Pepsi Continues Move Away From Sugary Drinks With SodaStream Deal -- 2nd Update

By Saabira Chaudhuri

PepsiCo Inc. has agreed to buy SodaStream International Ltd. for $3.2 billion, the latest move by the cola giant to diversify away from sugary sodas and salty snacks.

Israel-based SodaStream makes countertop machines that allow consumers to carbonate tap water and other beverages at home by filling a reusable bottle and flavoring with an array of syrups. The Nasdaq-listed company has in recent years focused on promoting itself as a maker of homemade sparkling water instead of a maker of homemade soda.

PepsiCo has been under pressure this year to restructure its North America beverage business amid weak sales of its core brands Pepsi-Cola, Mountain Dew and Gatorade. The sales slump came after the company last year shifted too much shelf space and advertising money to new, healthier brands.

PepsiCo had previously test-sold its cola with SodaStream machines in a few dozen stores, describing the experience at the time as a learning opportunity.

The soda giant's deal to buy SodaStream comes as consumers shift away from sugary soft drinks toward bottled water. More broadly, big brands are losing shelf space to smaller, trendier entrants and established players are scrambling for growth.

Under outgoing Chief Executive Indra Nooyi, Pepsi has expanded from its cola roots into hummus, kombucha and other healthier products, although results have been mixed. The company has set a target for sales growth of nutritious products to outpace the rest of the portfolio by 2025.

PepsiCo sells the Aquafina and LIFEWTR water brands in the U.S. and earlier this year launched a new brand of sparkling water called Bubly.

Sparkling water has grown far more strongly than the overall bottled water category in the U.S., clocking volume growth of 38% last year up from 35% in 2016 according to data from industry tracker Beverage Marketing Corp. That compares with 7% growth for the overall packaged-water industry, down from 9% in 2016.

Growth is being driven by a continued move away from carbonated soft drinks that use sugar or sweeteners and toward healthier, low-calorie drinks that lack artificial ingredients, say analysts. By contrast still, bottled water -- a much bigger category -- has seen sales slow amid competition from sparkling water, tea, coffee and other beverages.

On Monday, PepsiCo said buying SodaStream would give the company the muscle it needs to expand geographically while helping it accelerate its research and development.

The Israeli company has courted controversy in recent years because its former location -- in the West Bank town of Ma'aleh Adumim -- made it a target for campaigns, who urged consumers to dump its products if the company remained in disputed territory.

In 2014, SodaStream gave in to the political pressure and announced it would move its headquarters to Tel Aviv and its manufacturing operations to southern Israel.

Earlier this month SodaStream reported its revenue had climbed 31% to $171.5 million for the quarter to June 30, while net income jumped 82%. The company described the quarter as its best ever, saying sales of sparkling water maker units increased 22% to over one million as its machines reach more households and concerns about single-use plastic mount. Soda Stream machines come with a reusable plastic or glass carbonation bottle, which the company estimates helps consumers save up to 1000 bottles and cans a year -- and a refillable gas cylinder.

In Western Europe, where SodaStream makes the majority of its sales, a backlash against single-use plastic has taken hold in countries like the U.K. In recent years, SodaStream's marketing had criticized the big makers of bottled water including Nestlé, Coca-Cola Co. and PepsiCo., arguing that plastic bottles cause pollution.

One ad featuring "Game of Thrones" actors Hannah Waddingham and Thor Bjornsson parodying a scene from the TV series, with a woman crying "Shame!" as she followed a man carrying bottled sparkling water out of a grocery store.

As recently as this month, SodaStream had been planning a fall campaign "against single-use plastic bottles and big beverage," a company spokeswoman said earlier this month.

PepsiCo said Monday that buying SodaStream helps it find "new ways to reach consumers beyond the bottle." A spokesman Monday said the SodaStream acquisition is one of several ways in which the soda giant is reducing the use of plastic bottles. Others include Drinkfinity, a kit that includes reusable bottle and recyclable flavor pods, and Aquafina water stations, which dispense water with or without flavors in offices and on college campuses.

The countertop carbonation-machine maker is widely accepted to have invented the notion of make-it-at-home soda and has roots going back to 1903 when it was founded in London by a gin distiller.

In early years it was marketed to Britain's upper class, and was reportedly a favorite of the royal household. But home carbonation of tap water eventually took off and the company's heyday came in the 1970s and 1980s, reaching 10 million U.K. homes, alongside a marketing catch phrase "Get Busy With the Fizzy."

A series of changes of ownership, which included Reckitt & Coleman and Cadbury Schweppes, grounded momentum. Eventually the company was bought by Soda-Club, its Israeli distributor. Then private equity took a controlling interest, appointed Daniel Birnbaum -- previously the Israel CEO of U.S.-based sports-apparel giant Nike Inc. -- as CEO, and listed the stock in 2010. SodaStream now has 2,000 employees.

--Felicia Schwartz contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

August 20, 2018 10:08 ET (14:08 GMT)

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