Coca-Cola and Green Mountain Are About to Put the Final Nail in SodaStream's Coffin

I've been critical of SodaStream (NASDAQ: SODA  ) for quite some time. Last June, when the stock was trading near its all-time high, I pointed out that the company had an absurd business model based on a fad -- for the vast majority of American consumers, brewing their own soda just didn't make any sense.

I might have been wrong about the business model, but not about SodaStream. Already battered, SodaStream is poised to get crushed: unless it does a deal with PepsiCo (NYSE: PEP  ) , Green Mountain Coffee Roasters (NASDAQ: GMCR  ) and Coca-Cola (NYSE: KO  ) will conquer the market.

SodaStream is already on the ropes
SodaStream shares are already down more than 50% since last June. A string of disappointing earnings results have hit shareholders hard -- in January alone, shares lost about one-fifth of their value after SodaStream gave disappointing guidance.

For fiscal year 2013, SodaStream expects to post net income of $52.5 million on revenue of $562 million. That's up from 2012, but not by much -- if SodaStream's estimates prove accurate, revenue will have grown about 29% in 2013 while adjusted net income rises just 5%. In contrast, both revenue and adjusted net income were up more than 50% in 2012.

In other words, SodaStream's growth is slowing significantly, casting doubt on the company's long-term prospects.

A challenger approaches
To make matters worse, SodaStream is about to face its biggest challenge yet. Sometime next year, Green Mountain Coffee will launch its "Keurig Cold" -- a new brewing platform centered around carbonated and cold beverages. Green Mountain hopes to replicate the success it had with hot beverages in the cold beverage space.

Longtime Green Mountain observers will know that its growth over the last half-decade has been a story of partnerships -- slowly but surely, Green Mountain was able to ink deals with most of the big coffee makers, adding new varieties of K-Cups and strengthening its platform over time.

SodaStream has been attempting something similar, working to bolster its line of off-brand drinks with name-brand products from major companies. But when Green Mountain comes to market, it will be with the biggest of partners. Both in the U.S. and globally, Coca-Cola dominates the cold beverage space, with legendary brands like Coca-Cola Classic, Diet Coke, and Sprite, not to mention its portfolio of products in other categories like Powerade, Minute Maid, and Full Throttle.

Is there any hope for SodaStream?
Wednesday's news was a major blow to the SodaStream story, but shares are rallying on Thursday anyway. Investors seem to be pinning their hopes on a deal with PepsiCo -- if Coca-Cola wants in the business, shouldn't Pepsi follow suit?

It's possible that SodaStream could do a deal with Pepsi, but betting on such an outcome seems inordinately risky. There's no guarantee that Pepsi will mimic Coke's move, and even if it does, it could develop its own competing system, or partner with another company already in the space (Hamilton Beach, Cuisinart).

If Pepsi does partner with SodaStream, it will be a boon to shareholders, but if not -- watch out. When Green Mountain enters the market next year, it will have the support of Coca-Cola, a major advantage.

Prospective consumers trying to decide between the two machines will have the choice of going with SodaStream, and its line of off-brand cola, or buying Green Mountain's solution, and being able to brew Coke, Diet Coke, and Sprite in their homes. The choice seems overwhelmingly obvious.

Barring an acquisition from PepsiCo, or a similar deal, it's difficult to see how SodaStream stays relevant in the face of what's likely to be an overwhelming competitor.

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Editor's note: A previous version of this article stated that SodaStream had made a deal with Dr Pepper Snapple in the past. The Fool regrets the error.


Read/Post Comments (11) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2014, at 1:55 PM, Risky88 wrote:

    Cuisinart?

    That really did make me laugh.

  • Report this Comment On February 06, 2014, at 2:06 PM, evanmacdonald wrote:

    What deal did SodaStream make with the Dr. Pepper Snapple Group?

    Linking to a Motley Fool article from over a year ago does not make it a fact, especially when that article points out it was actually Snapple that signed a deal with, coincidentally, GMCR.

    If anything, wouldn't this make it more likely that they'd also partner with GMCR on Dr. Pepper? Not sure why you'd make up a fact that actually hurts your thesis.

  • Report this Comment On February 06, 2014, at 2:12 PM, brybat wrote:

    Yup. Cuisinart? Makes me laugh too! I called Cuisinart to find out where I could get CO2 refills. They said that they don't do refills but i could buy a new canister off the shelf and return my old canister for a credit. When I asked where I get CO2 canisters, the said ONLY at Bed Bath and Beyond. When I went to one of their stores, they told me that they stopped carrying canisters at their store but some other Bed Bath and Beyonds still sell them. They also said that Sodastream out sells Cuisinart 50 to 1.

  • Report this Comment On February 06, 2014, at 2:43 PM, dapperone wrote:

    Although Sam Mattera may ultimately be proven correct in his assessment of SoadaStream's bleak future, he has forgotten one extremely important factor. SodaStream has already placed millions of their soda machines in the hands of consumers, while Green Mountain's machine is still many months away and its sales success is not at all assured. Last year, it was predicted that the Starbucks Verismo coffee machine would heavily erode Green Mountain's single serve coffee business; the Verismo ended up being a sales dud. Soda machines are a "razor and blade" business model, for which SodaStream already has a huge lead over current and potential competitors that could become insurmountable if a deal with Pepsi were to take place. Green Mountain apparently intends to rely exclusively upon the single serve pod concept for creating soda beverages, which means that the cost per serving will undoubtedly be higher than purchasing a soda from the supermarket. It will be a convenience appliance and perhaps therefore a a small market share niche appliance. On the other hand, SodaStream beverages can be made using bulk syrups or single serve packages, which means that it attracts both money conscious consumers and those seeking convenience.

  • Report this Comment On February 06, 2014, at 2:43 PM, cobwebstocks wrote:

    Gotta love MR. doom & gloom.

  • Report this Comment On February 06, 2014, at 2:44 PM, brybat wrote:

    I just read an article that said Bed Bath and Beyond just discontinued Cuisinart sales.

  • Report this Comment On February 06, 2014, at 3:12 PM, martinitony wrote:

    I'm sorry, but you're a moron. "I might have been wrong about the business model," Yeah, that's right. And now I should accept another erroneous idea from you. Get real. You know nothing!

  • Report this Comment On February 06, 2014, at 3:25 PM, miteycasey wrote:

    Sigh...this business has been around since the mid-80's.

    Google Charlie-O

    my friend had one at his house.

    from 1989

    http://newsok.com/charlie-o-hoping-soft-drink-network-brews-...

  • Report this Comment On February 06, 2014, at 3:41 PM, ElCid16 wrote:

    miteycasey

    not sure you can compare this Charlie-O soda thing you're speaking of with the Sodastream, anymore. It looks like the Charlie-O thing never really materialized (like, did they ever get to even a million in annual rev?). Their unit, in 1989, had a cost to consumers of nearly $200. I'm guessing in today's dollars, that cost would be even higher.

    Sodastream, on the other hand, is pulling in $500M in annual revenue - possibly due to its much more reasonable price of $80 or so. A company that brings in $500M in revenue is, indeed, a viable business.

    Are they both soda-makers? Sure. But are they like-products? It appears that that answer is definitely not.

  • Report this Comment On February 06, 2014, at 3:47 PM, Franko1000 wrote:

    PEP + SODA = WINNER

  • Report this Comment On February 06, 2014, at 3:55 PM, freedom64 wrote:

    The price for a single serving coke and other drinks will likely prevent this the GMC and CC product from really taking off. Some people will pay a premium for what that see as a quality product with the single serving coffee pods. For coke products and the like this won't be possible. If Soda Stream is able to team up with other soft drink maker this deal won't matter too much. CC is the one that isn't going to fulfill their home soda potential by going with GMC instead of Soda Stream.

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