The Next Big Thing? I Don't Think So

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

Disruptive companies tend to draw a lot of fanfare. These companies, which threaten established, mature industries with innovative products or services, have both strong advocates and detractors. One such company that's been getting some attention lately is SodaStream (NASDAQ: SODA). If the niche product which they offer can become mainstream, then the company could see fantastic growth ahead. But that's a big IF.

What Do They Do?

SodaStream in an Israeli company founded in 1903 which manufactures a consumer device which allows one to make carbonated drinks, such as soda. A version of the machine is pictured below.

<img src="/media/images/user_13886/sodastream_large.png" />

The machine has been selling in Europe for decades and has achieved between 5% and 15% market penetration in many western European countries. About 20% of households in Sweden own a SodaStream device, making it the company's best market. After its IPO in 2010 SodaStream started targeting the United States for expansion, with systems now selling in stores like Wal-Mart, Bed Bath & Beyond, and Macy's. Since the device requires a reusable bottle the company has been marketing it as an environmentally friendly alternative to traditional sodas which come in plastic bottles an aluminum cans.

This puts SodaStream in direct competition with the big soda companies like Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP). Coca-Cola recorded TTM revenue of $47.6 billion while PepsiCo recorded $65.7 billion, although only half of PepsiCo's revenue is from beverages. Just from these two companies the total beverage revenue is around $80 billion per year. Clearly, the market is enormous. SodaStream recorded revenue of $389 million in the TTM period, and that number has been growing quickly in recent years as the company expands. But is SodaStream really a threat to the beverage industry?

DIY Soda

It seems to me that there are three reasons why someone would want to make their own soda at home:

  1. Environmentally conscious
  2. Health conscious
  3. To save money

I'll deal with each of these in turn.

Environmentally Conscious

By replacing traditional soda purchases with the SodaStream the consumer goes through far fewer plastic bottles each year. According to about 2.5 million tons of plastic bottles were thrown away in 2008. Plastics take a long time to break down and does so in a way which can contaminate soil and water. So from an environmental standpoint, SodaStream offers a great solution.

The problem is that only a small fraction of the population cares enough about the environment to actually modify their behavior. People still buy bottled water in droves (spending an estimated $100 billion in 2006) even when water comes out of their tap for free. There's certainly a market for the SodaStream here, but I don't think it's all that big.

Health Conscious

The soda that a SodaStream machine makes has fewer calories and less sugar than store-bought sodas. This is because the syrups used contain both sugar and Splenda, with diet syrups available with only Splenda. To call this "healthier" than traditional soda is a little dubious. There really haven't been long-term studies on the effects of consuming artificial sweeteners, and truly health conscious consumers try to avoid both sugar and artificial sweeteners all together. Chances are they're not drinking soda to begin with. So I honestly don't see much of a market here.

To Save Money

The main benefit of making something at home as opposed to buying it in a store is to save money. It costs a lot less to cook a meal at home than to buy a comparable meal at a restaurant; otherwise very few people would cook. The SodaStream involves the initial purchase of the machine and periodic purchases of the syrups and CO2 canisters.

First, the base machine is $79.99. That may be a big enough hurdle to deter many potential buyers from the get go. This comes with a re-usable bottle so you don't need to buy that separately. The carbonators can be exchanged when empty, which costs $30 for the 130 liter model - probably the best value. The costs of the syrups vary - $4.99 for Diet Caffeine Free Cola to $9.99 for more exotic flavors. Each makes about 12 liters of soda. These prices are from SodaStream's website.

For the cheapest syrups the cost of ingredients and CO2 comes out to $0.65 per liter. The more expensive flavors come out to $1.06 per liter. Even without including the cost of the machine a 2-liter bottle of the cheapest soda you can make is $1.30 and the most expensive $2.12. A 2-liter bottle of Coca-Cola or Pepsi goes for between $1.25 - $1.75 these days, while a store brand cola may go for as low as $0.89.

Now, if we amortize the cost of the machine over a year and assume that you make one 2-liter bottle per day, the cost per 2-liter bottle is between $1.51 and $2.35.

The SodaStream doesn't save you any money at all. It will most likely cost you more than simply buying soda at the store. And on top of that, you have to deal with exchanging CO2 canisters every so often.

A Comparison

I want to compare the SodaStream to two other home beverage devices - the juicer and the drip coffee maker. Almost everyone has a drip coffee maker in their home, while very few people own or use a juicer. To make 59oz of orange juice Tropicana uses 16 oranges. This juice costs around $3. You'd have to be able to buy oranges for about $0.19 each in order to make the equivalent amount of juice at home, not including machine cost and electricity. You may be able to buy oranges for that price depending on where you live and the season, but just like the SodaStream you're more likely to pay more by doing it yourself. This is one reason why very few people juice their own fruits.

Contrast this with the drip coffee maker. A six-ounce serving of coffee uses 1-2 tablespoons of coffee grounds. I'll be extremely conservative and say you get 25 six-ounce servings out of a twelve-ounce bag of coffee grounds. Even if you buy high-end coffee at, say, $10 per bag, that's $0.40 per six-ounces or $0.80 for a twelve-ounce cup. This may very well over-estimate the cost by a factor of 4 if you buy cheaper coffee and/or use less grounds per cup. In comparison, a twelve-ounce Starbucks coffee is a little over $2. Coffee is significantly cheaper to make at home. This is one reason why many people make their own coffee.

The Bottom Line

On a scale from juicer to drip coffee maker, I believe that the SodaStream falls much closer to the juicer. It offers no cost benefit, introduces another small appliance into the kitchen, and involves the hassle of exchanging carbonators. I don't see it becoming mainstream in the United States. It's a niche item and I suspect it will remain that way. SodaStream poses no real threat to Coca-Cola or to PepsiCo.

Now, the company may very well grow quickly - for a while - but only because sales are so low right now. Market saturation will come far sooner than many people think. With the stock trading at 24.6 times TTM earnings, it's a good idea to stay away from this one.

TheBargainBin 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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