SodaStream Shares Remain Volatile With Broad-Based Speculation On Potential Partnerships


Shares of SODA remain volatile due to continued rumors and speculation of an equity stake.

Starbucks' CEO claims Fizzio product line to focus on all-natural customization benefits.

Distribution could be the key benefit in a partnership between SodaStream and Starbucks.

On Wednesday this week, shares of SodaStream (NASDAQ:SODA) spiked almost 15% before finishing the day up just under 11% and over $44 a share. The share price appreciation came on the heels of the latest report from Globes publication citing that Starbucks and SodaStream were in talks whereby Starbucks (NASDAQ:SBUX) would purchase a 10% equity stake in SodaStream with the option to increase their stake in the company if they should choose to do so. Globes reported the equity stake was valued at a 30% premium to the reporting day share price of roughly $40. This would effectively result in a $52 share price valuation for SODA.

Since Wednesday, however, no immediate validation of the Globes report has come forth. Additionally, there has been no comment out of Starbucks despite the company releasing its 2nd quarter results for FY14. During a CNBC interview, Jim Cramer attempted to bait Starbucks' CEO, Howard Shultz, into tilting his hat with respect to a partnership with SodaStream, but the savvy CEO of the famed coffee-house company wouldn't offer any commentary directly on the topic.

Shares of SODA fell sharply on Thursday and the sell-off continued into the Friday morning trading hours as investors and traders decided it was more prudent to take profits rather than continue to speculate on a deal between SODA and SBUX. But keep in mind, nobody has yet to deny the reporting from either Calcalist or Globes and Howard Shultz had every opportunity to do so with Mr. Cramer during their on-air interview. In late afternoon trading, however, shares of SodaStream surged in the face of a declining market as news was disseminated that the company was closing deals for expansion into the Mexican marketplace in combination with a new distribution deal in the United States.

Far be it from me to speculate on this proposed partnership or equity stake by Starbucks in SodaStream International as it may be, but in keeping with efforts to disseminate information and sort fact from fiction, let's look more deeply into what could be the reasoning behind such a deal between the two firms. Like SodaStream, Starbucks is an international company with aspirations to continue on with its expansion plans, especially those aimed at China. SodaStream also has plans to enter China as recently stated in SodaStream's Q4 2013 Conference Call. Naturally, this assimilation in business trajectory is just the tip of the proverbial "ice berg" as they say.

Does Starbucks need SodaStream; no. Does SodaStream need Starbucks; no. These are the wrong questions to be asking in my opinion. I can't seem to figure how Facebook (NASDAQ:FB) needs Oculus. In fact, most partnerships are not entered into on a needs basis; they are initiated and acted upon for future benefits. So what could those future benefits look like? Before answering that question, I think it prudent to state openly that while a partnership between Starbucks and SodaStream would be advantageous in the long run, it would take an awful amount of perseverance in the synergistic process; solely my opinion and based on extensive industry insight and historical data points taken from Capital Ladder Advisory Group, IRI Data, Nielsen Data and NPD Data Group (Subscription based reporting).

First and foremost let's keep in mind that Starbucks is planning to expand its handcrafted soda product line to roughly 3,000 stores in the United States and Asia. While the CEO stated publicly that the product has performed very well in test locations, it should be understood that this is an insider's perspective with still yet no year-over-year results to be compared with. Is selling 100 handcrafted soda beverages a month classified as "performing very well;" we simply don't know what the numbers are until they are meaningful enough to break out in a quarterly report. What we do know is whatever they are, they are incremental and incremental is enough to expand the product into additional store locations in order to help increase revenues.

Obviously, SodaStream is the leading home carbonation/handcrafted soda company in the world. What may not be so obvious is that SodaStream boasts over 70,000 points of retail sales locations. Starbucks has roughly 20,000 shops and arguably another 40,000 points of sale for its product line. Starbucks current partnership with Keurig Green Mountain (NASDAQ:GMCR), boasts roughly 22,000 points of sale for its co-branded product line. In weighing distribution and international points of sale, by partnering with SodaStream for the Starbucks Fizzio product line, both SODA and SBUX could see beneficial sales. Unfortunately, Keurig Green Mountain would not be able to offer the same immediate distribution reach for the Fizzio product line as the company's primary and majority distribution structure resides solely in North America with plans to broaden its reach in some nations outside North America over the coming years.

So here's the problem with the aforementioned benefits of distribution. It's a long-term process! Fizzio will need several years to develop a consumer base here in the United States before ever venturing dramatically into international markets. Building a brand prudently takes careful and thoughtful steps, some of which take a great deal of time. But domestically, Fizzo could benefit from SodaStream's handcrafted home carbonation platform exposure which invites the consumer to customize their own beverage, something Howard Shultz honed in on when discussing its soda business as being highly important to the category. The consumer, increasingly, desires the ability to customize their own beverage and a host of new products are empowering the consumer to act upon this desire. Unlike the developing Keurig Green Mountain platform, the SodaStream platform can maintain the desired customization process which Howard Shultz has identified as desirable for the Fizzio product line.

So far we have strong distribution benefits and similar beverage delivery goals as it pertains to the benefits which could be extracted from a SodaStream/Starbucks partnership. Could there be more benefits though? We could speculate all day and line up the pros and cons of a partnership between the two firms, but for the sake of brevity let's close with another product segment which both companies hope to benefit from going forward, alcohol.

Both SodaStream and Starbucks are looking toward the alcohol category for future revenue growth. SodaStream kicked-off its journey into the category with Night Spirits in several markets back in 2012. The test went quite well, and late last year, SodaStream rebranded the product line in the United States to be named "Happy Hour." The 4 Happy Hour flavors are non-alcoholic cocktail flavors and have been received well by various retailers since the launch. Also in 2013, SodaStream launched a "Campari Spritzer" product in Italy. In a recent conversation with SodaStream's Yonah Lloyd, he had the following to say about the Campari Spritzer and the alcohol category as a whole: "In addition, we see the alcohol industry as a natural extension of our technology. We recently did a pilot test with Campari in Italy where we packaged their product with ours and marketed it as a full Campari Spritz in-a-box. The sellout was fantastic, we ran out of stock very quickly and produced more to help meet the demand. So we know that our entry into this industry will be positively received. We do have a project in place for a carbonation system next year that will offer tremendous benefits to bartenders as well as people at home, making it easier and more fun to create all kinds of cocktails and other mixed drinks". Bartenders… maybe baristas… hmmmm?

With everyone's eyes narrowly focused on the soda category, they might be overlooking the product pipeline development in the works by SodaStream which has plans to more broadly enter the commercial and home alcohol category way ahead of the product cycle launch of GMCR's Keurig Cold launch which might be seen as a little late and limited by then. Starbucks also has plans to expand its wine and alcohol offerings that the company began as a test program last year. The business trajectory for the two firms seems very much aligned given the evidence at hand. With that being said, it takes a lot more than supporting evidence to make a deal.

Moreover, I could equally outline negating factors for such a deal to take place. The most glaring factor to dispense with the notion of a partnership between the two firms in question would be the existing partnership which Starbucks maintains with Keurig Green Mountain and its distribution agreements with PepsiCo (NYSE:PEP). Are there obligations within these partnership agreements that negate or impede a deal from commencing between Starbucks and SodaStream? There certainly might be an impediment to license Starbucks products on the SodaStream platform, but I would find it disingenuous to suggest that there is anything in those agreements that would prevent Starbucks from investing in SodaStream by way of an equity stake arrangement. Now, if I put the truck in reverse, check both my mirrors and realize that the products in discussion such as alcohol and sodas have nothing to do with Starbucks' current partnerships which are for coffee-based products, maybe my negative argument folds in on itself altogether. Oh well, the floor is still open for speculation it appears.

In closing, I will leave investors and readers with a few last thoughts on the subject of partnerships raised in this article. First, for all the hype surrounding the Keurig Cold platform, it certainly is being evidenced by SodaStream and Starbucks that there is a market demand trend that the Keurig Cold might be ignoring. Customization and do-it-yourself drink concoctions are the way the consumer is leaning and eventually that lean turns into a full-scale tilt and that tilt turns into the defined direction. Secondly, partnerships are largely based on sales potential that can be benefited through the partnership. A key component of sales potential is distribution. If the goal is to get your product into the hands of as many consumers as possible, you need distribution… and supply lines to boot. SodaStream has over 70,000 global points of retail and it's about to grow that number significantly in the coming months. Lastly, while we are focusing on the speculative partnership between SodaStream and Starbucks in this article, investors shouldn't dismiss what usually brings this situation about. There is hardly ever a single player sitting down at the table, Starbucks is just the name being mentioned in the latest Globes report.

Disclosure: I am long SODA, PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.