Disruptive Innovation: Will Sodastream Do To Soft Drink Category What Nespresso Did To Coffee?
I love it when companies innovate new ways to deliver products, and services that can flip legacy business models, products and companies upside down. That's probably why I'm now running my third tech start-up. Roiling markets is the only way to roll.
We just got a Sodastream machine. If you're not familiar with the Sodastream system, it's a carbon dioxide injection system that lets you turn plain old tap water into refreshing sparkling water or any one of a multitude of flavored, sparkling soft drinks. Basically, you fill a bottle with water, screw it into the device, press a button to inject the fizz, add any one of a number of syrups or flavorings -- and, voila, you have a ready-made soft drink.
Like Gillette with its razor blades, Sodastream doesn't just sell the machines, it sells the flavorings too, from diet cola to lemon-lime to orange soda to energy drink and virtually every other flavor you could imagine. Critically, it's very easy to use -- nothing like the home bottling systems that were popular in the '50s and '60s. And, the flavorings are of very high quality.
What a great innovation. Soda when you need it. Very low-cost. No heavy bottles to lug home from the supermarket. Mix and match and customize flavors. And, as is quite fashionable these days, it's very green, is all about recyclability and reeks of sustainability.
What I wonder is whether Sodastream might do to the soda market what Nespresso did to the home coffee market. Just think about it. Launched at scale in only 1988, Nespresso now does around $3 billion in annual sales and accounts for approximately one-third of the ground European coffee market. Further, its profit margins are reported to be the very highest in the market.
Finally, what is so special about what Nespresso has achieved is that it sells its coffee pellets directly to consumers in most cases. No middlemen or distributors to eat into profits, or independent retailers also pushing competitors' products. In the era of the Web, direct consumer access is so critical. It lets you "relationship-manage" your consumer marketing. I love that Nespresso sends us free chocolates each year during the holiday season.
Should Coke and Pepsi be on their guard for Sodastream and its like? There was a day when Folgers and Maxwell House were the only coffee brands that mattered in the U.S. Those days are long past. For Sodastream, picking up a point or two share of the soda market would make it a very big business. Loss of that market by the Big Boys would come right out of their margin and bottom line.
I think Coke and Pepsi need to get in this game. If I were them, I would be marketing flavorings and syrup directly to consumers. Fortunately, the Sodastream system isn't a "closed" system with patented pellets like Nespresso. So the Big Guys should play in this market -- or lose some market share to innovators.