Coke's Freestyle Machines Will Help Expand Its Dominance Over Pepsi

| About: The Coca-Cola (KO)

Recently Forbes magazine named two products to its coolest products of the decade. The two products were the iPhone from Apple (NASDAQ:AAPL) and the Coke (NYSE:KO) Freestyle Machine from Coca-Cola. Now if you asked anyone on the street what the iPhone was it is highly likely they would be able to tell you something about it. If however you asked people what the Coke Freestyle Machine was you would likely get a lower percentage of correct answers.

The introduction of the Coke Freestyle Machine in 2009 showed how the proprietary Pure Pour technology could combine carbonation with a cartridge releasing syrup and another cartridge releasing flavoring could combine classic Coca-Cola drink brands with new flavors. A visit to the website provided me a demonstration of the machine in use. A user selects their brand of drink first. The next screen prompts them to combine a flavor or multiple flavors to the drink and then the machine does the rest. For example, I would select Fanta on the screen and then select Strawberry on the next screen to enjoy the hard to find Fanta Strawberry brand made by Coca-Cola. The machines also allowed customers to have access at previously released products that were harder to find like Raspberry Diet Coke, Coke Zero Raspberry, and Fanta Strawberry. Products like Orange Coke, which was previously only available in Russia and several European countries, is available to Americans now through the machine’s technology.

As a manager in a restaurant I understand the convenience of switching to a machine like this. Most fountain pop machines have eight to ten flavors and will always likely make several customers mad a week based on the flavors you do not carry in the restaurant. A Freestyle machine allows picky customers to have their way and also allows the restaurant to have an easier to ship product as opposed to bulky heavy bags of syrup in boxes. The restaurant I work for is a Pepsi (NYSE:PEP) location so we will likely not be getting a Freestyle machine ever, but the prospects of it still make me excited and I think the machine could lead to some companies, smaller restaurant chains, making the switch from Pepsi to Coca-Cola. The Freestyle machine cartridges are more costly than traditional fountain pop but research conducted by restaurants with the Freestyle has shown that the investment has paid off with increased sales and increased guest counts.

Last week Coca-Cola made the announcement that the Freestyle machines would be added to all company owned Burger King restaurants. The 850 added restaurants represents an increase of 50% to the current total of 1,772 locations with Freestyles. The Burger King deal will put the machines in place by April of 2012. Along with company owned locations, the company will be recommending all franchisees to add the Freestyle to locations as well.

Prior to the Burger King deal, Coca Cola’s Freestyle machines were present at restaurants like:

  • Subway (Select Locations)
  • Firehouse Subs
  • Five Guys Burgers & Fries
  • AMC Theaters (Atlanta and Select Locations)
  • Pei Wei (owned by PF Changs)

The Burger King deal adds a national chain with thousands of locations to the growing list of companies looking into the innovative product. Wendy’s (NYSE:WEN) and McDonald’s (NYSE:MCD) are currently testing the Freestyle in select locations.

The expansion of the Freestyle machine means that I may be able to try Fanta Strawberry for the first time. A search on the company’s website reveals the closest Freestyle machine 29 miles away at a Burger King. I’m hoping a machine is installed a little bit closer so I can try some new flavors.

The machine is growing in popularity and the recent Forbes article and Burger King announcement will likely increase the growth of the customer base of products. A Facebook page dedicated to the machine has 51,000 likes and has applications and games for people to create random flavor combinations for viewers to vote on.

Several of the companies who manufacture parts for the Freestyle machines that are publicly traded may be worth more research as they could benefit with the likely thousands to be sold over the next five years. Some of the options are:

  • BSQUARE Corporation (NASDAQ:BSQR) – Makes the technology of the machine possible through its software.
  • DEKA - Designs key electronic components for the Freestyle machine
  • Plexus (NASDAQ:PLXS) – Manufactures, integrates, and performs the final testing for the Freestyle machine for Coca-Cola

In the all important battle of soft drink makers there are three large players in Coca-Cola, Pepsi, and Dr. Pepper/Snapple Group (NYSE:DPS). Coca-Cola has the lead with its Coca-Cola, Diet Coke, and Coke Zero brands and is beginning to pull away from number two player Pepsi. The Freestyle Machines could further Coke’s world dominance in the soft drink market and could lead to it being to pop brand favored by restaurants and restaurant companies.

I am a buyer of Coca Cola stock at the current price of $66.26. Shares trade for less than 16x next year’s estimated $4.15 earnings per share. The dividend of 2.8% is safe and growing. The company has increased its payout every year since its initial dividend in 1978. Now is the time to get behind this trusted world leading company while shares are still cheap.

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