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 International Ltd (NASDAQ:SODA) 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 International Ltd (NASDAQ:SODA)’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, The Coca-Cola Company (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, Inc. (NYSE:PEP)’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 International Ltd (NASDAQ:SODA) 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 The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) could be bought for roughly a quarter.
Compare that to the combined cost of Sodastream International Ltd (NASDAQ:SODA)’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 International Ltd (NASDAQ:SODA) 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 (The Coca-Cola Company (NYSE:KO), Pepsi) have no reason to fear it.
The article SodaStream Is a Fad originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
