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At SodaStream, a Rush Away From Sugar

DOW JONES & COMPANY, INC. 5:30 AM ET 7/30/2015

Symbol Last Price Change
SODA 18.45up 0 (0%)
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SodaStream International Ltd. (SODA) is pushing its makeover into overdrive before Keurig Green Mountain Inc.(GMCR) launches a countertop soda machine this fall with Coca-Cola Co.

The company that invented the notion of make-it-at-home soda is now recasting itself as a "sparkling water" dispenser after hiring a two-star Michelin chef to concoct flavors like "raspberry lychee rose" to introduce this summer. This fall it hopes to begin home pick-up of its used carbon-dioxide cylinders. It also is spending more than 70% of this year's roughly $30 million U.S. marketing budget in the second half, Chief Executive Daniel Birnbaum said in an interview.

But two new digital SodaStreams--one that can mix cocktails and another that can make hot or cold drinks--won't be ready until next year, said Mr. Birnbaum, who is racing to fend off rising competition and reverse a steep slide in revenue.

The company is hoping the changes, along with prices that undercut the new competition, will get sales moving again. Keurig has said its new cold-drink machine, Kold, will initially cost at least $300 each and $1 a serving when it starts online sales in late September ahead of a broader rollout.

"They're launching a can in a cup for a lot money," said Mr. Birnbaum, noting popular soda brands cost about 25 cents a serving in stores. "We think the consumer wants to make something else at home."

By contrast, SodaStream's(SODA) machines cost $80 to $200 and its drinks cost 8 cents to 20 cents a serving.

Keurig said high prices are typical for new technology and that its beverage brands set it apart from SodaStream(SODA). Keurig's cold-drink machine will dispense Coke products like Sprite, Fanta and namesake cola in addition to sodas from Dr Pepper Snapple Group Inc. Coke, which acquired a 16% stake in Keurig last year, said the new machine is "innovative and convenient."

Pressure is rising after SodaStream's(SODA) revenue fell 23% in the first quarter to $91.3 million and slid 9% last year, reversing seven straight years of double-digit growth. The biggest headache is the U.S., where consumers are drinking less soda and SodaStream's(SODA) machines and syrups went unsold in stores after a big retail rollout.

SodaStream's (SODA) Nasdaq-listed shares have lost nearly 40% of their value from a year ago and its U.S. store count has fallen to 13,000 from 17,000 as chains like Wal-Mart scale back. It had slashed marketing expenditures following last year's Super Bowl television ad starring Scarlett Johansson. There has also been management upheaval: Chief Corporate Development Officer Yonah Lloyd, Chief Marketing Officer Ilan Nacasch and Americas General Manager Scott Guthrie all have left since last summer.

Now competition is heating up. In addition to Keurig, Canadian startup Bonne O began shipping a $150 carbonation machine in May to more than 100 U.S. outlets of Williams-Sonoma Inc., Bloomingdale's and Bed Bath & Beyond Inc. Unlike SodaStream(SODA), neither of those machines requires C02 cylinders.

Akshay Jagdale, an analyst at KeyBanc, thinks Keurig has the advantage with its brands and new technology, which chills drinks at 38 degrees. "Nobody has ever miniaturized a fridge. It's really the definition of breakthrough innovation," he said.

But SodaStream(SODA) is banking on more consumers like Scotty Landes, who stopped drinking Coke about a decade ago to avoid sugar and calories. Mr. Landes, a 33-year-old Comedy Central writer and producer, bought a SodaStream(SODA) machine in 2013 after struggling to find soda water at gas stations during a cross-country drive.

"I just grab a lemon or lime from one of the trees in my yard" to flavor water carbonated by SodaStream(SODA), said Mr. Landes, who lives in Los Angeles. He isn't interested in Keurig Kold.

Bottled carbonated water sales rose 10% last year to $786.3 million in U.S. stores, the third straight year of double-digit growth, according to market researcher Euromonitor. Sales of soda remain much much larger, at $36.87 billion last year in the U.S., but they were down 2.8% from a year earlier, the second straight yearly decline.

SodaStream (SODA) has struggled to sell its self-branded soda syrups but is launching a low-calorie, naturally sweetened " Waters" line this month with flavors like "lime basil" and "yuzu mandarin" priced at about 20 cents a serving. Last month it rolled out a new $150 machine, called Power, that is sleeker and quieter than the $180 Revolution that it is phasing out.

This summer SodaStream(SODA) is erecting billboards in New York, San Francisco and Seattle urging consumers to "Be a Sparkling Water Maker" and running a TV ad with the tagline "You Are a Factory of One."

SodaStream (SODA) currently doesn't offer home pick up for empty CO2 cylinders, which are classified as low-grade "hazmat" and require special handling. Mr. Birnbaum said SodaStream(SODA) is about three months from a solution so that customers don't have to go to a store.

A new machine, Mix, is expected in the second quarter of 2016 and will carbonate any liquid, not just water. It will connect to owners' smartphones through Bluetooth to upload software updates and share recipes online. The machine already will be programmed to make 100 cocktails, for example allowing the user to make a carbonated Tom Collins by mixing tap water with gin, lemon juice and sugar.

SodaStream (SODA) plans in the third quarter of next year to launch another machine, Ultimate, using flavor pouches to make hot or cold beverages, including non-carbonated coffee. Mr. Birnbaum declined to disclose the price of either machine but is weighing various billing models, including usage fees common for cellphones. Keurig declined to discuss plans for hot-and-cold or wifi-enabled machines.

PepsiCo Inc. also recently finished a test selling its cola with SodaStream(SODA) machines in a few dozen stores. Mr. Birnbaum said the test went well. PepsiCo called it "a great learning opportunity" but declined further comment.

Annie Gasparro contributed to this article.

Write to Mike Esterl at [e-mail]

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