SodaStream’s Kitchen Appliance Fizzes Up Shares Amid U.S. Push

When London gin distiller George Gilbey began selling British aristocrats do-it-yourself gadgets to carbonate tap water in 1903, the emphasis was on function, not style. Even by 1955, when the first mass-market version was introduced, the soda machine resembled a miniature scuba tank.

No longer. SodaStream International Ltd. (SODA), a successor to Gilbey’s venerable enterprise, last year pumped up its marketing in the U.S. of sleek countertop versions, Bloomberg Businessweek reports in its July 11 issue.

Buzz about the $80-$200 appliances, which can turn tap water into over 100 flavors of soda in refillable bottles, has helped drive up SodaStream’s share price almost 200 percent since its initial public offering in November. The shares fell $4.71 to $71.87 yesterday on the Nasdaq stock market.

“In 20 years,” said Chief Executive Officer Daniel Birnbaum, “the soda industry will not be the same.”

Persuading the masses to embrace homemade soda will take some doing. Selling the appliance is one thing; getting people to keep buying syrup refills and carbon dioxide canisters is another. As with razors, refills are where the real money lies. Men have to shave. They don’t have to drink soda.

SodaStream faces an uphill battle to carve out a niche in the $233 billion soft drink market, but shares have risen 218 percent in eight months. Close

SodaStream faces an uphill battle to carve out a niche in the $233 billion soft drink... Read More

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SodaStream faces an uphill battle to carve out a niche in the $233 billion soft drink market, but shares have risen 218 percent in eight months.

SodaStream, based in Airport City, Israel, is now in 4.5 million homes in 41 countries. After stepping up distribution in the U.S. last year, its updated soda makers sold out during the holidays at some Bed Bath & Beyond Inc. (BBBY) stores.

No 24-Pack

“It’s fantastic,” said Jim Sinclair, a financial planner in Tybee Island, Georgia, who received a SodaStream appliance in December. “If you have guests coming over, you don’t have to buy a 24-pack to keep them happy.”

Although SodaStream’s concept is more than a century old, over the years its popularity has waxed and waned, peaking in the 1970s and 1980s. By the late 2000s, SodaStream had won a solid niche in Europe and was making headway in the U.S.

That’s when Israeli private equity firm Fortissimo Capital got interested, seeing a way to profit from converging trends: a backlash against plastic bottle waste, resistance to empty calories and childhood obesity, and recession-induced cost- cutting. So Fortissimo pumped $17 million into SodaStream and hired Birnbaum, a former marketer at Nike Inc. (NKE), Procter & Gamble Co. (PG), and Pillsbury Co., to revamp the company.

He added a lower-cost device while maintaining designs that appeal to style-conscious consumers.

“The kitchen counter is precious real estate,” Birnbaum said. “To earn a space you have to look dynamite.” They also made the gadget simple to use: Just push a button to inject water with carbon dioxide and add flavored drops or syrup.

Environmental Pitch

The syrups were reformulated with all-natural ingredients, without high fructose corn syrup, and with less sugar. Birnbaum also boosted the environmental pitch, telling consumers that buying SodaStream products means fewer plastic bottles and aluminum cans in landfills. (A counter on the company’s website claims SodaStream use has saved the world 1.28 billion bottles.)

The strategy helped boost global first-quarter sales 50 percent to $64 million.

Still, Richard J. George, a food marketing professor at Saint Joseph’s University in Philadelphia, says soda appliances may have limited appeal because consumers like freshness and convenience, both of which already have been perfected by big beverage makers at a reasonable price.

“You just reach in your refrigerator and grab your soft drink,” he said.

Exchange Canisters

It may be especially hard to persuade convenience-addicted Americans to get into the habit of reordering syrups and exchanging carbonation cylinders once they run out of gas. Of 6,000 SodaStream retail locations in the U.S. (there are 45,000 worldwide), just 3,000 currently exchange CO2 canisters, though customers can reorder online.

Nor can SodaStream boast a significant price advantage: Two liters of its drinks cost about $1.30, compared with about $1.50 (full-price) for the same amount of Coke.

“We don’t want to be the poor man’s water,” Birnbaum said. “We’re not a cheap alternative.”

Birnbaum says his company will never overtake giants Coca- Cola Co. and PepsiCo Inc. Instead, he would like to co-brand soda that could be delivered in SodaStream machines -- a strategy that has worked handsomely for Green Mountain Coffee Roasters Inc. (GMCR) and its Keurig brewing system.

For now, Birnbaum wants to develop a device for offices, and brand restaurant soda fountains and table carafes with the SodaStream logo--and then supply healthy syrups. He also wants U.S. grocery and drugstores to carry SodaStream syrups, as they do in some European markets.

First, he’ll have to win more of that precious kitchen counter space.

To contact the reporters on this story: Duane Stanford in Atlanta at dstanford2@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Robin Ajello at rajello@bloomberg.net; James Ellis at jellis27@bloomberg.net

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