Why This Company Is the Best Soda Play

As the health and wellness trend gains momentum, consumers are switching from classic sodas to healthier options. SodaStream should benefit as soda drinkers make their own low-calorie sodas at home.

Jan 21, 2014 at 5:19PM

As consumers become increasingly health conscious, they are shifting from classic colas produced by Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) to low- or zero-calorie drink options. This bodes well for SodaStream (NASDAQ:SODA), a manufacturer and distributor of homemade soda makers. With SodaStream's soda makers, soda drinkers can get their daily dose of soda with two-thirds less carbohydrates, calories, and sugar than their regular off-the-shelf counterparts. SodaStream isn't just a great product for consumers--it is also an attractive investment play on the at-home soda market.

Market penetration
The growth rate of any company is largely a function of industry growth and market share gains, particularly the former. The U.S. of carbonated soft drinks (CSDs) market is a very mature market. Since the time the first bottle of Coke was sold in the U.S. in 1886, almost everyone in the country has drank at least a soda in his lifetime. This places a natural cap on how many more cans of soda Coca-Cola and PepsiCo can sell every year.

On the other hand, SodaStream estimates that the U.S. household penetration rate for home carbonation systems is at a low 1.1%. With Sweden's penetration rate estimated at 25%, there is ample room for SodaStream to grow further.     

Revenue stability
Traditionally, soda drinkers have been fiercely loyal to their chosen brands. For example, when Coca-Cola replaced its classic Coke with a new formulated version in 1985, the backlash from its customers forced it to relaunch its classic Coke within months.

However, with the health and wellness trend contributing to lower CSD sales in recent years, it seems that while consumers have their favorite soda brand, there is nothing to stop them from switching away from sodas altogether. The key is that every soda sale is a one-off transaction -- Coca-Cola and PepsiCo must keep selling the same number of products every year to maintain the same revenue level as the previous year.

In comparison, SodaStream operates on a classic razor and razor blade revenue model. As SodaStream's installed base of customers who bought its soda makers grows, recurring sales of consumables such as carbonation bottles, carbon dioxide refills, and flavors will also increase in tandem. Based on September 2013 year-to-date data, sales of soda-maker units increased 47% year over year, but refill units and flavor units were up by 265% and 139%, respectively. This set of financial numbers is indicative of the annuity-like and highly profitable nature of consumable sales.

Price insensitivity
Price competition and the proliferation of private labels have dented the profitability of many consumer-product companies. However, soda seems to be a unique product category, where consumers are willing to pay more when they find something that suits their taste.

Unlike product categories like packaged food, personal care, and home care, private labels haven't made much headway in taking business away from the branded beverage giants. As of year-end 2012, Coca-Cola and PepsiCo still have a combined 70% market share of the U.S. CSDs market. In contrast, products from Cott, the country's largest private-label beverage company, accounted for a mere 4.7% of the entire market. This is the strongest indication that soda drinkers are relatively price insensitive.

Furthermore, true to the razor and razor blade model, SodaStream's Fountain Jet soda maker is affordable at less than $100, with the margins made on the "blades" and not the "razor." For example, Switzerland, a more developed home-soda market, boasts of an operating margin in excess of 25% because of a product mix tilted toward consumables (82%).

On the other hand, the U.S. operating margin is significantly lower, at 5% for SodaStream, because sales are split almost evenly between soda makers and consumables. Therefore, SodaStream will benefit from margin expansion going forward, as an increased number of higher-margin consumables are sold.

Foolish final thoughts
With Coca-Cola and PepsiCo suffering from lower CSD volumes, SodaStream is a much more attractive play on the soda market because of its superior growth prospects. In addition, SodaStream has a superior business model vis-à-vis Coca-Cola and PepsiCo, resulting in stable revenue streams and profit margins.


Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information