What Pepsi Really Thinks of Its Partnership with SodaStream

By Markets Fool.com

The CEO of Sodastream International once called the consistency in flavor of Coca-Cola and PepsiCo "a trap." Perhaps channeling the trend of customization and personalization of the fast-casual dining trend, SodaStream's executive reveled in "empowering the consumer with an inexact dosing."

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Unfortunately for SodaStream, it's now caught in that trap's iron jaws.

Making your own Pepsi apparently isn't such a great idea after all. Image: Pepsi Homemade

Back in October the at-home beverage maker announced a partnership with Pepsi that would trial branded sodas under the soda giant's name in two limited test markets. It was viewed by some as SodaStream's salvation.

As results from the Pepsi Homemade trial run bubble up, the at-home system maker tells Beverage Industry the response has been positive and more consumers are clamoring for the flavors in their areas. Don't count on it happening.

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Despite SodaStream's spin, it's partner has a decidedly different view of how things are going. Pepsi CEO Indra Nooyi is reported by Business Insider as telling an industry conference, "People taste the product at home and say it doesn't taste as good as Pepsi."

Uh-oh. When your partner is slamming your product it doesn't bode well for the experiment expanding. In fact, investors ought to look at it as a sign of doom.

When it comes to taste, soda drinkers have some pretty definite preferences. Photo: Flickr via Sean Loyless

SodaStream should have learned from all those head-to-head taste-test commercials Coke and Pepsi used to run: consumers like the taste of their soda and not something else. What SodaStream is proving is when a soda drinker makes a soda at home that says "Pepsi," he wants it to taste like a Pepsi. The fact that it doesn't suggests the user won't come back for seconds.

This should also be a warning sign for Coca-Cola. It took a large stake in coffee maker Keurig Green Mountain to develop an at-home cold beverage machine, and if Keurig can't get an at-home Coke to taste like a Coke it might quickly face the same fate as SodaStream.

For all the disparagement of consistency by SodaStream it's actually very important in conveying quality. It's one of the reasons why franchise businesses have very specific rules about what franchisees can and can't do with their stores. They might be able to introduce a local flavor or menu item, but by and large walking into a McDonald's in New York is the same as walking into one in Los Angeles as it is in Singapore.

It gives consumers assurance that the quality they know and expect is what they'll get.

Consistency isn't the only trouble following the beverage maker. Even among customers not trialing the Pepsi flavors it's having problems getting them to return. Total Revenues at SodaStream fell 13% in the third quarter while sales of new SodaStream units plunged 32% year over year. Even though it's the consumables where the beverage maker generates most of its profits, it's seeing sales wither there as well.

CO2 cartridge sales may have risen 10% for the quarter, but that's still the lowest increase in years and was down from 17% jump in the second quarter and a 34% increase the year before. If that weren't bad enough, flavor sales have fallen through the floor as well. Although they stopped producing double-digit rates of growth a while ago, in the third quarter they turned negative too, falling 8% from the same period in 2013.

SodaStream sales have lost their fizz across the board. Data: SodaStream International quarterly SEC filings

All of these difficulties are in addition to the elephant in the room: the industry-wide decline of carbonated beverage sales. Both Coke and Pepsi report a secular decline in volumes of soda sold -- and consumers are also rejecting artificial sweeteners (many SodaStream flavors include acesulfame potassium). All of these headwinds may prove to be far too difficult for SodaStream to surmount.

Heck, even SodaStream suggests flavored-water segment is its future and will minimize soda's role in its future. Considering the substantial resources Coke and Pepsi have invested in water, that might have even less of a future than soda.

SodaStream International is putting a brave face on a bad situation, but investors should be afraid it signals Pepsi won't be able to save the company from ultimate failure.

The article What Pepsi Really Thinks of Its Partnership with SodaStream originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the most important news and developments in the leading brand name products you use. Hehas no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Coca-Cola, Keurig Green Mountain, McDonald's, PepsiCo, and SodaStream. The Motley Fool owns shares of Chipotle Mexican Grill, PepsiCo, and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.