What’s the value?
While machines that make carbonated beverages have been around since the early 1900’s, they have gained in popularity as consumers desire greater variety in their flavor choices and are more concerned about waste from disposable bottles. Sodastream International Ltd (NASDAQ:SODA) generates most of its profits from its European home base, but its initial public offering in 2010 brought name recognition in the U.S., leading to brisk sales growth. In addition, SodaStream has benefited from the introduction of flavors in partnership with U.S. food giants, like Kraft Food’s Country Time and Campbell Soup’s V8 brands.
In its latest fiscal year, Sodastream International Ltd (NASDAQ:SODA) reported strong financial results, with increases in revenues and adjusted operating income of 51.0% and 55.5%, respectively, versus the prior year. Its sales growth was positively impacted by double-digit increases in sales of its namesake machines and refill containers, as well as gains in its growing roster of syrup flavors. In addition, Sodastream International Ltd (NASDAQ:SODA)’s operating margin reached a five-year high as it continued to drive efficiencies from its global distribution network, which totaled 60,000 store locations in 45 countries as of December 2012.
A bump in the road
Despite the potential threat from Sodastream International Ltd (NASDAQ:SODA)’s do-it-yourself product, the beverage giants seem to be holding their own, with The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) continuing to own the top five best-selling beverage brands in the world. While volume growth rates aren’t what they once were, the companies are finding regional gains in less tapped markets, like the periphery countries of Latin America and Africa. In addition, both companies have been increasing their control of bottling operations in select geographies to better control the distribution of product.
In FY2013, The Coca-Cola Company (NYSE:KO)’s financial results have been pretty lackluster, with declines in revenues and operating income of 1.8% and 2.6%, respectively, compared to the prior-year period. Sales growth was negatively impacted by declines in the company’s key North American and European markets, as well as weakness in its China operations. However, The Coca-Cola Company (NYSE:KO)’s operating margin has held up well, due to cost savings from its global productivity initiatives, including a restructuring of its large German bottling unit. The company also continues to search for greater success in the ready-to-drink tea market, as it builds on its 2012 launch of its new Fuze tea brand.
Meanwhile, PepsiCo, Inc. (NYSE:PEP)’s beverage unit has suffered from similar negative trends in overall sales of its carbonated beverages, with volumes down 3% in FY2013. Like The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP) initiated wide-ranging restructuring plans over the past few years in order to better align its administrative and management structure to a low growth environment. In FY2013, cost savings from the plans continue to flow to the bottom line, with rising operating margins for both the company and its beverage unit. More importantly, operating cash flow has been strong as well, with $3 billion generated during the first six months of FY2013, which has allowed PepsiCo, Inc. (NYSE:PEP) to invest in new products and return excess funds to shareholders.
The bottom line
Sodastream International Ltd (NASDAQ:SODA) may be cutting in on the beverage giants’ turf, but there seems to be room for all players in the carbonated beverage segment. SodaStream’s do-it-yourself machines continue to win converts, with roughly 6 million active users, but it is unlikely to win broad market acceptance from constantly on-the-go consumers. The beverage giants’ growth problems stem more from weak global economic growth and an inability to further increase per capita unit consumption in its mature markets. Until the developing markets can pick up the slack in overall unit demand, The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) may have a hard time generating meaningful top-line growth. As such, growth-oriented investors should put the beverage giants back on the shelf and stock up on SodaStream.
The article Are the Beverage Giants Worried About This Upstart? originally appeared on Fool.com and is written by Robert Hanley.
Robert Hanley 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. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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