On February 5, Coca-Cola announced that it was purchasing a 10% Equity Stake in Green Mountain Coffee Roasters, Inc. for $1.25 Billion. The two companies agreed to a 10-year collaboration on a new Keurig Cold at-home beverage system. Like the popular coffee machines, the cold drinks system will use Keurig’s proprietary single-serving K-cup pods.
Gain for Keurig
Aside from the financial boost, the partnership would give Keurig exclusive rights to Coca-Cola flavors and an association with one of the world’s most well-established brands — and the extensive marketing power behind it. According to the Motley Fool’s analysis, Keurig needs these kinds of brand partnerships to remain profitable.
The cup sales bring in more than machine sales, and the patent on them expired in September 2012. Keurig already locked in almost 80% of the K-cup market by entering partnerships with J.M. Smucker, Starbucks, Eight O'Clock, and Caribou. It makes sense to secure a big brand for a new line of flavor pods in the future.
Gain for Coke
For Coke, Keurig offers the means of adopting the “if you can’t lick ‘em, join ‘em” strategy. Over the past several years, SodaStream has gained significant market share for soda drinkers who want to make their own drinks at home. This partnership allows Coke to try to win over some of these customers to their own brand without compromising its integrity or demystifying the famously secret Coca-Cola formula.
Maintaining the Coca-Cola Mystique
Last year, a New Yorker article positioned SodaStream as the antithesis to Coke and Pepsi because the make-at-home system strips the drinks down to their fundamental components, removing the veil of mystery that makes branded drinks more than the sum of their parts. The magic is in the celebration of the brand’s image rather than what actually goes into the drink.
The beauty of branded K-cups, though, is that they keep the brand seal intact over the components, maintaining the essential mystique. It also allows Coke to avoid some of the problems it ran into in previous incarnations of soda machines.
Revisiting 1988: Coke’s Breakmate
A recent Gizmodo article took a look back at the Breakmate, a machine designed to serve as the soda equivalent of a coffee machine for offices. In 1988, Coke presented it as a revolutionary breakthrough, but it never lived up to expectations. Customers found the dispenser system caused an undesired mix of flavors and that the machine was far from maintenance-free. The soda giant stopped producing the necessary parts for it in 2007.
A 1988 Los Angeles Times article recounts the high hopes that the soft drink company had for the machine. Affirming Coke’s own version of “If you build it, they will come,” W. Andrew Harvill from the company’s fountain sales department declared, "If you make Coke available, then people will drink it." His confidence was based on the actual rates of soda consumption at the time.
In the same article, Ira L. Gleser, a Coca-Cola spokesman, said, “soft drinks are now the beverage of choice in America with people consuming about 45 gallons per capita annually. ... And Coke is the nation's No. 1 soft drink."
The soda sales slide
While Coke may still be number one among sodas, Americans are buying much less of it today. Soda consumption in 2013 was down to 38.6 gallons per person. Both regular and diet soda consumption has declined in the past several years due to findings that obesity is linked to the sugary drinks’ empty calories, and to health concerns about diet soda’s ingredients.
Coke, as well as Pepsi, responded to changing consumer demands by offering alternative drinks in bottles, like teas and water. However, they also have to contend with the consumer who prefers not to buy bottles or cans at all.
The appeal of SodaStream
People who buy SodaStream have four primary motivations, some of which are perennial, and some of which have gained particular attention in recent years:
- Saving money: Carbonating water at home and mixing in flavors is more economical than buying soda.
- Convenience: Users don't have to carry home heavy bottles or cans and can make the soda for themselves and guests when needed.
- Health: The machine allows full control of the ingredients and water consumed.
- Environmentalism: Even though they contribute a great deal of non-biodegradable waste to the environment, plastic bottles can be recycled.
The rise of SodaSteam
The SodaStream concept has been around for over a hundred years. It was well-known in some countries abroad, though it took a while to make inroads into the American market. In 2007, U.S. sales amounted to $4.4 million. That figure spiked all the way up to $85 million in 2011, one year after SodaStream’s stock launched on NASDAQ.
While the rate of growth has slowed somewhat, Yonah Lloyd, SodaStream’s chief corporate development and communications officer, asserted that he expects annual sales to break the $1 billion mark by 2016. Though that is still far short of the sales Coke and Pepsi can boast, the two Goliaths do take note of this David. For the past two years, the company has been compelled to remove any mention of the two soda brands from its Super Bowl commercials before they can air.
Politics and the SodaStream controversy
The latest censored commercial stirred up another type of branding conflict – a political one. Scarlett Johansson, the commercial’s star, severed her relationship with Oxfam International. The British relief service couldn’t reconcile having Johansson as an ambassador while she also served as the face of a company with a factory on Israel’s West Bank. This and its employment of Palestinians make it a particular target for the Boycott, Divestment and Sanctions (BDS) movement.
According to Bloomberg Businessweek, the boycott movement has had no significant impact on SodaStream’s U.S. sales, which continue to rise, but it may account for declining sales in Europe and Africa. Perhaps those who make a point of not buying SodaStream will want to support a competitor. That could give the Keurig and Coke partnership something to capitalize on abroad.
The upside for SodaStream
Political pressures aside, SodaStream is considered to be at an advantage in being first to this market. Some point out that Coke’s entry into the soda-at-home business is a good indicator for the future of SodaStream because it “endorses the business model and could prompt takeover or partnership interest in SodaStream from rival PepsiCo.” One other advantage that SodaStream will offer is a more economical and environmentally friendly system than one based on K-cups.
The future of soda
There’s no reason why both Soda Stream and Keurig’s soda machine cannot coexist. The two will be offering different branded flavors and even different ways of adding flavors. SodaStream could capitalize on what appeals to its users, while Keurig can offer people the familiar and elegant K-cup arrangement. The key takeaway for any beverage or food business is to pay attention to changing demands and prepare to respond to them.