PepsiCo Heats Up Fountain Beverage Battles Against Rival Coca-Cola With New Spire Device

May.20.14 | About: PepsiCo Inc. (PEP)

Summary

Coca-Cola dominates the fountain beverage market with 70% share.

New kiosk system from Pepsi could hit into Coke's market share and already helped lure Buffalo Wild Wings.

Pepsi's new model has higher profit margins for restaurants with traditional bag-in-a-box system.

With its partnerships with McDonalds (NYSE:MCD), Burger King (BKW), and countless others, Coca-Cola (NYSE:KO) has 70% market share of the fountain beverage industry. The company has increased its profit margins with its iconic Coke Freestyle kiosk. Now, rival PepsiCo (NYSE:PEP) is taking Coca-Cola head-on with its newest invention, the Pepsi Spire.

Pepsi has launched the Pepsi Spire, which provides over 1000 different flavor combinations. Customers can select from combinations like Raspberry Lemon Mountain Dew, Diet Pepsi with Vanilla and Strawberry, and Brisk Iced Tea with a splash of Cherry. The machine comes in three different models listed below:

  • Pepsi Spire 1.1: countertop self-service unit, allows 40 different flavor combinations
  • Pepsi Spire 2.0: countertop self-service unit, allows 500 different flavor combinations, also available as a crew-service station
  • Pepsi Spire 5.0: self-service or free-standing unit, launching soon, will allow 1000 different beverage choices

Click to enlarge

Picture Source (pepsispire.com)

All of the units are touchscreen and will allow customers to integrate popular Pepsi brands with flavor shots like: cherry, lemon, vanilla, strawberry, raspberry, and lime. Fan favorites include Pepsi with Cherry and Vanilla, Diet Pepsi with Lemon, Mountain Dew with Cherry, Diet Mountain Dew with Strawberry and Lemon, and Sierra Mist with Strawberry and Vanilla.

The fact that Pepsi knows what fan favorites are brings up one of their strong advantages. Both the Pepsi Spire 2.0 and 5.0 offer real-time information from customers to show restaurants and Pepsi what flavors are popular. Pepsi also plans on using the machines to show advertisements or gain more information from customers.

Pepsi Spire uses a traditional bag-in-a-box system, unlike the cartridge model used by Coca-Cola. It was a test of the Pepsi Spire that played a role in Buffalo Wild Wings (NASDAQ:BWLD) making the high-profile switch from Coca-Cola to Pepsi at the beginning of the year. Many analysts argued that it was the possibility of food brands from Pepsi being used in restaurants or Pepsi's strong partnerships with major sports leagues like the NFL, but this Spire machine may have played a bigger role than anyone imagined.

Pepsi Spire is available in select locations before rolling out into a more national presence. Here is a look at the locations listed on the website:

  • California (2), Taco Bell locations
  • Colorado (5)
  • Florida (10), KFCs
  • Illinois (13), Buffalo Wild Wings locations
  • Kentucky (1)
  • Minnesota (1)
  • Nebraska (1), Pizza Hut
  • New York (10)
  • Virginia (2), Pizza Hut
  • Wisconsin (8)

As you can see, the majority of the current test stores are Yum! Brands (NYSE:YUM) locations. This shouldn't come as a big surprise, since the largest restaurant chain in the world was once a unit of Pepsi. What investors should pay attention to is the number of restaurants that could easily be on Pepsi's national roll-out.

In fact, these four chains alone represent 19,100 U.S. restaurants that could soon have one of the three different Pepsi Spire models. Some of the units may even have more than one machine. Coca-Cola has over 20,000 Freestyle machines in restaurants, so you can see how quickly Pepsi can catch up. The majority of Coke's locations come from the 7393 Burger King locations in the U.S. and Canada.

Of course, a switch by McDonald's at any time could once again tilt the scale in the favor of Coca-Cola. McDonald's has been testing Freestyle machines for years and may be more inclined to switch now with the smaller Freestyle models.

The Coke Freestyle machine was once named Forbes Coolest Product of the Decade, an award it shared with the Apple's (NASDAQ:AAPL) iPhone. However, the machine takes up a lot of space, and the cartridges used for syrup and flavors are more expensive for restaurants than a traditional high-margin bag-in-a-box fountain system. This may be the biggest reason McDonald's hasn't made the switch; after all, it routinely offers any size fountain drinks for $1.

To fight off competition from Pepsi, Coca-Cola has already announced three new models, including counter-top models of its Freestyle machine. The models offer over 100 different flavor combinations, coming nowhere near the 1000 combos Pepsi promises with the Pepsi Spire 5.0. The new designs are targeted for small and medium size volume retailers, which will offer 35 or 80 flavor choice combinations respectively. Coca-Cola is also working on a smartphone app that would allow users to create flavors on their phone and hold that phone up to the Freestyle to create their flavor.

I wrote about the Freestyle machine in detail back in 2011 here on Seeking Alpha. At that time, the kiosks were only in 1772 locations. Coke representatives believe that:

since Coca-Cola Freestyle made its debut in 2009, it has proven to be a game-changer.

Since that article, a national rollout at Burger King locations, along with other chains like Moe's, Firehouse Subs, and select Subways, have powered over 20,000 Freestyles to be sold.

Coca-Cola has 70% of the market for restaurants, movie theaters, and dining halls for fountain beverages. Coke has contracts with McDonald's and Burger King, two of the biggest fast food chains. Coke is also present in all Subway locations. Despite this dominance, Pepsi has its drinks in large restaurant chains like Taco Bell, Pizza Hut and KFC, the three units of Yum! Brands.

The Spire was part of a presentation at the National Restaurant Association Show in Chicago this weekend. New announcements could come soon of the machines rolling out into more restaurants or additional locations.

Shares of Pepsi continue to trade close to their fifty-two week high point of $87.68. The company continues to look like a winner with the possibility of growth in beverage sales and a split of its snack food business. At the beginning of the year, Pepsi was one of the stocks I selected for my annual top ten list. I continue to think shares of Pepsi are undervalued with the growth of its snack foods and new restaurant deals like the Buffalo Wild Wings one. With Pepsi Spire and the news that it played a role in the Buffalo Wild Wings deal, Pepsi could see more traction in its fountain beverage sales.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.