The Bearish Case for This Beverage Company

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

In part one we looked at the strong side of Sodastream (NASDAQ: SODA); In this post we will take a look at the empty half of the glass (no pun intended). After all, Sodastream has its own share of critics and disbelievers, is headquartered in a volatile part of the world, and has some pretty scary competition to go up against.

Weaknesses

Generic nature of many soda syrups

Branding is extremely important in the beverage industry and many of Sodastream's syrups are as generic as they come with names like Cola and Root Beer. There are some flavors that have some powerful brands from third parties such as Ocean Spray and Kool Aid, however as I said these are third party brands and aren't owned by Sodastream.
 
Which do you think make a better investment, The Coca-Cola Company (NYSE: KO) or the many independent bottlers that Coca-Cola sells its syrups to? While Sodastream may have built a powerful brand as an at-home soda-maker and carbonator provider, I believe it should complete the circle with powerful syrup and flavors brands of its own and focus on marketing those as well as the soda-makers.

Home only use

A look at the latest filing of Coca-Cola reveals that 38% of its revenue was generated by the sale of syrup concentrate to third parties. That means that Coca-Cola generated almost 2/5 of its revenues from sales at restaurants, movie theaters, etc.  Sodastream can only act as a substitute for beverages consumed at home. It's not likely you will see a Sodastream at McDonald's any time soon. People also like to consume much of their beverage intake away from home such as when they are at the beach, at the gym, or at the mall. This is evident by the success of the bottling water Industry; 40% of water consumed in the US is in the form of bottled water.
 
This reduces the potential market for Sodastream relative to companies such as Coca -Cola or Pepsico (NYSE: PEP) unless Sodastream can provide an innovative way to let people use its products away from home. 

CO2 exchange headaches

One of the selling points of Sodastream is how it simplifies life for the soda buyer-- no longer will a person need to carry on with the chore of lugging over dozens of cans from the grocery store and find the space to store them in the fridge. Nor will that person have to deal with all the garbage that these cans and bottles generate or have to deal with properly recycling them.
 
That pitch however ignores how much of  a headache CO2 exchange can be. Sodastream CO2 canisters were deemed by the Department of Transportation to be Hazardous Materials (HAZMAT) last February and thus can no longer be delivered by couriers to places of residence. The proprietary valve of Sodastream carbonators prevent customers from filling the carbonator with CO2 any way they like. Sodastream's CO2 carbonators have to be filled out only at authorized third party retailers. The cost of refilling CO2 also eats into the cost benefit that Sodastream provides to its users over buying regular soda as users have to pay a high price to fill the carbonators.
 
This is a double-edged sword; on the one hand it offers Soda Stream a high margin business that is not easy to duplicate; on the other hand it is a hassle for the customer which can reduce the desire to use the soda-maker in the future.

Threats

Loss of customer interest

If there is one thing that skeptics like to focus on when they criticize Sodastream it is that the whole thing may be just a fad -- like the pet rock fad back in the 1970s. They say that people one day will just tire of their Sodastream machines and that these soda- makers will be doomed to collect dust on kitchen shelves or worse -- in garages, basements, and attics. Critics also like to point out that there is a long history of kitchen appliances who were the hottest new thing only to quickly go out of fashion a few years later. Examples include the George Foreman grill, the bread maker, and crepe makers. 

Heavy Hitting Competition

It was not that long ago that Richard Branson, the founder of Virgin Group, drove a tank over Coca-Cola cans in Times Square and took aim at its sign celebrating the launch of Virgin Cola in the US. Coca-Cola came out of that little skirmish victorious, though, as Virgin Cola is no more.
 
<img alt="" src="http://g.fool.com/editorial/images/48770/virgin_cola_01_large.jpg" />
 
Even-though Sodastream is not exactly a copy of Coca-Cola or Pepsi the same way Virgin Cola was, going against established stalwart brands such as Coca-Cola and Pepsi will not be a walk in the park. Coca-Cola has recently been rolling out its Free Style Soda Machines across many establishments in the US since 2009 and there is speculation that Coca Cola may sell a Free Style Machine directly to consumers in the future which would put in direct competition with Sodastream. Moreover, a recent Coca Cola marketing campaign featured Coca Cola selling bottles made entirely out of ice at a beach! The bottles were 60% more expensive, but sold at a faster rate. The bottles are eco-friendly as they melt and leave behind no waste; this makes the environmental selling point of Sodastream moot.   
 
DIY carbonaters
 
Sodastream makes a lot of money on refilling empty CO2 carbonators. CO2 refills may bolster up to 90% margins for Sodastream. The proprietary valve on Sodastream carbonators insures that the canisters cannot be filled any other way. Some folks aren't thrilled by the fact that they have to pay $15 for 60 liters of CO2 and there have been articles and videos around the web which show devised ways to get around the proprietary valve and to refill the gas canister the Do It Yourself (DIY) way. If this trend increases it may hurt the company's top and bottom line going forward. 

Geo-political volatility

Sodastream is headquartered in Israel and has a manufacturing plant in the West Bank. This puts the company's stock price at the mercy of political events taking part in the Middle East. There is a possibility, although slim, that violence in Syria could escalate even further and spill over into neighboring countries creating a greater war. Another concern would be a US or Israeli strike on nuclear sites in Iran. Iran is likely to retaliate against Israel and if that happens and the stock price and even company operations could suffer as a result.  

Conclusion 

In these two articles we performed a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis of Sodastream; a company who is disrupting the relatively stable beverage industry. I presented you with both sides of the story.

I will conclude with my own opinion. I believe that Sodastream is not a fad and that the razor/blade business model for the company will allow investors to use consumable sales as an indicator of how well the company is doing even if soda-maker sales slowdown.

I also believe that Coca-Cola and Pepsico will not be able to stop the growth of Sodastream as both companies are tied to their business model and infrastructure that they have built up for the last century.  


Mohammed Shaaban 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!

blog comments powered by Disqus