The world’s No. 2 soda giant is trying to save itself by buying a company whose main purpose is to get people to buy less soda. PepsiCo announced Monday that it had agreed to buy SodaStream for $3.2 billion, a more than 10 percent premium on the Israeli-based company’s stock price at the end of last week. This is the biggest PepsiCo acquisition in almost a decade, according to data collected by Bloomberg.
The SodaStream deal is, in many ways, the ideal capstone to the beverage-and-snack giant’s departing chief executive Indra Nooyi’s 12-year reign as chief executive. Nooyi spent much of her time at the top trying to convince the world—and the world’s governments—that PepsiCo is more than the second best purveyor of sugar-water that also has a massive snacks business. This was Nooyi’s mission because she was convinced, and not without evidence, that consumer tastes were shifting away from Pepsi’s core products and toward healthier drinks. The acquisition is, then, the perfect example of Pepsi’s dilemma.
If Nooyi was right about a massive transformation in consumer taste, then paying a modest premium for SodaStream makes perfect sense. The company’s revenue has grown more than 30 percent in the past year, and it tamped down its lingering controversy over goods produced in the occupied territories when it abandoned its production facilities in the West Bank in 2015. But if the future really is SodaStream—people making their own sodas and sparkling water using home-equipment and refills bought directly from the company—then there doesn’t seem to be much for PepsiCo or any major soda company to look forward to, other than paying more and more money for brands that undercut its core business.
For instance: When revenue in its workhorse segment, North America beverages, which makes up about a third of its total revenue, fell 3 percent in the third quarter of last year, the company explained the decline by saying it had “directed too much of our media spending and shelf space to new low-calorie, much smaller brands at the expense of our Pepsi and Mountain Dew trademarks.” This decline would be fine if the healthier brands were making up for it, but Pepsi’s transformation into a healthier company has been slow-going. While it has both launched and bought brands devoted to healthier snacks and drinks, its list of “Top Global Brands”—a list that includes Pepsi, Gatorade, Doritos, Mountain Dew, Lay’s, Cheetos—boasts only one, Aquafina, that can reasonably be considered healthy, and that’s with the known waste and sustainability issues inherent to bottling and selling water. Pepsi has already had to scale back its ambition to hit $30 billion in revenue from healthy products by the end of this decade to merely having its healthy brands grow faster than its legacy ones by 2025. (If there really is a massive shift in consumer taste happening, this new goal should occur more or less on its own.)
While the company assures analysts that some of its healthier drinks are doing great—Pepsi Zero Sugar is “doing exceedingly well,” Nooyi said on a recent conference call—there’s little direct evidence that any newly launched or acquired brands have a chance of knocking off the myriad seltzer and water brands that don’t have the Pepsi-stench. (Just think of which fizzy drink you’ve heard of: LaCroix or PepsiCo’s Lemon Lemon?) And the only one of Pepsi’s flagship drink brands that’s close to exclusively “healthy”—Aquafina—is in a segment, bottled water, that’s growing much slower than sparkling beverages, according to consumer data cited by the Wall Street Journal.
As for SodaStream: The Israeli company has based its marketing around the wastefulness of massive soda and sparkling water companies like Coca-Cola and PepsiCo. The company has an ingenious business strategy similar to how Gillette sells razors and blades: Once you get a SodaStream, you are locked into getting more carbonization cylinders and, if you like flavored carbonated water, you can buy syrup directly from the company. In its most recent quarter, 38 percent of its revenue came from its “starter kits,” and the rest came from refills and flavors.
Pepsi is not the first massive beverage company to get in bed with make-at-home drink company. Coca-Cola ended its disastrous crossover with Keurig in 2016 , abandoning the “Kold,” a specially-built and expensive Keurig machine for making soda at home. While Pepsi does not appear to be on the verge of investing in a white-elephant hardware project with its new Israeli partners, the Coke-Keurig experience is still a cautionary tale: If someone is willing to go through the trouble of making soda at home, they don’t want what they can get on the shelves—especially if it’s not even Coke.