SodaStream - Gaining or Losing Steam?

By Michael Carter - June 13, 2012 | Tickers: AMZN, KO, GMCR, PEP, SODA, KR | 0 Comments

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Sodastream (NASDAQ: SODA) has seen its share price roller coaster from an open at $24.75 on Nov. 3, 2010, to a high of $79.72 in August of 2011, to today’s price of around $34 a share.  Often compared to Green Mountain Coffee Roasters  (NASDAQ: GMCR), SodaStream’s recent positive financials may hide some of the obvious realities in the soda market.  Here is a quick overview of the positive progress made in the Americas:

Note: Beginning in 2012, Sodastream switched currency from Euro to the U.S. dollar.

Let’s use SodaStream’s top consumer benefits as stated by the company on their website and through their quarterly filings first.  Convenience is the first benefit stated as Sodastream says there are "no heavy bottles to carry from the store."  This is a somewhat weak argument to make if you live in the Americas.  One user review from a buyer from Amazon says, “these are great in the UK, where you can buy gas refills in many supermarkets.... However, in the US there are pitifully few outlets for the refills.” 

Personally, I don’t see what is convenient about the entire process of making your own soda.  We live in a country where people would rather wait in line at a Starbucks and pay $3-4 for a cup of coffee rather than buying the Starbucks bags themselves and making their own at home.  On top of this, making coffee takes far fewer steps than does the SodaStream system!  Additionally, a large portion of soda purchased by professionals that work during the day are through vending machines, or through the tap at the cafeteria, or soda in their lunch box at work. 

Being cost effective and healthy are two other benefits advertised, yet I think these are misguiding as well.  Retail, it costs over $100 just for a starter kit and the phrase "healthy soda" is basically an oxymoron.  In addition, if you need to refill the gas cartridges frequently because you will be drinking enough of this soda to warrant the starter kit purchase anyways, that carbonated gas and those trips to the store requiring the other type of gas will cost more money as well.  SodaStream also states that its diet drinks contain Splenda.  Splenda contains a small amount of indigestible sucralose that is a man-made sugar substitute and has been controversial in the adverse effects to humans. 

Other benefits as stated by SodaStream are that it is customizable, environmentally friendly, and fun and easy-to-use.  Of all the top benefits mentioned, I will partially agree that it is somewhat environmentally friendly since the main selling point early on was the ability to provide soda using 1 bottle vs. the thousands of soda bottles and cans that might be used instead.  I will explain why I partially agree later.

As for being fun and easy-to-use, I am not so sure about this.  Each carbonator bottle is stated to have enough CO2 to carbonate up to 60 liters.  However, what if the people drinking this stuff while you are away from home (kids) decide to have fun and wind up wasting the CO2 away?  Another trip to the store for more carbonated gas?  Or how about your first time using this stuff and you are just getting familiar with the process and steps and you wind up wasting a few liters worth of CO2?  You can’t exactly grab it back and stick it back in the carbonator bottle.

Looking at SodaStream overall, one has to wonder why haven’t the big players come up with such an idea yet if the business is as good as it states it is and will be?  Why haven’t Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) come out with their own version?  Maybe they don’t see the benefit and if they did, they would have created their own version years ago?  If you compare the revenue in 2011 between KO and SODA, KO made a gross profit of nearly 180x that of SODA ($28,326,000,000 vs. $157,653,000).  If this business model ever does work – especially in the U.S. – KO or PEP could easily create their own version of the carbonation machine or their own flavor packets compatible with the existing machines and wipe out SodaStream entirely or at least wound it seriously financially.  Recently, Kroger (NYSE: KR) announced they are too making their own single-serve coffee cups compatible with Green Mountain’s Keurig brewer thus showing any new entrant is possible.

If we look at global trends and analyze where SodaStream makes their money, it is mostly Western Europe.  Looking at the prices of traditional soda (soda that is already in a bottle and on a shelf), you will see that the price of a 2-liter of Coke isn’t the same everywhere in the world.  In fact, you will find the cheapest prices within the United States and the most expensive prices in places like the UK, Spain, Paris, Sweden, Finland, Italy, Belgium, and Germany.  Several of the European countries sell Coke for over twice as much as that in the U.S.

SodaStream talks about being a Razor/Razor Blade business model.  You have the consumer buy the soda maker initially (similar to the razor).  Then you have them buy the consumables which consist of the exchangeable CO2 cylinders, carbonation bottles, and flavors (razor blades).  This is how they advertise to their shareholders.  However, what is wrong with this picture?  I thought this company was supposed to be earth friendly and reduce waste?  So are we now trading plastic soda bottles for plastic soda flavor packets?

Bottom line, the SodaStream story doesn’t quite add up.  Outside of the Americas, the economics make sense and the convenience factor is there.  However for those of us in the United States, which is SodaStream’s main target for future growth, as stated from an Amazon reviewer, “when the first gas cylinder runs out, the soda cans on the supermarket shelves are going to look really tempting again.”

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