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There's been a lot of speculation over the past few days after Green Mountain Coffee Roasters (GMCR) entered into a global strategic agreement with the Coca-Cola Company (KO) to develop a single serving Coca-Cola product line in its upcoming Keurig Cold at-home beverage system. Interestingly, the speculation has not about either company but about what PepisCo's (PEP) response will be. And that has spurred even more speculation about a possible partnership with a small but growing company that makes affordable countertop home-based soda machines, SodaStream (SODA).

Coca-Cola let the word know it's entering the home based soda machine business when it inked a ten year partnership agreement and purchasing a10% stake in Green Mountain, in a deal worth $1.25 billion. In what may be the next step in the evolution of in home soda machines, Green Mountain will have an exclusive to produce and sell the Coca-Cola branded single-serve, pod-based cold beverages, and will work closely with Coca-Cola to bring the Keurig Cold beverage system to consumers worldwide.

That was the shot in the arm that Green Mountain needed after missing analyst estimates for its first fiscal quarter 2014. In the quarter the company announced revenue of $1.39 billion, slightly lower than analysts' consensus estimate of $1.40 billion, but up 4% from same quarter 2013, which had revenue of $1.34 billion. Green Mountain had seen double-digit revenue growth since late 2009, however in 2012 the company lost patent protection on its K-cup single-serve coffee packets, which was biggest source of revenue and revenue growth slowed.

While the company still has licensing agreements with such giants as Starbucks (SBUX), Dunkin Donuts (DNKN) and Dr. Pepper Snapple (DPS), sales have come under pressure from companies like Kroger (KR) and Whole Foods (WFM) that began selling their own unlicensed pods that fit in the Keurig. While the next model of the Keurig will use a different pod, which will cut down on the growing use of unlicensed pods, and hopefully stem the revenue growth slide, the partnership with Coca-Cola will put Green Mountain in a strong position to become the leader with in home counter top single serving sodas, as it will be the only in home soda machine that will feature a major cola bottler's product. After the announcement the stock rose from $80.88 per share to $110.50 per share. To continue to grow, the company needs to expand its line to offset competition, and has done so by a licensing agreement with Campbell Soup's (CPB) to produce soup cups as part of its plan to go beyond beverages. However, the company will need to continue to find new pod products, and that's where expanding its machine line for cold products may be the answer.

Green Mountain is clearly the big winner in the deal partnering with one of the most known brands on the planet. The deal also gives the company a partner with deep pockets and access to a worldwide distribution network. The deal gives Coca-Cola an exclusive outlet to sell its products to a new and growing market - the custom carbonation industry, an industry that SodaStream's spokesman Yonah Lloyd called a $260 billion dollar industry.

The deal also freezes out PepsiCo and its product line from the single serving in home counter top market. It's been well documented that soda sales have been dropping rapidly and both companies are looking for ways to reignite sales. From November 2012 to November 2013 regular soda sales fell 3.3%, with diet soda sales plummeting further down 7.2%. While I doubt the single packet in home soda machines will make up the difference in lost sales, it will give Coca-Cola a considerable advantage over PepsiCo in this new market.

Speculation On What Pepsi May Do Makes Sense

This is where the speculating can get interesting. I believe that PepsiCo will not sit idly by and allow Coca-Cola to own the counter top home-based soda market, as it has grown considerably over the past few years. That would mean PepsiCo would either have to develop a similar machine or partner with another company developing a counter top machine, or partner with a company that already has an existing, though different, counter top machine. And no sooner did Coca-Cola and Green Mountain announce the agreement that the speculation about talks between Pepsi and SodaStream heated up.

Such talks between the two companies are not new. Last June PepsiCo was in discussions with SodaStream about a potential deal. However SodaStream shares at the time were $77, making the deal a bit pricey. Today SodaStream shares have fallen to more attractive levels, closing on February 7th at $37.57 per share, making a partnership or a buyout more financially attractive.

Frankly I think a partnership between the two companies might be a good fit. SodaStream already has a stronghold in the at-home carbonated beverage making industry, with 6.5 million machines in homes worldwide. With a deal with SodaStream, PepsiCo can leapfrog over Coca-Cola by actually having its products in consumers' homes before the first home based Keurig/Coca-Cola machine is out of development.

SodaStream Could Use Pepsi's Might To Grow

Over the past five years SodaStream's revenue averaged a 33% gain and posted profits in each of those years. The company has targeted to reach $1 billion in yearly sales by 2016. However, that goal may be a bit lofty after the last quarter came in slower than the company expected. Daniel Birnbaum, Chief Executive Officer of SodaStream pointed out that while the company did have record sales, it failed to deliver on its profit targets and was disappointed in its fourth quarter performance:

"These preliminary results reflect a challenging holiday selling season in the U.S. and several factors, mostly from the second half of the quarter that negatively impacted our gross margin. These include lower sell-in prices and higher product costs, a shift in product mix versus plan, and unfavorable changes in foreign currency exchange rates. While we expect some of these headwinds to continue into the first half of 2014, we are moving quickly to implement the necessary measures to restore margins to historical levels in the coming year. We remain confident that despite this setback, we will continue to profitably expand our share of the global carbonated beverage category and are on the right path to meet our long-term goals."

This is where a deal with PepsiCo could help. Like Coca-Cola, PepsiCo has a worldwide distribution network, and while SodaStream is in 15,000 stores in the U.S., it did take the company years and a major financial effort to get to that point. PepsiCo, with its strong leveraging ability and its established distribution channels could open doors instantly for SodaStream. PepsiCo also has the ability to nullify one the main complaints with SodaStream customers, and that's getting replacement tanks for the CO2. With PepsiCo's fleet of trucks throughout the nation, the small CO2 tanks could be as easy to access as getting a bottle of Pepsi.

Conclusion

The only similarity between Green Mountain's Keurig Cold at-home beverage system and SodaStream's machine is that they are both designed to be used in the home. Keurig will be a single drink delivered in a pod, while SodaStream makes a half liter at a time. Based on its current product, Keurig will be more of an upscale product, but one will pay a hefty price comparatively for that one cup.

SodaStream on the other hand, for the most part uses generic syrups that are designed to save the buyer money. Its system may not be as convenient as simply popping a pod into a machine, but it does serve the same purpose, and the product will cost a lot less.

The other issue is soda is a lot different than coffee. One can't just go the refrigerator and grab a warm cup of coffee, it has to be brewed. Soda, on the other hand, can be readily available by reaching into the refrigerator and grabbing a single serving and popping the top. So the question with the Keurig is will people pay the extra dollars to make their soda at home using pods or will they just reach into the refrigerator and grab a readily available cold one in a can or bottle?

That being said, Green Mountain's partnership with Coca-Cola does validate that SodaStream's product is relevant, and that there is a vast home soda market still to be tapped. In the short run, Green Mountain's partnership with Coca-Cola could be the best advertising for SodaStream. However, in the long run, to compete with Keurig, I think SodaStream is going to have to cut a deal with a giant bottler, and today PepsiCo seems like the best match.

Source: Green Mountain, Coca-Cola Deal May Put SodaStream In Play