SodaStream's bubbly rise

  @FortuneMagazine March 21, 2013: 7:10 AM ET
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(Fortune)

SodaStream CEO Daniel Birnbaum has an effervescent personality, a valuable quality for an executive trying to persuade consumers to ditch bottled and canned soda for his company's product, which lets people make their own carbonated beverages. At a recent housewares trade show in Chicago, the 50-year-old Birnbaum worked the crowd, cajoling passersby and personally concocting batches of homemade orange fizzy water. "Who wants some Fizzy Bubblech?" he called out. (For the uninitiated, "Bubblech" is a fictional drink featured in You Don't Mess With the Zohan, a 2008 send-up of Israeli culture starring Adam Sandler.)

It turns out that a lot of people want Bubblech, orange and otherwise. SodaStream last year reported $436 million in sales, up 51% from 2011 and more than four times its annual sales five years ago. SodaStream's blender-size machines, which retail in the U.S. for $80 to $200, can turn plain old H2O into sparkling water or, with the addition of concentrates, dozens of different flavored drinks in less than a minute.

It may seem as if SodaStream is everywhere these days, especially in urban areas, where cool kids are developing "artisanal" flavors for DIY soda and trying to jury-rig the devices to carbonate liquor (a no-no, according to the company). But the make-your-own-soda phenomenon is nothing new -- the SodaStream machine was invented more than 100 years ago, and it has enjoyed varying degrees of popularity over the years, primarily in European markets. Still, the product had mostly floundered under its various corporate owners until it ended up in the hands of an Israeli private equity firm and Birnbaum. More on that in a moment.

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Our story starts in London in 1903. Gin distillery W & A Gilbey developed a machine for butlers to make soda water for their upper-class employers, including the royal family. The much larger forerunner to today's SodaStream apparatus featured a 28-pound gas cylinder. It took 50 more years for the first slimmed-down home version of the device to enter the market. The SodaStream enjoyed some popularity in Europe in the 1980s, but the machine had a hard time finding the right corporate home. Cadbury Schweppes owned it for a while. So did Reckitt & Colman, a British consumer goods company.

Eventually SodaStream was acquired by an Israeli company called Soda-Club, which in turn sold it in 2007 for $8 million to a group led by Fortissimo Capital, a private equity firm. Managing partner Yuval Cohen called up his Harvard Business School buddy Birnbaum, a former head of Nike's (NKE, Fortune 500) Israel unit, and asked him to run the company.

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"At first, it was a matter of survival," says Birnbaum. He quickly cut down on millions of dollars in expenses by closing offices and discontinuing projects he deemed irrelevant. He then directed the remaining employees to build a brand-new SodaStream machine -- and fast. The result: the Pure, a sleek metal and plastic model that sells for $130. He also redesigned four of the five existing models to make them look more modern and ventured into new countries. When he took over, SodaStream was sold in just 13 regions. Today it is the market leader in soda machines (Cuisinart sells one and Hamilton Beach is about to release its own version), and its products are available in 45 countries, including Brazil, Japan, and France. In Israel, where people really do drink an awful lot of orange soda, nearly 10% of households have one.

SodaStream's relationship with its headquarters country is complicated. Antisettlement groups have pushed for boycotts of the product because the company's main factory is in the West Bank, technically Palestinian territory. (Birnbaum says he employs hundreds of Palestinians and Israeli Arabs.) SodaStream is now building a 1-million-square-foot plant in Israel's Negev desert, but it's not clear whether it plans to shutter its West Bank site once the new factory opens, and a recent Deutsche Bank report lists "geopolitical risks negatively impacting exports from Israel" among potential threats to the company.

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The company's model is classic razors and blades: Soda machine owners need to restock with higher-gross-margin goods like flavored syrups -- which represent almost half the company's annual revenue -- and CO2 canisters, which need to be replaced about three times annually. But Birnbaum believes he can also grow by expanding his market share in the U.S., where SodaStream penetration is a mere 1% or so of households. A new machine, the Source, crafted by design superstar Yves Behar, should appeal to houseware snobs, and SodaStream and Samsung recently teamed up to develop a fridge with a built-in sodamaker. Other new distribution schemes are in the works.

Birnbaum is also aggressively promoting his product as healthier and "greener" than commercial sodas. SodaStream's bottles are reusable, which can cut down its customers' consumption of plastic, glass, and aluminum. At the housewares trade show, SodaStream's booth featured a gimmicky Cage of Global Shame -- a huge crate of discarded soda bottles and cans.

Birnbaum's tactics aren't making him any friends at Coca-Cola Co. (KO, Fortune 500) and PepsiCo (PEP, Fortune 500). (Both companies declined to comment for this story.) But for all of Birnbaum's jabs at the beverage giants, analysts say he doesn't need to take significant market share from Coke or Pepsi to succeed. He just needs to get more people to embrace some Fizzy Bubblech.

This story is from the April 08, 2013 issue of Fortune. To top of page



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