The Bullish 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.

Sodastream (NASDAQ: SODA) is an interesting company -- no doubt.

This small company from Israel is challenging two titans The Coca-Cola Company (NYSE: KO) and Pepsico (NYSE: PEP). Coca Cola and Pepsi may be, in the words of Steve Jobs, only sugar water, but the companies behind them are so large and influential that they have become globally recognized icons of American culture and have been featured on the Fortune 500 for decades. Coca-Cola also happens to be in the Dow Jones Industrial Average which consists of companies that are believed to be bellwethers of the economy. In fact, Warren Buffett himself was quoted as saying “If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done.”

So does Sodastream actually have what it takes to challenge these giants or even threaten their very existence the same way that Amazon did to Borders and Barnes & Noble? And could it turn Coca-Cola's and Pepsico's huge bottling and delivery apparatuses that were a source of competitive advantage in the past into their Achilles Heel in the future? 

Well, its too early to tell for sure, but we can gain better foresight by appreciating Sodastream's current Strengths, Weaknesses, Opportunities, and Threats (SWOT), performing what is called a SWOT Analysis.

In this article we'll look at the Sodastream's strength and opportunities; in part 2 we'll look at the weaknesses and threats. 

Strengths

Marketing aptitude
 
In an Industry where marketing matters, Sodastream has shown that it can play with the big boys. in 2010, Sodastream launched a guerrilla marketing campaign called Cages.  It featured exhibits showing thousands of empty plastic bottles and cans representing the garbage of bottled beverages and cans a household generates over 5 years.
 
 
<img alt="" src="http://g.fool.com/editorial/images/48749/_63028994_sodastream_bank_large.jpg" />
 
 
A subsidiary of Coca-Cola in South Africa  in 2012 issued a Cease and Desist ordering Sodastream to remove Coke bottles from its exhibitions. Sodastream used this as ammo against Coca-Cola and capitalized on the situation to bring more attention to its campaign thus garnering as much free publicity as possible.  Sodastream refused to comply with Coca-Cola's request, its CEO Daniel Birnbaum quoted as saying "it would take more than a letter to shut me up." Sodastream also announced that it will bring the Cages exhibition to Coca-Cola's home town of Atlanta, Georgia. 
 
Birnbaum went on to say "If Coca-Cola claims to still own these bottles, then they should clean up their own garbage. Approximately 1 billion bottles and cans end up in our parks, rivers, oceans and garbage dumps every day worldwide -- almost 400 million in America alone." All of this noise resulted in a win for Sodastream and PR nightmare for Coca-Cola.
 
Sodastream has also started to use more conventional media to get its message across. Sodastream aired its first Super Bowl ad this year; 200 million viewers in the US had the chance to hear about Sodastream. For many this was the first time that they had heard about the company or its products. Initially the company wanted to air an ad that depicted Coca-Cola and Pepsi in a negative light and when that ad was refused, the company showed a backup ad during the Superbowl, but  posted the original ad on its Youtube channel where it has received 4.9 millions of views up until now for free.  

WOW factor!

Sodastream's soda-machines by their nature inspire a certain fascination. I noticed that they immediately capture peoples' attention when they catch a glimpse of a Sodastream soda-maker for the first time.
 
Lots of people also go on YouTube once they have bought their Sodastreams and start broadcasting to the world what this new gizmo is and how it works. This makes the word of mouth spread faster and makes advertising  and selling the product a whole lot easier. 

Established markets

Sodastream is not some start-up that suddenly emerged from nowhere, even if the company just recently expanded into the US. Sodastream has been operating in Europe for quite some time now and has demonstrated staying power in many countries. Its most developed market is Sweden where it has a %24 penetration rate of Swedish households.

Razor and blade business model

Sodastream's business model involves the sale of soda-makers and then the sale of CO2 refills, carbonators, syrups, and  re-usable bottles. Thus when one purchases a Sodastream machine and keeps on using it, that person will be a recurring customer of Sodastream  and should provide the company with a recurring revenue stream. Consumables also happen to have higher margins than the soda-makers themselves so this makes margin expansion a possibility.
 

It's not all about soda

While Sodastream is heavily associated with making your own sodas at home, that's not the whole story. Not everyone who purchases a Sodastream soda-maker at home is trying to make their own versions of Coca-Cola. In fact there are heavy users of Sodastream machines who don't use it to make soda at all. Instead they use it to prepare sparkling water and other beverages.
 
Sodastream is also creating new partnerships with different beverage companies such as Ocean Spray, famous for its cranberry juice, to diversify what its soda-makers can be used for. This is important because soda consumption has been declining in the US for the last several years. The average American consumed 44 gallons of soda in 2012 down 17% from the peak of 54 gallons in 1998.

Opportunities

US market penetration

Currently Sodastream is only in 1% of US households. This isn't due to Sodastream being unappreciated in the US of A, but due to the fact that the US is a new market for Sodastream as the company started operating in the US a mere three years ago.
 
It stands to reason that if Sodastream has an average penetration rate of 8% of in most European markets and a penetration rate of 24% in Sweden, then theoretically in due time it can make it in a higher percentage of households in the US market which happens to be the world's largest and most lucrative beverage market.

Green Mountain Coffee Roasters, a company that is constantly compared and contrasted to Sodastream, currently has a 13% penetration rate of US households and is expected to increase that penetration rate to 30%-40% in the future. 

Evolving into a kitchen fixture

Sodastream's business model depends on people buying its soda-makers and then the subsequent future purchases of consumables and CO2 refills. However, Sodastream is not content with merely waiting for more people to take the plunge and decide to purchase its soda-makers; It has gone into partnerships with Samsung to install Sodastream built-in water carbonators in new Samsung refrigerators.
 
Sodastream has also recently partnered with KitchenAid a brand of Whirlpool to create its own version of an at-home carbonation machine. This has the potential to turn home soda-makers into a kitchen fixture similar to the microwave, coffee maker, and toast maker. If that were to happen, Sodastream would undoubtedly be the leader in this space for decades to come, as it has already invested in and built a distribution network that is not easy to replicate.

Future product and geographic expansion

Sodastream keeps on announcing new partnerships, new flavors, and new products; this is likely to continue in the future. One such recently launched product is Soda Caps which is a patent pending flavoring system which functions as a single serve disposable capsule that can be used to instantly flavor a Sodastream carbonating bottle. In other words you can use cap of the bottle to flavor your carbonated water on the go.  
 
Sodastream also had success on the distribution front. One of the greatest triumphs of Sodastream was making it onto the shelves of US giant Wal-Mart last year.  The company isn't done with its expansion plans though, and has plans to expand into grocery stores and drug stores in 2014.  
 
Sodastream still has some ground to cover to catch-up to the geographic distribution of its larger rivals which are almost present on every country on earth. Sodastream is currently only available in 38 counties out of 198 and still has not entered the giant population centers that are India and China.

Conclusion

Sodastream has a lot going for it, but there are also causes of concern. We will look at these issues in part 2 where I'll discuss the weaknesses and the threats facing the company. 


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!

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