GMCR (MM)

By Mike Esterl 

PepsiCo Inc. is deepening its U.S. distribution deal with home-carbonation company SodaStream International Ltd., as the cola wars head to the kitchen counter.

Caps filled with Pepsi and Sierra Mist to flavor water carbonated by SodaStream machines will be sold on SodaStream's website and at about 50 Bed Bath & Beyond Inc. stores across the U.S. The expanded trial follows a smaller retail test in Florida late last year.

The move comes as Keurig Green Mountain Inc. prepares to launch a countertop cold-drink machine this fall featuring brands from Coca-Cola Co. and Dr Pepper Snapple Group Inc., PepsiCo's chief soda rivals. Coke has built up a 16% equity stake in Keurig since last year.

The three soft-drink giants are hoping make-it-at-home appliances can buoy U.S. soda industry volumes, which have fallen for 10 straight years. The downturn stems partly from health concerns, as consumers scale back on sugary drinks and drink more bottled water.

Israel-based SodaStream also is seeking a lift after its first-half revenue fell 27% from a year earlier to $190.2 million. The decline was even steeper in the U.S., where a big retail push fizzled. The world's leading maker of carbonation machines has struggled to sign up big-name soda brands, and its U.S. household penetration remains below 2%.

PepsiCo said on Friday it is exploring "multiple technologies in this area and SodaStream is one of several companies we're talking to about potential ideas." PepsiCo declined to name the other companies. It also wouldn't say whether it has plans to take an equity stake in SodaStream.

SodaStream's share price closed 6.4% higher at $15.77 in Nasdaq trading on Friday, but is still down 52% over the past 12 months.

Keurig, known for its single-serve coffee brewers, last month said sales of its carbonated cold-drink machine would begin on its website in late September or early October, followed by stores in select cities later this year. It has said it expects the machine, called Kold, to be on shelves nationwide by the 2016 holiday season.

A handful of other companies are targeting home carbonation, including Canadian startup Bonne O International Inc., which began shipping its machines to U.S. stores in May. Unlike SodaStream, Keurig and Bonne O machines don't require consumers to exchange carbon-dioxide cylinders.

Under SodaStream's deal with PepsiCo, each cap of Pepsi HomeMade, Pepsi HomeMade Wild Cherry or Sierra Mist HomeMade will make half a liter of soda. They are sweetened with sugar and stevia and have about half as many calories as regular soda. A four-pack of caps will sell for $3.49, and SodaStream machines cost $80 to $200.

Keurig is betting its alliance with Coke and its machine's technology--including flash-chilling--will give it a leg up. But the Kold machine will also cost more, selling initially for at least $300. The Kold pods, which make 8-ounce servings, initially will cost at least $1.

A lot is at stake for Keurig, which last month lowered its overall sales projection for the year for a third time after its new Keurig 2.0 coffee brewers left many consumers cold. Last December the company recalled more than seven million older single-serve coffee machines following reports water can overheat and spray out of users.

Coke Chief Executive Muhtar Kent called Keurig's Kold machine "a real game-changing" innovation when the two companies announced their partnership in February 2014. Coke has continued to say it has high hopes for the business, although its equity investment is in the red following a sharp drop in Keurig's share price.

PepsiCo is wading into home carbonation more cautiously. At an industry conference last December, PepsiCo Chief Executive Indra Nooyi said it is tough to predict if such machines will take hold because it is tough to replicate the taste and users must wait 45 seconds for their drink, instead of the three seconds it takes to open a bottle or can. "People think that's 42 seconds wasted," she said at the time.

Meanwhile, PepsiCo also is trying to claw back market share from Coke. Volumes of Pepsi-branded soda fell nearly 35% between 2005 and 2014 in the U.S., compared to an 18% decline for Coke-branded soda, according to Beverage Digest, an industry trade publication.

Last month PepsiCo began rolling out a reformulated Diet Pepsi without aspartame, citing public concern over the artificial sweetener. It is still too early to tell if the new version, which uses an artificial sweetener mix of sucralose and acesulfame potassium, will help reverse an industrywide plunge in diet-soda sales.

Earlier this summer the snack-and-beverage giant launched a new soda-fountain line called Stubborn Soda with exotic flavors like orange hibiscus and black cherry with tarragon. The company says the fountains are in about 50 locations, including Panera restaurants. Last year it introduced another "craft" soda, Caleb's Kola, which is sold in glass bottles and sweetened with cane sugar instead of high-fructose corn syrup.

SodaStream, meanwhile, has been rebranding its machines as dispensers of "sparkling water," rather than soda, to tap into Americans' thirst for more natural, low-calorie beverages. This summer it introduced a new line of flavors including "Sparkling Gourmet Coriander Apple Blossom" and posted billboards in major cities urging consumers to "Be a Sparkling Water Maker."

SodaStream also plans to start home pick-up and delivery of CO2 cylinders by the end of this year so consumers don't have to visit stores. It hopes to launch a new machine, Mix, in the second quarter of next year that can carbonate any liquid, not just water. It aims by the third quarter of next year to roll out another machine, Ultimate, that can mix hot or cold beverages.

Write to Mike Esterl at mike.esterl@wsj.com

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(END) Dow Jones Newswires

September 11, 2015 18:16 ET (22:16 GMT)

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