The SodaStream company, which recently announced its acquisition by PepsiCo for $3.2 billion, has had several years of growth. One of the important factors, and perhaps the secret of its economic magic, is the dependence of its customers on SodaStream CO gas refills.
Michael Shapira, CEO of the Super Soda company founded a year and a half ago, believes that this dependence is unreasonable, and that he can eat away at SodaStream’s share of the Israeli market. The high profits recorded by SodaStream in the carbonation field must attract other players to the market, he says.
“We will break the gas monopoly,” declares Shapira in an interview with TheMarker. Super Soda intends to provide an alternative to the refills that SodaStream sells at what Shapira describes as inflated prices. In the coming weeks, the new company will market the refills at a price 30% lower than SodaStream: a 40-shekel container that is good for 60 liters of carbonated beverages.
“Many customers shy away from the refills because of their high price. We are able to lower the price significantly. We were in Germany, and we learned about this field from one of the largest companies, with a 7-digit annual turnover. The most significant obstacle to entering this business is the high cost of setting up a factory and the need for technical know-how. We’re past that already. Within a few weeks customers can buy gas refills that meet the highest standards of purity. And our containers are the safest in the world.”
Super Soda is planning to negotiate with distributors world-wide, and fix a maximum price of 39.9 shekels per container. It will also begin marketing its own carbonation machine, and expects in the future to work with the drink concentrate market as well. According to SodaStream’s business model, once a customer has bought one of its systems, they finds themselves beholden to the company forever because of the need to keep purchasing gas refills. The model is tried and true. The company markets high-profit accessories, while the permanent piece of equipment – in this case, the soda machine – is sold at a low price, or even at a loss. It is similar to the printer market in the past, where the printer itself carried a low price-tag, but the ink refills were very expensive.
In its annual reports, SodaStream records that the bulk of its profit margin derives from the sales of gas refills. It even dubs the business model a razor or razor-blade model – the blade and the razor that holds it. The contribution of the disposable product (the refills) therefore accounts for the lion’s share of the company’s turnover and profits.
According to the reports, in the second quarter of 2018, SodaStream registered record sales of 9.7 million refills, more than nine times the number of machines sold. That translated into $194.5 million, an increase of 26.5% over the same period in 2017. Those sales constituted almost 62% of the company’s total turnover, similar to the same period in 2017. For the sake of comparison, SodaStream’s sales of machines amounted to $115 million, and only $5.7 million for its flavored concentrates. SodaStream did not detail the contribution of its gas sales to its operating profits; but in light of the fact that those sales accounted for the bulk of its earnings, and their profit margins were the highest, it would appear that the company chooses to play down the fact that its profits are mainly from gas sales.
Today, the company’s Israeli website offers a sale-price drink bar – a soda machine, three bottles, and syrup in various flavors – for between 289 and 499 shekels. Refills can be bought online, on return of the empty containers, for 59 shekels (good for 60 liters of soft drinks), or for 99 shekels (good for 130 liters) – in other words, between 76 and 98 agurot per liter of carbonated drink. The containers are designed for reuse and remain the company’s property.
The product the customer is buying, therefore, is just the contents of the refill, that is just the gas. The customer uses the gas in the container, and when it is empty, he exchanges it for a full one. SodaStream’s prediction in April 2014 was that the average home user would buy gas two or three times a year. One can assume that Super Soda is not much of a threat to giant SodaStream, certainly not right now, with the latter’s price tag in the billions of dollars, and, from the end of the year, with the economic strength of its new owner, PepsiCo, behind it. But the entry into the market of soft drink carbonation by a new player, who claims he can make a profit even though his prices are tens of percentage points below those of SodaStream, raises the question of why no other competitors have surfaced until now – and whether SodaStream is considered a monopoly. “SodaStream notes on its gas containers that they are given to the customer only on a ‘temporary’ basis, in exchange for a holding and user fee. This is in effect a stipulation that protects ownership, and prevents the customer from acquiring ownership of the container,” says attorney Michael Adler, from the firm of Adler Shachar Adler, which works in civil litigation.
“By means of protecting its ownership of the containers, the practice of ‘tying’ becomes possible, [a practice] that is prohibited for monopolies, and can undermine free competition. The provider, who apparently enjoys monopolistic power in the main market [of carbonization machines], compels his customers to require his services in the secondary market [of gas containers].” In his book “Protection of Competition Rules via the Law of Unjust Enrichment” Prof. Ofer Grosskopf, who was recently named to the Supreme Court, wrote about Soda Stream with regard to the “soda wars” of the 1990s: “The clear goal of the distributors is to gain a monopoly in the market of filling the gas containers that they sell.”
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