Home Carbonation Category Evolving Into Do-It-Yourself Hydration

Includes: GMCR, SODA
by: Seth Golden


Bonne O offers new carbonation system with pros and cons, but enhances category recognition.

Sparkling Drink Systems boast a bevy of new and innovative products for the DIY Hydration category as the company advances its distribution network in 2015.

Keurig Kold faces a number of challenges, which if able to overcome, could prove highly profitable.

SodaStream looks forward to late 2015 product launches and early 2016 innovation deployment.

In this publication, we aim to offer a "round-up" of developments affecting the home carbonation category. Additionally, this article will serve as the first article that pushes the renaming of the category to a more appropriate identity known as "Do-it-yourself hydration (DIY hydration)". The reason for which we are renaming the category is due to the developing products and efficacy of these products that are closely related to home carbonation, but might also be used on-the-go. So from here on out we will be referring to SodaStream (NASDAQ:SODA), Keurig Kold (NASDAQ:GMCR), Sparkling Drink Systems, Bonne O and other vendor products used for hydration as competing and complementing each others' products within the DIY hydration category.

Bonne O

Bonne O is a new entrant to the DIY hydration category. The company's major achievement claim is that it is the world's first home carbonation system that carbonates all ingredients in the bottle for intense, pressure-infused flavor, without the use of a CO2 tank. The machine itself is aesthetically appealing and its slim design takes up little space on the countertop, although more than any similar system on the market presently, which is the most accurate depiction of the systems dimensions.

I had the opportunity to test the Bonne O system at the International Home and Housewares show last March. The system works well or at least as well as intended. The appealing aspects, on the surface for this system, are that it needs no CO2 tank, not that the company had this viable option at its disposal anyway. The carbonation levels for pressure-infused flavored water met my professional standards for the industry expectation, achieving a high level of carbonation for simple carbonated water solutions. Additionally, the system enables the carbonation of various liquids, not just water, as the system employs the use of a pressure release valve. Lastly, the system requires very little maintenance and the bottle holds .75L of liquid, which is enough to offer multiple servings per use. And you are going to need every bit of those .75 liters per use.

The overall efficacy of the Bonne O system is strong, however, the practicality of the system fails to meet some requirements in the DIY hydration category; those requirements are determined by consumer purchase activity. Firstly, and probably the biggest issue with the Bonne O system, is that it takes 3-4 minutes to perform a complete carbonation cycle. This is nearly quadruple the amount of time it takes most DIY hydration systems to carbonate presently. The most impactful aspect of testing the system at the IHH Show that I endured was simply waiting for the system to finish preparing my beverage. I believe this to be a major drawback and inhibitor to sales of the system. Creating your own beverage is one thing, but waiting 3-4 minutes for prep time when there are so many other, immediate hydration returns out there is a hefty proposition to accept by the consumer.

The second issue we expect sales of the Bonne O system to face would be the lofty price tag on the system. The company expects the machine to retail for roughly $149.99, which is also significantly higher than most DIY hydration products on the market today, be them for blending, mixing or carbonating.

The last significant issue we see facing the Bonne O system is that Alka-Seltzer like tablet used to infuse water with CO2.

The cost per tablet will boost the per liter price of a bottle of carbonated water nearly on par with store bought seltzer water, therefore eliminating a necessary benefit to the consumer. This cost also simultaneously overshoots its competitor's cost per liter pricing model.

In closing, the Bonne O system is a smart system with a variety of advantages and drawbacks, which the consumer will ultimately decide upon. The Bonne O will launch in-time for Mother's Day in North America. Williams-Sonoma (NYSE:WSM), some 50 Bed Bath & Beyond (NASDAQ:BBBY) stores, Hudson's Bay and Home Outfitters will carry the product.

Keurig Kold Karbonator

It remains to be seen just how the Keurig Kold Karbonator is branded in North America as the initials for the current trademarks leave much to be desired (KKK). The largest slate of Keurig Kold details was recently articulated in the publication titled " Keurig Kold Details Unveiled". With this in mind, our most recent discoveries surrounding the Keurig Kold Karbonator, which is slated for a Fall 2015 launch, suggests that some retailers are not quite enamored with the product just yet.

Capital Ladder Advisory Group does expect Bed Bath & Beyond to carry the product line, which will offer the machine unit for carbonating water and up to 30 flavor Kold Pods. The Kold Pods will come in a variety of Coca-Cola (NYSE:KO), Dr. Pepper Snapple Group (DPS) and Keurig branded flavors.

Outside of Bed Bath & Beyond, we understand that Sam's Club, J.C. Penney (NYSE:JCP), Kroger (NYSE:KR) and Costco (NASDAQ:COST) may not offer the product this year. Wal-Mart (NYSE:WMT) has indicated it will not offer the product in Canada, but is still considering the product for the holiday season in 2015 and in the United States. Target Corp. (NYSE:TGT) has indicated it may list the product for the holidays depending on early adoption rates and Keurig Green Mountain promotional programs supporting the product launch. We have yet to hear back from Macy's (NYSE:M) with regards to their intentions to offer the Keurig Kold to shoppers this year. One of the major factors weighing on retailer buyers' minds regarding the Keurig Kold is the rate of sale within the DIY hydration category, which tends to be a rather slow moving category. Given the expected, relatively high cost of the machine and per-pod cost, this also adds another layer of necessary buyer consideration.

Not to be overlooked by the previously mentioned buyer considerations, the issue surrounding Keurig "MOLD" will be another aspect the system must contend with at the consumer level, which may also impede the products sales reach. A 2011 germ study conducted by NSF International found that coffee reservoirs ranked as the fifth germiest place in the homes sampled.

Carolyn Fortas, director of the Home Appliances and Cleaning Products Laboratory at the Great House cleaning Study Institute says the best way to clean a coffee pot or brewer is to use vinegar, which (in addition to sterilizing) "decalcifies," or gets rid of the mineral accumulation from faucet water. Fortas states to provide it a mild cleaning every day and to decalcify it depending on how difficult the water is where you live if you have a traditional coffee maker.

The human body is a fascinating place and nobody can state with any certainty to what degree the mold and yeast in your coffee maker might be affecting your health. One thing is for sure, however, consumer sentiment surrounding this issue remains relevant and elevated in recent years. When it comes to cleaning a Keurig all one can really do is run the hot water and vinegar solution cycle that attempts to clean the outer reservoir and system. The problem with this solution is that it doesn't capture the mold potential within the inner water tank of the single-serve brewer. Unfortunately, the inner tank can't be drained either, that is unless you crack open your single-serve brewer which may or may not void your warranty. Basically, if you want to ensure that mold is not a part of your "dietary coffee and future carbonated soft drink intake", you'll have to perform some additional maintenance with your single-serve brewers. When was the last time you took a look at your Keurig water tank or ever even considered the inner tank? Ever wonder why Keurig K-cups almost always rank toward the bottom in taste tests performed by the National Coffee Association and Consumer Reports? Sometimes it's the bitter taste provided by the growing yeast and mold spores inside the system. Water quality inside of single-serve brewing systems is largely the worst in the small appliance industry as the systems are a breeding ground for bio-films and mold. Blenders can also have similar issues if not cleaned properly.

Having considered some of the issues surrounding Keurig Green Mountain and its single-serve brewers, investors should recognize that much is to be learned of the Keurig Kold Karbonator in the coming months. In May, Keurig Green Mountain will invite analysts and VIP investors to sample and demonstrate the machine for themselves. I would expect additional details surrounding the Keurig Kold Karbonator to be disseminated around these private viewings.

Sparkling Drink Systems

Sparkling Drink Systems (NYSEARCA:SDS) has been a pioneer in the DIY hydration category and in 2015 the company has taken its innovation and product deployment to the next level. After signing a distribution deal with Korea's HAAN Corp. in late 2014, SDS and HAAN will launch Viberation by HAAN in over 50 countries, including Asia (including India but not China), Oceania and Middle Eastern (excluding Israel) markets. HAAN will offer the full "BE" product range including both the at-home and on-the-go appliances while SDS will handle the sales of the single-serve flavor pods. Without the need for CO2 cylinder exchange infrastructure, which was needed in previous at-home carbonate appliances, Viberation by HAAN will allow many countries to move quickly and seamlessly into the new hassle-free technology.

The photograph above is of Sparkling Drink Systems ViBErant 350, which offers single-serve hot or cold beverages at the touch of a button. The system has a detachable water tank that holds up to 1.5L of water. While the retail price of the ViBErant 350 remain to be seen, the company believes the system can sell for under $100 in North America. $100 for a hot and cold beverage machine? Here's why!

What Sparkling Drink Systems learned from the failed attempts of Bevyz Global and other similar technological advances in home beverage stations is that by introducing an ice grid or cooling element to such machines, the costs of development and the end product soar beyond mass market appeal at the consumer level. What Sparkling Drink Systems also understood is that this type of condenser unit for cooling is unnecessary for at-home use as most people have a refrigerator with cold and filtered water dispensing capabilities. Having a cold water-dispensing machine on the countertop is just a redundancy that is logically unnecessary and cost prohibitive in the end. So Sparkling Drink Systems ViBErant 350 uses a more practical and cost effective passive cooling system.

Sparkling Drink System's Chairman Serge Bueno is not resting on the laurels of the company's recent successful distribution deals. After recently signing a licensing deal with Riley Foods, Bueno and SDS executives are participating in a U.S. road show that will likely see the company gain additional distribution and partnerships for North American sales and with greater respect to the company's advancing product line as shown in the photograph below.

Some of the company's most interesting products are related to the company's flavor innovations for non-alcoholic beer transformers. As shown in the picture below, a simple squeeze of the Mio-like bottle can dispense a variety of beer flavorings into simple, cold water to achieve the full flavor of store bought beers like Budweiser or Heineken.

Rumor has it that a plethora of small appliance manufacturers and alcohol providers are in deep discussions with the company to develop products for international distribution to come later in 2015. Capital Ladder Advisory Group expects to hear much more from the rapidly developing operations surrounding Sparkling Drink Systems in 2015.


By now, investors should recognize that since the International Home and Housewares Show shares of SodaStream have largely outperformed the market. In fact, as earnings and revenues are forecasted to decline in 2015, the stock is actually witnessing multiple expansion. In my personal opinion (wink, wink), the multiple expansion is largely due to expectations surrounding the developing partnership between SodaStream and PepsiCo (NYSE:PEP). With this in mind, Capital Ladder is forecasting a 99% probability that the two beverage providers further their partnership in 2015 with an international roll-out of PepsiCo brand SodaCaps to be used exclusively on the SodaStream platform. The parameters surrounding "international" that Capital Ladder has set is in keeping with North American distribution as well as several international markets.

Moreover, given this forecast, we are recognizing the need for retailers to adjust shelf space allocation for the back half of 2015 to provide for additional SodaStream/PepsiCo branded products should the forecast come to fruition. This may impact the launch of Keurig Kold to some degree and analysts' forecast for the Kold system sales in the early going.

Outside of the probability for a SodaStream/PepsiCo expanded partnership, unfortunately, sales for SodaStream products in the U.S. remain under pressure. With U.S. distribution taking a step back in the early parts of 2015, SodaStream Canada and Australia continue to expand with the addition of Home Hardware and Williams- Sonoma in each respective region.

It's going to be a tough year for SodaStream and as the currency headwind centered on the strengthening USD hits a recent high against the Euro and other major currencies. Most of SodaStream's operational and sales improvement expectations are back-end loaded for FY15. With that being said and in recognition of the recent share price strength, investors are likely positioning themselves ahead of the potential tailwinds into 2016.

One thing that I will be looking forward to are the sales results when SodaStream's newly developed flavors hit the market alongside the probable roll-out of PepsiCo branded SodaCaps. Between these two product lines, that is a lot of new potential sales for the company going forward. The following picture displays the SodaStream Sparkling Gourmet flavors:

The Sparkling Gourmet flavors are as follows: Yuzo-Mandarin, Sea Buckthorn (I have not tested), Green Apple-Cucumber, Blackcurrant-Lime, Raspberry-Lychee-Rose, Vanilla-Lemon, Hibiscuss-Blackberry, Passionfruit-Rosehip, Lime-Basil, Sassafras-Black Cherry, Shiso-Yuzu and Green Apple-Coriander.

The Sparkling Gourmet flavors are just the tip of the flavor roll-out objective. The company will also be launching reformulated classic soft drink flavors which will be branded as "Crafted Fountain Style" flavors to be accompanied by 48 new and reformulated flavors as shown in the following picture:

Unknown DIY hydration party

The notable companies participating in the DIY hydration category above have been considered in previous reporting and should be well-known by readers/investors. However, there are always companies looking to make a "Splash" into the category (Play renamed Splash by SodaStream) These unknown parties may be able to enhance the applications for the category. In the past, DIY hydration products were largely centered on the home, but the evolution of the category has spurred the development of on-the-go products. What will the next innovation of the category bring? Fortunately, I am privy to the answer of this very question and look forward to revealing the answer more publicly in the future. What should be recognized is that the consumer packaged goods industry never sleeps and the DIY hydration category within the industry is bringing a totally new experience to the consumer.

In closing, Capital Ladder has received several requests to analyze the Keurig Kold versus SodaStream systems to come, juxtaposing one against the other. We will deliver this analysis in a future publication for investors to consider as part of their due diligence.

Disclosure: The author is long PEP, JCP.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.