Healthier Soda or a Fad That Will Fizzle?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many people brew their own beer, sometimes with interesting results.  Imagine instead making you own bottle of soda.  SodaStream (NASDAQ: SODA) manufactures a line of beverage carbonation systems that allow you to do just that.  Using proprietary carbon dioxide cartridges, flavorings, and bottles, SodaStream allows you to turn a bottle of cold water into a variety of carbonated drinks in about 30 seconds.  The company entered the US market in 2012 and is looking for a break-out 2013.  

What’s the attraction?
According to The Motley Fool, SodaStream reported 34% revenue growth and 110% earnings growth over the past 12 months.  Despite this, it sells for around 25 times earnings.  With the American market barely scratched, this rapid growth should continue.  Supporting SodaStream’s sales is the addition of Wal-Mart and other retail chains to its list of distributors.  The company carries no long term debt, giving it flexibility to tailor its marketing to the New World.

SodaStream hopes to duplicate its decades-long success in Europe by appealing to Americans who want healthier, greener beverage choices.  SodaStream’s diet flavorings, for example, are either low or no sodium.  The system requires no electricity.  The bottles are BPA free and re-usable for about three years.  Reusing bottles also means consumers don’t have to lug heavy bottles from the supermarket.  Those customers living in states that charge a deposit or a redemption fee on soft drink bottles and cans avoid that expense.  For those of the Jewish faith, SodaStream is kosher, OK for use during the Sabbath, and the seltzer water is kosher for Passover.  

What’s not to like?
As a business, SodaStream makes its money on consumables: cartridges, flavorings and bottles.  These items also serve as a useful barometer for ongoing consumer use.  These proprietary items, particularly the cartridges, may be the Achilles tendon of the business.  Customer reviews of SodaStream devices frequently mention the hassle of replacing or exchanging the cartridges.  Competitors like iSi, Mosa or Kayser, makers of so-called “soda-siphons,” use standard, widely available and disposable CO2 cartridges.  SodaStream also only uses tapwater.  The company Fizz Giz not only uses standard cartridges, it works with a variety of beverages, including fruit juices and beer (yes, beer).  Fizz Giz customers can even use their own bottles.  One minor annoyance for SodaStream users is that the bottles are not dishwasher safe and need to be cleaned by hand.

SodaStream also pitches itself as a low cost alternative to typical carbonated drinks.  Again, customer reviews on various retail websites point out that after purchasing the device, cartridges, flavorings and bottles, the cost advantage over store-bought drinks may not be as great as expected.  Furthermore, some of the competitors mentioned above are significantly less expensive that SodaStream products.  The notable exception would be iSi products.   Fizz Giz even goes so far as to sell plans so you can build your own beverage carbonation device for about $10.

Some have described SodaStream as a disruptive technology, something that could upend the current carbonated beverage market.  To be sure, SodaStream products make a great Christmas gift.  The devices are clever novelties, but disruptive technology... um … no.  There are too many competitors doing the same thing.  Furthermore, despite the success of SodaStream in Europe, I see no evidence of Coca-Cola (NYSE: KO) or PepsiCo (NYSE: PEP) closing up shop over there.  In fact, Coke reported a 2% growth in Europe from 2010-2011.  Pepsi did even better, growing 11% in 2010 and 15% in 2011.  No sign of disruptive technology derailing Coke or Pepsi in Europe, and I don't see it happening in the States.  Also, Coke and Pepsi market a variety of soft drinks with broad consumer appeal, brand recognition, and world class marketing teams.  That will be tough for anyone to disrupt, no matter how healthy or green.  Frankly, given Pepsi's, and particularly Coke's, habit of buying out smaller competitors, SodaSmart could be a take-over target rather than a disrupting presence.

Final Foolish Thoughts
After reading several customer reviews, SodaStream products remind me of Cherry Coke: you either like it or you don’t.  There’s no middle ground.  The company’s success in Europe bodes well for its foray into the United States, but success in Europe by no means assures success here.  Americans may grow tired of the hassle of buying or exchanging cartridges while SodaStream expands into more retail or grocery stores.  Unlike competitors, you can’t use your own recipes for flavorings and not everyone likes the company’s flavorings.  The required cold water (and the colder the better) means you can’t spontaneously make yourself a bottle of soda unless you keep a pitcher of water handy in the refrigerator.  

SodaStream is certainly a greener alternative to traditional carbonated drinks, but not necessarily a less expensive or convenient option.  None of which is to say SodaStream won’t continue making piles of money as it penetrates the US market; just don’t sell your Pepsi stock when you see SodaStream products on Wal-Mart’s shelves.

dylan588 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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