Four years ago, the situation looked quite grim for SodaStream. Even Scarlett Johansson's high-profile pitch during the 2014 Superbowl for the company’s home carbonated-drinks devices couldn’t seem to reverse the company’s fortunes.
The bubble looked like it was about to burst (and that is the last tired reference I will make to bubbles or fizz in relation to the company).
The news today that PepsiCo has agreed to buy SodaStream for $3.2 billion just shows how far the Israeli company and its CEO Daniel Birnbaum have come in a very short period.
PepsiCo is paying a lot of money – 32% more than SodaStream’s average share price over the previous 30 days, and that’s after the shares have already risen 9.5-fold in the past two-and-a-half years.
Israel is used to giant buyouts like this in high-tech, where companies like Intel and Google shell out millions and billions to get their hands on innovative technology. Making fizzy-drink devices and the capsules to go with them doesn’t sound very high-tech, but even in older industries like soft drinks, the dynamics of rapid market change and innovation have become the rule.
More about that below, but first, how did SodaStream find itself in such a funk and so quickly turn itself around?
BDS takes credit
At the time of the Scarlett Johansson ad, SodaStream was under sustained attacked by the boycott, divestment and sanctions movement because its main Israel plant was in the West Bank. Johansson herself was dropped as spokeswoman for Oxfam over the affair, and Birnbaum himself famously called the West Bank plant a “pain in the ass” for the unwanted attention it drew.
The BDS movement gleefully took credit for SodaStream’s falling sales.
“Pressure has forced retailers across Europe and North America to drop SodaStream, and the company’s share price has tumbled in recent months as our movement has caused increasing reputational damage to the SodaStream brand,” Rafeef Ziadah, a spokeswoman for the movement, said at the time.
SodaStream did move its plant sometime later to inside the Green Line, but the BDS claims that it was causing SodaStream pain was perfect nonsense, as the rest of the story demonstrates.SodaStream’s real problem was that consumers in America and Europe were drinking less sugary, carbonated drinks like Coke and Pepsi.
Fine line between soda and water
SodaStream’s strategy at the time had been to offer consumers the alternative of making their own soda pop at home. In fact the original Johansson ad (which Fox refused to run on the Superbowl) contained the line, “Sorry, Coke and Pepsi.”
A year later, Birnbaum announced a repositioning of the SodaStream product line. SodaStream machines would be longer marketed as making soda pop but sparkling beverages, and the message would be about health and wellness. The company offered a new line of trendy fruit flavorings like pomegranate açaí, green tea lychee and yuzo mandarin, and options like no calories, added vitamins and fiber, or no sweetening at all.
“There is a blurring of the space between soda and water, and we’re in the perfect position to capitalize on that,” said CEO Daniel Birnbaum told the Times at the time.
Ironically, at the time PepsiCo CEO Indira Nooyi pooh-poohed the whole idea of home beverage-making, but she was wrong in a big way.
Birnbaum’s turnaround should be studied in business schools around the world. In the last quarter alone, SodaStream reported that sales of its machines rose 22% in volume terms and refill units by 17%. Meanwhile, other beverage companies have been rushing to get into the carbonated-water business, including PepsiCo with its Aquafina line.
The fact is many drinkers don’t like the sugar in soft drinks, but they love the bubbles. Sales of Pepsi brands declined 4.5% by volume in the U.S. last year while sales of Aquafina were up 2.6%, according to Beverage Digest's annual report.
Overall, the carbonated-soft-drink category declined 1.3% by volume, while bottled water grew 6.2%.
Meanwhile, the big food and beverage companies are trying to cope with rapidly changing consumer preferences. Supermarkets are becoming more problematic as channels because they're devoting more shelf space to their own private label goods and niche brands. Consumers, especially younger ones, are doing more of their grocery shopping online and show an increasing preference to customize what they eat and drink.
Like other big companies, PepsiCo has been responding to the challenge by doing things like backing a startup call Drinkfinity that makes a capsule that lets the user make her or her own drinks on demand. SodaStream is another, bigger and more market-tested version of the same thing.
In other words, as low-tech as SodaStream appears to be, its success was the product of innovative marketing and its ability to pirouette quickly and decisively when conditions changed.
Big companies, with their bureaucracy and heavy investments in doing things the way they are, simply don’t have the same abilities. It’s the same reason Intel bought Mobileye or giant pharma companies make deals with tiny Israeli startups.
What happens next for SodaStream? The announcement didn’t say very much about that, although Birnbaum told the company’s Israeli employees in a letter on Monday that it would remain in Israel and grow.
That has yet to be seen. SodaStream is still a manufacturing business, and while innovation is one half of its success, costs are another. Israel isn’t exactly anyone’s top choice to manufacture things, especially mass-market appliances. Meantime, the BDS people should give up the economic boycott as a lost cause and focus on college campuses where at least they stand a chance of getting a lecture cancelled.