SodaStream Is a Fad

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SodaStream (NASDAQ: SODA) shares surged early on Thursday before later pulling back. An Israeli tabloid had reported that the company was in talks to be acquired by Pepsico (NYSE: PEP) for as much as $95 per share.

The idea that a company like Pepsico would want SodaStream is absurd -- although this stock has been a solid performer in recent months, its business is fundamentally based on a fad (one that has been seen many times in the past) and isn't a sound, long-term investment.

The next hot kitchen appliance

Analysts are currently projecting that SodaStream will grow its earnings by 25% over the next five years. In order to produce those kind of results, the company will need to continue to grow in the US, getting more consumers to turn to a kitchen appliance for their soda needs.

Over the years, there have been many of these “next big” appliances -- Spectrum Brands' George Foreman grill immediately comes to mind. Sure, there was a market for it, but as short seller Jim Chanos has noted, it was ultimately a niche product -- it had its uses, but was never able to replace the traditional grill.

As Mary Maushard (writing in 1990) observed, countless devices have attempted to become the next kitchen staple -- juicers, waffle irons, popcorn poppers, crepe makers, etc. But outside of the traditional coffee maker and toaster, none of these devices have found their way into a meaningful percentage of American homes.

The model doesn't make sense

Fundamentally, SodaStream’s business model just doesn't make much sense. The company is built on the premise that consumers would prefer to use its home machines in place of buying soda at a store. There are a number of problems with this idea.

First, consider the fact that a particularly high percentage of soda isn’t even bought by consumers directly. In its most recent 10K, Coca-Cola (NYSE: KO) notes that 38% of its revenues are derived from the sale of concentrate. That is to say, at least 38% of the time, consumers are buying Coke products somewhere besides a traditional store -- a restaurant, a bar, a fast food drive-thru, wherever.

Second, there’s a great degree of brand loyalty among soda drinkers. The backlash Coke received from its decision to change its recipe in the 1980s is proof enough that; Pepsico’s “Pepsi Challenge” and “Ask for a Pepsi” advertising campaigns have attempted to both up its own brand loyalty, and dispel some of Coke’s.

Third, using SodaStream isn't any more convenient, and it doesn’t save people a significant amount of money. Soda, if purchased intelligently, can be bought for next to nothing. Most grocery stores run sales on soda constantly -- three packs of 12 for $10 seems to be a common promotion in my area. That means that a typical can of Coke or Pepsi could be bought for roughly a quarter.

Compare that to the combined cost of SodaStream’s expensive machines (~$100), syrups (~$10), and regular gas refills (~$15). The savings is minimal or nonexistent.

In terms of convenience, I would argue that people prefer their beverages prepackaged. As evidence, I would point to the bottled water industry. In the US, water is nearly free and can be captured with any plastic bottle or cup -- no expensive machine is required.

And yet, the bottled water industry continues to explode in popularity. In 2012, sales jumped 6.7% to $11.8 billion!

If consumers are increasingly willing to pay for bottled water (something that they can get at home basically for free), why on earth would anyone believe that they no longer want to pay for bottled soda?

Investing in SodaStream

Like many popular appliances that have come before it, SodaStream will find a home in a small number of American households. But it will not disrupt the market to any meaningful extent.

Ultimately, the established soda players (Coke, Pepsi) have no reason to fear it.

PepsiCo has quenched consumers’ thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.

Joe Kurtz 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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