"I saw the problem late. I plead guilty"

Daniel Birnbaum  photo: Eyal Yitzhar

SodaStream CEO Daniel Birnbaum confesses, describes the company's new path, and looks forward to another round with Coca Cola.

SodaStream International Ltd. (Nasdaq: SODA) CEO Daniel Birnbaum looks somewhat tired, even exhausted. "I have allergies in my eyes," he explains, and immediately adds emphatically, "I'm really not tired. On the contrary, I'm full of energy."

Although he denies it, it would be reasonable for Birnbaum (52), who has led SodaStream for the past eight years, to be worn out. It seems pretty obvious to describe what SodaStream has been through, and is still going through, as a crisis, even a severe one. Just over eighteen months ago, the company's results started to deteriorate, and there was only one conclusion to be drawn from this trend: SodaStream's solution is a passing fad, particularly in the US market, its main growth engine. The Israeli company's home fizzy drinks machines, which had pretensions of replacing Coca Cola and PepsiCo's bottles, instead of producing bubbling sales gathered dust on the shelves of American stores, and stopped being snapped up like hot cakes as they had when they first hit the US market.

The reaction from Wall Street, where SodaStream has been traded since November 2010, was swift and hard. The company's stock started to lose altitude, and dived to its current level of $21.8, giving a market cap of $458 million, 72% below the August 2011 peak share price of $77.68. Thus $1.2 billion was wiped off SodaStream's market cap. Its current price is close to the price at which it made its Nasdaq debut, $20.

So, like its stock, SodaStream has gone back to square one, and has to start again. The doubters were presumably unsurprised by the crisis that has hit the company. It fairly well confirms what they claimed all along: a gimmick, a passing fad, and so forth. "Maybe. I didn't hear such feedback, but it could be that I simply didn't listen. But still, the capital market and even the end-consumer give us a little credit. Looking back, SodaStream did cause a revolution, and there aren't many Israeli consumer companies that have succeeded like it has. Now we have hit a crisis, and we have allowed ourselves a year to regroup," Birnbaum says.

The capital market gives you credit? The stock is back to its IPO price.

"The market's reaction was overdone, but the share price doesn't interest me at the moment. I'm focused now on the restructuring, and on educating SodaStream's workers about the new path it is taking."

You talk about the crisis as though it was a light blow, and not something that necessitates a change of strategy.

"Every company has to reassess every seven to eight years, and that's fine. Even Procter & Gamble did it."

Procter & Gamble, a $210 billion company, is not based on a single product like SodaStream.

"On the contrary, when a company has a very varied portfolio of solutions and products, it has to be flexible, and change strategy every few years." (Birnbaum was at one time a senior executive at Procter & Gamble, T.T.)

I have the feeling that you are still evading acknowledgement of the dimensions of the crisis in which SodaStream finds itself.

"No, that's not true. There has been substantial change in the company. Everything in it has changed, from the product line to the marketing message."

Everything changed because a tough problem arose. SodaStream's solution, as it was, became irrelevant.

"Yes, there was a problem, but the solution is still very relevant. It's just necessary to sharpen the company's strategy and positioning."

Why do you need to sharpen it?

"Because the company's market turned upside down. The carbonated beverages market, and I didn't invent this, is undergoing a dramatic transformation, just like what happened in the mobile telephone market. To remind you, in the past there was a company called Nokia. And then along came Apple and the iPhone, and Nokia in effect disappeared."

That was a consumer revolution in which Apple made Nokia disappear. SodaStream has not made Coca Cola or PepsiCo disappear.

"True, but Coca Cola is disappearing by itself."

To understand why SodaStream's CEO claims that a giant worth $175 billion is "disappearing by itself", it's necessary to shift perspective. First of all, SodaStream chose to abandon the sweetened soft drinks category, and to focus on carbonated water and on flavored non-carbonated water. As it puts it in its publicity material, "So, What is Health and Wellness? Water".

Less sugar, more water

SodaStream bases its choice on the trend developing mainly in the US but in other countries too. Global per capita consumption of carbonated beverages fell from just over 46 gallons (174 liters) annually in 2004 to just over 38 gallons (144 liters) in 2014. The figure projected for 2018 is about 36 gallons (136 liters), which will make it a 22% drop in fourteen years.

The volume of beverages produced by Coca Cola rose 2% last year. The 2013 figure was similar, and this compares with a 6% rise in 2007. "The consumption of diet beverages in the US, like Diet Cola or Zero, fell by 7% annually, or nearly 15% cumulatively, in 2014-2015. And diet represents 40% of the total carbonated beverages market. Consumption of non-diet beverages is falling at an annual rate of 3-4%. And this is a revolution, like what we were talking about with mobile telephones," says Birnbaum.

Why is this happening?

"The consumer wants to drink healthier drinks. Sugar is fattening (Birnbaum points to foreign press cuttings about the war on sugar consumption), and in the US there is a severe obesity problem and a high incidence of diabetes. At the same time, Aspartame, the most popular artificial sweetener in the US, has acquired a fairly poor reputation as being carcinogenic."

But this trend is not new.

"Yes, but it has increased in the past year. There was an obesity problem, but not an epidemic as there is now. One third of US children under 13 suffer from overweight. So a situation has arisen in which the US consumer has to choose between obesity, diabetes, or cancer. I haven't invented this; this is the macro picture in my industry."

Last March, the "Wall Street Journal" devoted a long article to the future of Coca Cola and the problems it faces. Coca Cola CEO Muhtar Kent was asked in the article what his solution was, and he answered laconically, "to sell more soda".

"Coca Cola is behaving like an ostrich," says Birnbaum, "The company is simply ignoring the problem, which is that the consumer doesn't want to drink its beverages any more.

"Even we were surprised by the trend, when it started in 2013. We believed that our solution did represent an alternative to the beverages of Coca Cola and PepsiCo, but we forgot one thing: the word 'soda', which is part of our name, had become a rude word in the US, even a curse, because it is automatically associated with Coca Cola products. I even heard an American shopper saying about Coca Cola products, 'Why would I bring this devil into my home?'."

So the change caught you unprepared.

"It did. I spotted it late, and that was my mistake. I didn't realize how dramatic the trend was, and the extent to which it compelled us to review our positioning, and even our brand. We woke up late, or, to be more precise, I diagnosed the problem too late, towards the end of 2014, and I plead guilty.

"SodaStream had to work out where its value proposition lay, and we came to the conclusion that we could turn a disadvantage into an advantage, and be the bridge between the less good industry of sweetened carbonated beverages and the better industry, of flavored water. This is an extraordinary opportunity, because no-one else can be this bridge."

A new, smaller market

In numbers, the "less good industry" has an annual turnover of $225 billion, while the "better industry" has a turnover of $39 billion. SodaStream's target market is substantially smaller, but it seems to have no choice but to try to conquer it.

"For the average American, water is a boring drink, and he drinks about two-and-a-half glasses a day, compared with a recommended eight glasses," says Birnbaum, who of course seeks to change this. "SodaStream's solution always started with water, to which we added gas according to the consumer's choice, and now we will also add favors, and so water will become a more interesting drink. This category, flavored water or carbonated water, is the category we have decided to be in from now on, and I'm very excited about it."

But flavored water is a category that already exists. You haven't invented the wheel.

"Right, but flavored water with the sweetness you choose and with the degree of carbonation you choose, that's not an existing category. Control over the sweetness and the carbonation is important, because when you buy a bottle of flavored water of this or that company, you don't know exactly how many calories there are in the drink. It may be sweetened just like regular cola. You think it's water, but it's not exactly water.

"SodaStream is trying to produce an authentic product that is much closer to water than to a carbonated beverage. It's natural, it contains few calories, and it contains no preservatives at all. To my mind, that's rare."

So you still believe that the company can bring about a consumer revolution, as you declared in the past about its obsolete product.

"Yes, or at least try. The president of one of the world's biggest drinks companies called us 'the future of the beverage industry.'"

That's flattering to the ego, but what in your view are the chances that SodaStream chapter 2 will actually succeed?

"In my view, chapter 1 succeeded. It's not bad to go from revenue of almost $100 million in 2007 to revenue of over $500 million in 2014."

True, but you didn't go all the way with the revolution because the fashion went away.

"The fashion did not go away. The market changed."

You really don't like the word "fashion".

"Right. I don't accept it. A little self-forgiveness won't do us any harm. No-one's perfect. True, we didn't adapt to the change in the market fast enough, but now we're doing it, and if we don't dare, we won't succeed."

Water in four flavors

SodaStream's new product line is currently on its way to the market, and it will be made up of four categories, all of them water based: Essence, an unsweetened fruit essence; Fruits; Zeros, that is, zero calories; and Plus, which is water with added vitamins and so on. The company will also launch carbonation devices suitable for these products.

Birnbaum says that the process of penetrating the market with this new product line will take a year, starting from last month (depending on how often each store chain changes the products on its beverages shelves), and this change of direction by SodaStream will cost it a one-time write-down of $20 million. The company has $40.6 million cash, and bank debt of $45.8 million.

What will happen to SodaStream's old product line? Will it slowly disappear from the market?

"Rapidly, not slowly. We may perhaps leave some of the classic flavors such as cola and orange so that anyone who has become used to them won't feel frustrated."

And what about the brand SodaStream? Will it remain?

"We still haven't decided. We still haven't worked out what the new advertising image should look like. It will happen soon."

Presumably in this new category too you will be in some kind of confrontation with Coca Cola, as in the past. It too is trying its luck in this category.

Birnbaum's eyes light up. "Yes, I'm ready and waiting for it. I have a much better product than Coca Cola has, and much cheaper. Coca Cola is due to launch its product in September, and I can't wait."

Did you not feel like giving up during all this hard period?

"No, but I was lost for a few moments. I felt that I had to search for the light, that I was faced with a riddle and hadn't a clue how to solve it. To tell the truth, I still feel a little that way. I'm still at a loss as to how to make the end-consumer see our advantage. I know what the message is, but I still don't know how to deliver it."

And Scarlett Johansson won't help you this time around?

(Laughs) "No. Perhaps we'll find another film star."

Published by Globes [online], Israel business news - www.globes-online.com - on June 14, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Daniel Birnbaum  photo: Eyal Yitzhar
Daniel Birnbaum photo: Eyal Yitzhar
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