SodaStream feeling cold shoulder from Coke

by Monica Watrous
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AIRPORT CITY ISRAEL — The battle of cold beverage systems is heating up.

SodaStream International, Ltd., the Israel-based maker of home carbonation machines, said Coca-Cola Co. made a mistake by partnering with Green Mountain Coffee Roasters to develop a similar product called Keurig Cold.

“I think that Coca-Cola could have just as easily partnered with SodaStream to deliver an outstanding homemade version of Coca-Cola,” said Daniel Birnbaum, chief executive officer, during a Feb. 26 earnings call with financial analysts. “Why (do) I think that Coke chose Green Mountain? Everyone has the right to make a mistake. It’s really their decision.”

Still, he said the product announcement is validation for the category of in-home carbonation, as well as an opportunity for SodaStream to defend its leadership position.

“I’m reminded of a page right out of the history of none other than Green Mountain, where back in 2005, the then tiny Keurig brand was fending off a competitive entry from Tassimo, which was a joint venture between not one and not two, but three giants,” Mr. Birnbaum said. “My personal belief is that when disrupting a category with a revolutionary approach, I’d rather be David than Goliath.”

Gloves off, SodaStream is prepared to fight for market share without overhauling its business model or product development. For starters, the company said it won’t price-cut at the expense of its margin to accelerate household penetration in advance of the Keurig Cold launch.

“I think that our model by and large is very sound,” Mr. Birnbaum said. “It’s proven and tested. It works very well. I think that the fact that G.M.C.R. and Coke are entering our category does not suggest that we have a fundamental flaw in our model. Indeed, they are coming out with a different mouse trap. It’s early to determine the validity of it. The pricing, functionality, efficiency, etc., we’ll see the product. Then we’ll be able to study and compare, but we have a really robust razor and razorblade business model.”

Additionally, SodaStream said it won’t change its machines to copy Keurig Cold’s attributes. For example, SodaStream machines use CO2 refills for carbonation, while Keurig Cold machines will not, offering a potentially compelling benefit for consumers. However, SodaStream’s CO2 canisters provide an attractive advantage for retailers, Mr. Birnbaum noted. The products increase store traffic and require little shelf space.

“Our model is well embraced by both retailers and consumers,” he said. “It provides a fantastic value and a great environmental solution and a very high level of carbonation. So there’s nothing to apologize about in our business model, which is doing very, very well.”

SodaStream’s competitive strategy includes a “strong innovation agenda” aimed at enhancing its users’ experience through automation, dosing and flavor partnerships with such brands as Del Monte, Welch’s, Skinnygirl and more to be announced soon.

“I can assure you that we have a pipeline of innovation that will continue to surprise the consumer and deliver a better and better user experience, easier, quicker, healthier, more environmentally friendly, taste great and be refreshing and all that at a great value that will not cause the consumer to spend more money on the soda that they are currently getting from the store,” Mr. Birnbaum said. “That is our model. We will stay the course and just improve it, stage by stage. Again, we look forward to see what we’re up against when it finally launches.”

SodaStream also plans to expand into new geographies and channels, including grocery and drug stores over the coming year, as it seeks to restore momentum after ending its fiscal year on a rough note. Company earnings tumbled 91% during the fourth quarter.

Net income during the quarter was $681,000, equal to 3c per share on the common stock, which compared with $7,533,000, or 37c per share, during the prior-year period. Revenue for the quarter advanced 26% to $168,110,000 from $132,947,000 in the fourth quarter of fiscal 2012.

“We entered the holiday season with a solid plan, including a balanced mix of promotional and marketing activity,” Mr. Birnbaum said. “Unfortunately, the challenging retail environment during Black Friday and in the weeks immediately following Black Friday reduced expected replenishment orders and triggered retailer requests for additional promotional support. We quickly changed our plans to avoid losing the important holiday window to increase household penetration. … As a result, revenue ended only slightly below guidance, but gross margin was well off-plan.”

Net income for the year dipped 4% to $42,027,000, or $2.02 per share, from $43,860,000, or $2.16 per share, in the year before. Revenue for the year increased 29% to $562,723,000 from $436,316,000.
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