions on the top 10 brands list in 2011. Its flagship CSD industry sales to retail stores." brand, Dr Pepper, held the #5 position in the industry. Diet Sales to restaurants, movie theaters, stadiums, and Dr Pepper was #9 on the list of the largest CSD brands. In other fountain drink outlets generated about 25 percent of 2011, Dr Pepper Snapple group launched a line of reduced- CSD industry sales. Coca-cola held an estimated 70 per- calorie products in 23 flavors accompanied by the slogan cent of the fountain drink market-dwarfing PepsiCo's "It's Not for Women." Products such as Dr Pepper 10 and estimated 19 percent share and Dr. Pepper's 11 percent A&W 10 were targeted to young men who are "turned off share in the channel. McDonald's exclusively sold Coca- Cola products and accounted for half of all food sales in by zero-calorie sodas. fast-food burger joints in 2011 and so was undoubtedly one of Coca-Cola U.S.'s most important customers. With the Table 2 U.S. Carbonated Soft Drink Advertising Effectiveness ($ in millions) estimated 75 percent retail margins on fountain drink sales, McDonald's relationship with Coca-Cola has proven to be 2011Spending/ a profitable one for the fast-food giant Company 2011 2012 Change Share Point Coca-Cola $241.4 $253.8 5.1% $5.76 Manufacturing and Distribution ofCompany 2011 2012 Change Share Point Coca-Cola $241.4 $253.8 5.1% $5.76 Manufacturing and Distribution of PepsiCo $236.7 5341.9 44.4%% $8.31 Carbonated Soft Drinks Dr Pepper $137.3 $148.1 7.9%% $6.47 Originally sold by druggists as a healthful tonic, the bub- Snapple Group bly potion has been enjoyed by Americans since the early Source: Advertising Age: Top 100 Advertisers, author's calculations. 1800s. The carbonated soft drink itself was a relatively PC 1-4 The Tools of Strategic Analysis simple concoction consisting of flavoring concentrate, car- of capital off of its balance sheet and focus on concentrate bonated water, and sweetener. Companies like Coca-Cola, production. Coca-Cola Enterprises (CCE) had an operating PepsiCo, and Dr Pepper Snapple Group-the concentrate margin of 7.6 percent and a return on average assets of 5 per- producers-manufactured flavoring concentrate and sold cent in 2009 excluding restructuring charges. Coca-Cola's it to licensed bottlers. Bottlers converted concentrate into operating margin was 26.6 percent, and return on average carbonated beverages by adding carbonated water and assets was 15.3 percent. Pepsi spun off its bottlers in 1999. packaging the drinks in bottles and cans. The concentrate Pepsi Bottling Group had an operating margin of 7.9 percent producers (CPs) added sweeteners such as sucralose or Ste- and a return on average assets of 4.6 percent in 2009. Pep- via before selling diet concentrate to the bottlers, while the siCo's operating margin on the North American beverage bottlers added high-fructose corn syrup or cane sugar to full business was 21.7 percent in 2009. calorie beverages. Coca-Cola and PepsiCo expected the purchase of For much of the past 25 years, the concentrate pro- the majority of their bottling systems in North America ducers did not purchase bottles, cans, sugar, or high- to allow both companies to realize significant cost savings fructose corn syrup, as they did not manufacture finished and better address the challenges of shifting consumer carbonated soda products. They did negotiate supply preferences in the United States. Increasing demand for agreements for their fragmented "bottling systems" in alternative beverages had strained both companies' bot- order to increase the buying power of their bottlers sys- tling systems as bottlers struggled to make investments temwide. The concentrate producers created marketing in equipment and logistics systems that would facilitate a campaigns and promotions for their brands and shared in shift away from a manufacturing and inventory manage- the considerable marketing costs for their brands with the ment process that was designed for large volume sales of a bottlers. The bottlers were responsible for purchasing raw relatively small number of stock-keeping units. Alternative materials and packaging, manufacturing the finished bev- beverages such as energy drinks and ready-to-drink teas erages, distribution and warehousing, and customer ser- used smaller production runs and had much more com- vice. They paid for promotions and bore some marketing plicated and extensive product lines that featured many costs, set local prices of the finished beverages, and sold flavors and sizes of beverages than CSD. These investments directly to retail stores. Coca-Cola and Pepsi bottlers were were not paying off for the bottlers but were desperately prohibited by contractual agreements from making and needed by both Coke and Pepsi to remain competitive in selling "imitative" products that competed directly with the United States. Coca-Cola and PepsiCo beverage brands. For example, Investors speculated that both companies would a Coca-Cola bottler could not sell Pepsi or Diet Pepsi. In eventually spin off or re-franchise the captive bottlers in the return, the CPs granted the bottlers exclusive distribution future or separate manufacturing and distribution. Indeed, rights in geographic areas. Coca-Cola announced in April 2013 it had reached an agree- While the independent bottling system was firmly in ment with its major independent bottlers to expand theirreturn, the CPs granted the bottlers exclusive distribution future or separate manufacturing and distribution. Indeed, rights in geographic areas. Coca-cola announced in April 2013 it had reached an agree- While the independent bottling system was firmly in ment with its major independent bottlers to expand their place in international markets in 2013, both PepsiCo and distribution territories, but not to increase their production Coca-Cola had purchased most of their respective bottling capacities. Muhar Kent, chairman and CEO of Coca-Cola, systems in the United States in 2010-2011. PepsiCo pur- commented, "A strong franchise system had always been chased its two largest bottlers in North America (Pepsi Bot- the competitive advantage of the Coca-Cola business glob- tling Group and PepsiAmericas) for a combined value of ally, and today we are accelerating the transformation of $7 8 billion in early 2010. The purchase gave Pepsi control our U.S. system in ways that will establish a clear path to of 80 percent of its distributors in North America. Coca- achieve our 2020 vision." A few days later, Kent told inves Cola purchased the North American bottling operations of tors, "In the coming months, we will be collaborating with its largest bottler, Coca-cola Enterprises, in a deal valued five of our bottling partners to implement a plan which will at about $12 3 billion in October 2010. Coca-Cola owned 90 include the granting of exclusive territory rights and the percent of its North American bottling system after the CCE sale of distribution assets with cold drink equipment. In the deal closed. near term, production assets will remain with Coca Cola The three acquisitions marked a reversal in strategy Refreshments, which will facilitate future implementation of for both Coca-Cola and PepsiCo. Coca-Cola spun off the bot- a national product supply system.""It appeared that Coca- thers it owned in 1987 as so-called "anchor bottlers." Spin- Cola had begun to transform its traditional manufacturing ning off the bottlers allowed Coke to push large amounts and distribution model in the United States. Case 1-1: Can SodaStream Disrupt the Carbonated Soft Drink Market? PC 1-5 Waning Popularity of Carbonated Soft more than 16 percent and the company nabbed more than Drinks 36 percent of all energy drink sales in 2011. Sports drink sales, pushed up by new low-calorie and no-calorie product At the peak of its reign as the U.S. consumer's favorite introductions, increased almost 9 percent to about $7 billion drink in the late 1990s, Americans drank nearly 55 gallons in 2011. Other alternatives to CSD such as ready-to-drink of CSD per year on average, and CSD were 30 percent of coffee also experienced strong sales growth in 2011. all liquid beverage consumption. Beer was the next larg- Coca-Cola, PepsiCo, and Dr Pepper Snapple Group est drinks category but only accounted for 12 percent of all acquired significant assets in the non-carbonated soft liquid beverage consumption in the United States. Dur- drink market to satisfy consumer demands for alterna- ing the 1990s, demand grew at about 3 percent per year tive beverages. Investors expected all three companies to on average. Demand for CSD as measured by case volume continue to explore acquisitions, strategic alliances such as began to decline in 2005 and fell for seven consecutive licensing, and homegrown forays into new beverage cat- years. Nevertheless, Americans still consumed a whop- egories. Coca-Cola was #1 in the non-carbonated soft drink ping 42.4 gallons of CSD per capita and the beverage market with a 34 percent share. PepsiCo came in second category accounted for about 25 percent of daily beverage with a 26 percent share, followed by Dr Pepper Snapple consumption. Changes in consumer preferences fueled by Group with an 11 percent share of the non-carbonated soft health concerns were the largest contributor to the decline drink segment in 2012. in CSD consumption. Coca-Cola's U.S. brand portfolio included the #2 Increasingly, U.S. consumers turned to bottled water, sports drink brand (Powerade) and #2 bottled water brand (Dasani). The com added Vitamin Water to its line upping 42.4 gallons of CSD per capita and the beverage market with a 34 percent share. PepsiCo came in second category accounted for about 25 percent of daily beverage with a 26 percent share, followed by Dr Pepper Snapple consumption. Changes in consumer preferences fueled by Group with an 11 percent share of the non-carbonated soft health concerns were the largest contributor to the decline drink segment in 2012 in CSD consumption. Coca-Cola's U.S. brand portfolio included the #2 Increasingly, U.S. consumers turned to bottled water, sports drink brand (Powerade) and #2 bottled water brand energy drinks, ready-to-drink teas, coffee beverages, sports (Dasani). The company added Vitamin Water to its line up drinks, and juice drinks to quench their thirst. Rising health through the $4.2 billion acquisition of Glaceau-putting concerns, especially regarding obesity, and interest in "nat- Coke in the lead in the fortified water segment. Other ural" and "green" products helped fuel demand for alter- key brands included Minute Maid, Fuze, and Glaceau natives to CSD in the 2000s. Campaigns against CSDs in SmartWater. Although it trailed Coca-Cola, PepsiCo had a schools and the 2013 proposed ban on fountain drink serv- strong position in non-CSD categories thanks in large part to ing sizes of more than 16 ounces for full-calorie CSD in New its $13.4 billion purchase of Quaker Oats in 2001. Quaker's York City highlighted the changes in public opinion about Gatorade brand gave Pepsi an 80 percent share of the fast- the health effects of CSD consumption. New York Supreme growing U.S. sports drink market. While Gatorade's market Court Judge Milton Tingling overturned the ban on grounds share had slipped to about 73 percent in 2011, the brand that the New York Board of Health was established to pro- still held a commanding lead in the category. At $3.3 bil- tect citizens against diseases, not to regulate the city's food lion in annual sales as of October 2012, Gatorade was one of supply except when the city faced an imminent threat from PepsiCo's most important brands. "* The company also held disease."Nevertheless, the proposed ban worried beverage the lead in the U.S. bottled water segment with its Aquafina makers, as it was an indication the movement to reduce the brand. Other key PepsiCo brands included Tropicana, SoBe, public's consumption of sugary drinks continued to gain Propel, Amp Energy, and licensed brands Lipton Brisk and momentum in the United States. Moreover, NYC's attempt Starbucks. to limit CSD consumption was a chilling reminder of the Dr Pepper Snapple Group was a distant #3 in the non- anti-cigarette movement that resulted in the smoking ban carbonated soft drink market but was still a strong com- in NYC restaurants and bars in 2003. petitor in several categories. The company's non-carbonated Bottled water was the largest non-alcoholic alterna- brands included #1 ready-to-drink tea brand Snapple, along tive drink category to CSD in the U.S. market. Of the esti- with Hawaiian Punch, Clamato, DejaBlue, Mott's, and Nan- mated 180 gallons of beverages Americans consumed on tucket Nectars. average per year, bottled water accounted for 29 gallons In addition to consumer concerns over health, demand per person in 2011-up from 18 gallons per capita in 2001. for CSD proved to be very price elastic. In fact, 160 research Bottled water sales generated about $11 billion in revenues studies on the elasticity of demand for food conducted in 2011, according to a report by Beverage Marketing." Con- between 1938 and 2007 showed that a 10 percent increase tinuing its meteoric rise in popularity, energy drink sales in soft drink prices results in an average -8 percent drop leaped more than 14 percent in 2011 to about $8.9 billion in in demand, with an even larger drop for carbonated soft retail sales. Energy drink leader Monster Inc.'s sales grew drinks of -9 percent on average for each 10 percent increase PC 1-6 The Tools of Strategic Analysis in price."CSD manufacturers increased retail prices in 2011 from colas to "flavors" over the past few years, SodaStream and 2012 to offset higher prices for sweeteners, especially emphasized that its 100 flavors of syrup allow the consumer high-fructose corn syrup. Price hikes appeared to be a con- to control the amount of concentrate per serving and werein price." CSD manufacturers increased retail prices in 2011 from colas to "flavors" over the past few years, SodaStream and 2012 to offset higher prices for sweeteners, especially emphasized that its 100 flavors of syrup allow the consumer high-fructose corn syrup. Price hikes appeared to be a con- to control the amount of concentrate per serving and were tributing factor to the decline in consumption of CSD in available in diet or sugar-free versions. The company's both years. product line included syrups for traditional carbonated soft drinks, energy drinks, fruit drinks, iced teas, and flavored waters. SodaStream Business Model Along with the boost to its customer value propo- sition afforded by a major improvement in both machine The home drinks system was quite popular in the United and concentrate quality, SodaStream stressed consumer Kingdom in the 1970s and 1980s but languished in the cost savings compared to canned or bottled soft drinks. 1990s and early 2000s as the company suffered through Excluding the upfront costs for the SodaStream machine, several changes in ownership. Close to bankruptcy, the SodaStream said consumers spent only $0.25 for 12 ounces firm received a cash infusion from Fortissimo Capital and of SodaStream soda (the size of a can of Coke or Pepsi) and new management in 2007. Daniel Birnbaum, installed as 50.25 per liter of sparkling water made with a SodaStream SodaStream's CEO in 2007, was fresh off of a three-year machine. The machine ranged in price from $79 for the stint as Nike Israel's general manager and also had estab- basic model to $199 for the company's automated model lished Pillsbury's business in Israel during the late 1990s. in the United States. Flavorings cost $4.99, $6.99, and $9.99 Under Birnbaum, the company modified its customer per bottle. Each bottle of flavoring made between 25 and 33 value proposition while retaining its tried-and-true profit eight-ounce servings of soda. A refill CO, canister (with a model. In order to build the brand, Birnbaum employed returned canister) cost $15 with each canister making about three value drivers that took advantage of major societal 60 liters of soda. trends: rising consumer interest in so-called "green" prod- SodaStream planned to profit from its customer ucts; increasing consumer concerns over health and well- value proposition by sticking with its proven profit ness, especially obesity; and the apparent change in the model. Like the famous Gillette "blade and razor" model, zeitgeist away from conspicuous consumption and toward SodaStream's profit model relied upon follow-up sales of frugality. flavor concentrates and gas cylinder refills. SodaStream As a result, the management team began to position starter kits accounted for about 43 percent of sales, while the SodaStream system as an environmentally sound and consumables (flavor syrups, bottles, and CO, refills) healthy alternative to prepared carbonated soft drinks. generated 57 percent of revenues in 2012. SodaStream According to SodaStream's corporate Web site, the company machines were profitable but generated gross margins seeks to, "revolutionize the beverage industry by reducing of only an estimated 30 to 32 percent-well below the plastic bottle waste and being an environmentally friendly corporate average gross margin of 54 percent in 2012. In product . . . SodaStream's vision is to create a world free contrast, the consumables business had gross margins of from bottles. At SodaStream, we believe it is time to rethink an estimated 72 percent. While the CO, refill business how you make your soda and to understand the positive produced significantly smaller revenues than sales of environmental impact when making soda at home. We are flavors and bottles, the refill canisters had astonishingly committed to continuously improving as an earth friendly high gross margins of an estimated 85 to 90 percent. The brand and offering eco-friendly products that have a posi- relatively small plastic bottle segment had the next best tive impact on our environment." Indeed, the company's gross margins-an estimated 60 to 62 percent. The flavor Web site prominently features a plastic bottle "counter" at concentrate business also was a very profitable one with the top of the page that displays management's estimates gross margins of an estimated 58 percent. of the number of plastic bottles that the company's custom- The company's profit model had several major parts. ers "have kept out of landfills" by using the SodaStream First, the company was vertically integrated into the manu- refillable system rather than purchasing prepackaged soft facturing of gas cylinders, SodaStream machines, and flavor drinks. As of July 2013, the count stood at roughly 3.2 bil- concentrates. The company counted on economies of scale lion bottles. in its Israeli gas cylinder production facility to keep margins Mindful of consumer concerns over obesity and high. Its patented fittings on gas cylinders and the SodaStream wellness as well as the broad shift in consumer tastes away machines made it difficult for potential competitors to copyCase 1-1: Can SodaStream Disrupt the Carbonated Soft Drink Market? PC 1-7 this critical element of the SodaStream system. Moreover, buyout in sight, the company had to continue to perform regulations on handling and storing hazardous materials- on its own to keep the stock market happy. SodaStream's the COz canisters were pressurized-made retailers leery of own research showed that an estimated 5 million consum- selling competing cylinders. Second, SodaStream intended ers worldwide used a SodaStream machine at least once to increase both its geographic reach and household penetra- every two weeks. The company sold more than 10 million tion of SodaStream machines, which would allow the firm to machines from 2008 to 2012. Still, investors had shown they benefit from the sale of higher-margin consumables to each were willing to bet on companies with far less impressive household with a SodaStream machine in the future. Over conversion rates than SodaStream such as Pandora. SodaS- time, management expected the company's already high tream bulls argued that the company was a "disruptive profit margins to increase as its product mix shifted from innovator" that would make canned and bottled soft drinks low-margin machines to high-margin CO, refills and flavor obsolete. The SodaStream system did not require a capital- concentrates. As part of its move to increase household pen- intensive bottling system because consumers made the etration and encourage repeat purchases of consumables, drinks at home with their own CO, canisters. SodaStream SodaStream aggressively pursued licensing partnerships drinks were inexpensive and relatively healthy. Consum- with established beverage brands such as Country Time and ers could customize the product by altering the amount Crystal Light. The company also formed a relationship with of carbonation and flavor concentrate. The product was Samsung to sell a line of refrigerators with built-in SodaS- environmentally friendly, unlike every other prepackaged tream machines. The refrigerator retailed for $3,900 in 2013. beverage on the market. The company's more than 100 Third, SodaStream pursued relationships with competing soda flavors gave consumers more variety than they could home soda machine manufacturers in order to try to estaba get from the large CSD brands. In addition, the company's lish the Sodastream gas cylinder as the industry standard. money-back satisfaction guarantee was an important signal As of summer 2013, SodaStream had no significant competi- of quality assurance to the consumer. SodaStream's total tors in the US. market. marketing expenditures worldwide were substantial at $153 million in 2012. The company indicated brand building was a top Financial Results priority by purchasing ad time from the U.S.'s most expen- The company sold its products in 60,000 stores and 45 sive ad venue-the Super Bowl. However, SodaStream's ad countries in 2012. A relative newcomer to the U.S. market, featuring exploding Coke-like and Pepsi-like bottles was SodaStream's U.S. sales were conducted through 15,000 banned by CBS from the Super Bowl in the United States. stores, including Williams-Sonoma, Best Buy, Wal-Mart, The ad immediately "went viral" on You Tube, according to and Target. As shows, the company's 2012 revenues in the NewsMax. SodaStream arguably garnered more consumer Americas were about $158 million-up from about $41 attention due to the CBS ban and a similar one in the United million in 2010. The majority of the company's revenues in Kingdom by television industry trade group Clearcast than the Americas were generated by sales in the U.S. market. it would have gotten through the ad. Overall revenues had more than doubled from $208 million Still, the system did not yet operate as smoothly as it to $436 million in two years. At the same time, operating should because US. retailers were unfamiliar with the gas profits more than tripled and net income in 2012 skyrock- cylinder exchange program and frequently did not know eted to nearly three and a half times net income in 2010. how to give consumers a newly filled but used cylinder for With $62 million in cash and no debt, SodaStream's balance $15 rather than selling them a new cylinder for $25. Infor- sheet was a strong one. Yet, the company was dwarfed by mation on cylinder exchange often was missing from store its larger CSD competitors (see Appendix 1). shelves, and many flavors frequently were out of stock. Moreover, SodaStream bears pointed to the lack of sig- nificant barriers to entry for a potential SodaStream competi- tor-should the market become large enough to attract large SodaStream's Outlook consumer products companies. A new gas cylinder factory might only cost $100 million to build compared to billions to Despite the company's exceptional financial results, inves- replicate the Coca-Cola or Pepsi bottling system in the United tors worried that the SodaStream system would lose its States alone. SodaStream's product might be a convenient appeal to consumers as it had in previous decades. With no alternative to prepackaged drinks at home, but US. consumersPC 1-8 The Tools of Strategic Analysis were accustomed to being able to purchase a Coke or Pepsi she thought about a quote from Birnbaum, SodaStream's nearly anywhere. The huge popularity of the Coca-Cola "Free- CEO, in response to the CBS Super Bowl ad ban; "Our ad style" drink-dispensing machine with its 125 different flavor confronts the beverage industry and its arguably outdated options underlined the company's efforts to respond to cun- business model." He went on to say, "One day we will sumer demands for flavor variety suggested that SodaStream's look back on plastic soda bottles the way we now view flavor variety might have some traction with customers. cigarettes."19 As Anna Claire pondered all she had learned about "Perhaps Birnbaum was right," Anna Claire thought. the CSD industry and SodaStream in the past few days, End Notes 1. Zekaria, 5. (2012). "SodaStream fizzes up global market for carbonated and flavored drinks." The Wall Street Journal, November 13. 2. Reuters Tel Aviv. (2013). "PepsiCo in talks to buy SodaStream for $2 billion." June 6, www.reuters.com/article/2013/06/06/sodastream-pepsi-idUSLSNOEION120130606. 3. Reuters Tel Aviv. (2013). "PepsiCo denies in talks to buy SodaStream." June 6, www .reuters.com/article/2013/06/06/us-sodastream-pepsi-idUSBRE9550AJ20130606. 4. Kosman, J. (2013). "SodaStream's sale hopes going pffffffft." New York Post, July 9, www.nypost.com/pews/business/sodastream_sale_hopes_going_pffffffft_ iFn51VKXOOTRVKNipLn3]. 5. Stevens, J. (2012). "Remember SodaStream? Now you can just twist 'n sparkle with a clever bottle that even makes your own champagne." Mail Online, May 11, www .dailymail.co.uk/femail/article-2142925/Remember-SodaStream-Now-just-Twist-n- Sparkle-clever-bottle-makes-Champagne.html. en.wikipedia.org/wiki/Sodastream, July 17, 2013. "SodaStream international presentation: Company overview." July 17, 2013, sodas- tream.investorroom.com/sodastreamoverview. B. "Breaking down the chain: A guide to the soft drink industry." National Policy and Legal Analysis Network to Prevent Childhood Obesity. Public Health Law and Policy. changelabsolutions.org/publications/breaking-down-chain. 9. (2013). "The Coca-Cola Company commences implementation of 21st Century Bever- age Partnership Model in the United States." Coca-Cola press release, April 16, www coca-colacompany/press-center/press-releases. 10. (2013). "The Coca-Cola Company discusses 10 2013 results-earnings call tran- script." April 16, seekingalpha.com/article/1344791-the-coca-cola-company-$-ceo- discusses-q1-2013-results-earnings-call-transcript?page=3. 11. Ibid. Page 5. 12. Esterl, M. (2013). "Fizzy drinks revenue goes from flat to sour." The Wall Street Jour- mal, January 18. 13. Adams, B. (2013). "Judge overturns NYC's soda ban." TheBlaze.com, May 11, www theblaze.com/stories/2013/08/11/report-judge-overturns-nyes-soda-ban/. 14. (2012). "Reinvigorated bottled water bounces back from recessionary years, new report from beverage marketing corporation shows. Press release, May. 15. Edwards, J. (2012). "In Gatorade war, Pepsi seems to have deliberately given up market share to Coke." Business Insider, February 1, www.businessinsider.com/why- gatorades-10-point-loss-of-share-to-cokes-powerade-is-not-a-total-disaster-2012-2. 16. (2012). "Apple tops the list of the world's most powerful brands." Forbes, October 22, www.forbes.com/sites/kurtbadenhausen/2012/10/012/apple-tops-list-of-the-worlds- most-powerful-brands/#736a9c63cc9a