A Story With Some Real Fizz

In the latest triumph for Israeli innovation, PepsiCo made a $3.2 billion deal this week to buy SodaStream. And the big announcement took an unexpectedly emotional turn.

For Daniel Birnbaum, SodaStream CEO and director, it wasn’t just a business event but also a family celebration of sorts. At the press conference, there was something he wanted to talk about before discussing the deal or the joys of carbonating drinks at home.

He told PepsiCo CEO Ramon Laguarta and the officials and journalists gathered about his father Ervin, one of the Holocaust survivors on the Exodus ship that was turned away from Haifa by the British.

But Ervin Birnbaum eventually made it to Israel, and was in the room watching his son declare that — against long odds — Israel has managed to create a “prosperous country and economy,” creating “rebirth” on the “ashes” of the Holocaust.

Who, he asked his father, could have believed it?

Excited by promises to keep SodaStream in Israel for at least 15 years, Birnbaum framed PepsiCo’s decision as a mark of “trust in the economy of Israel.”

For politicians and business leaders in Israel, it was an important moment, too. SodaStream, which makes products that enable people to carbonate their own drinks at home, has been a top target for Israel’s critics.

There were major BDS campaigns against SodaStream before 2015, when it had a production plant in the West Bank. It closed the plant, insisting that it was motivated to do so by logistics and not in response to controversy.

The BDS story can be read two ways.

Whatever the reason, SodaStream did leave the West Bank, and it’s highly unlikely that PepsiCo would have made the acquisition and allowed operations to continue uninterrupted if it hadn’t. BDS did succeed in making SodaStream’s former location a major issue, and in making multinationals nervous to acquire settlement-based businesses.

On the other hand, PepsiCo paid big bucks for an iconic Israeli company, one that built its brand in a settlement, and one that the BDS movement still reviles for moving manufacturing to the Negev and accuses of “colluding in the ethnic cleansing of Bedouin Palestinian citizens.”

For many like Michael Oren, Knesset member for the Kulanu party, the conclusion was clear — the deal was “a victory for Israel and a defeat for BDS.”

Oren, a former diplomat, argued that as the company used to employ Palestinians alongside Jews and today has Bedouin workers, it is “a champion of innovation and coexistence.”

Dani Dayan, consul general of Israel in New York, saw an irony in the acquisition. “PepsiCo boycotted Israel until 1991,” he noted. “Today it bought an Israeli firm for $3.2B and pledged it will continue to operate from Israel. The story of Israel’s economy in a nutshell.”

However one reads the political significance of the deal, for Israeli business the deal is a big confidence boost.

Start-Up Nation Central (SNC), an NGO that deals with issues of technology, just released figures indicating that in 2017 there were 700 startups established in Israel, down from 1,001 in 2014. And if you take closures into account, there was a net growth of 292 companies in 2017, down from 780 in 2014. Some were left asking if Israel is becoming less of a Start-Up Nation.

Eugene Kandel, CEO of SNC, said he was surprised by the “alarmist” reaction that the figures received, saying that the change is “not a death sign, it’s a sign of maturity.”

He argued that it is a natural process in which many of those with start-up ideas have already taken the leap and established companies, and that the focus is now shifting from new companies starting to scaling up existing companies. According to his figures, over the last three years the number of companies raising $10 million to $20 million in funding rounds has doubled.

In this maturing environment, SodaStream doesn’t just provide inspiration for other companies; it shows them the potential for broadening their focus.

“Five or 10 years back, what investors looked for in Israeli companies was very strong technology,” said Kandel, adding that if it weren’t for that pure technical know-how, the prevailing wisdom was that “Israelis are no good.” But today, it’s not just about international execs collecting code from Israeli programmers or ordering their chips — now there’s demand for Israeli marketing and for operations run from Israel to be integrating into multinationals.

“If you look at recent successes, and SodaStream is a perfect story of this, is that it’s also about operations,” said Kandel, explaining that much of what SodaStream has done is in the realm of marketing and branding. “It’s a new phenomenon that [Israeli] operational, strategic and marketing excellence are becoming much more prevalent.”

He added that foreign companies want to tap into this, which is “great news for the Israeli economy because it means we’re going to be able to grow much larger companies that are able to stay in Israel.”

Indeed, the feat of SodaStream hasn’t been inventing something new, but reviving an old idea that had fallen out of fashion. Birnbaum told me once that when, in 2006, a friend asked him to check out a company he wanted to buy, and said it was SodaStream, “I almost fell off my chair.”

SodaStream was then a dusty old company that had enjoyed a heyday in the 1970s, had since moved from Britain to Israel and had failed to explain to people why they should want to put their own bubbles in their drinks.

Birnbaum was heading the Israel division of one of the world’s coolest brands, Nike, at the time. Soon, his friend had acquired SodaStream and Birnbaum was CEO. He went on to rebrand the company, float it on the NASDAQ, and from 2009 to 2013, sales of soda maker units quadrupled.

His secret weapon was the environment. He launched a long-running campaign in 2010 in which he placed cages containing thousands of bottles and cans — supposedly the drinks-related waste of a family over three to five years — in various places and argued that one SodaStream bottle could replace all of it. The campaign reached 25 countries, garnered massive attention, and prompted a cease-and-desist letter from Coca-Cola.

The sky seemed to be the limit for SodaStream, but then in 2013 the tide turned against sugary drinks, and it hit a bump. Birnbaum picked himself up and got things back on track by shifting the focus to water — carbonated water and fizzy water with a healthy twist of flavor.

The strategy worked, and it’s widely believed that the company’s niche marketing to health-conscious consumers is a large part of the reason that PepsiCo was so keen to buy SodaStream. PepsiCo’s president, Ramon Laguarta, said on Monday that SodaStream is “adding to our growing water portfolio.”

And so, the company that just 12 years ago found the chutzpah to try to wrestle a modest slice of the soft drinks market from PepsiCo, has not only ended up with a big check, but has been drafted to help the giant multinational navigate a changing market.

Nathan Jeffay’s column appears twice a month.