SodaStream International Isn't Going Flat Because of Coke

The DIY soda company could see business bubble up with new competition.

Feb 7, 2014 at 11:02AM

Although I haven't been much of a fan of SodaStream International (NASDAQ:SODA), viewing its do-it-yourself soda making system first as a fad and then agreeing it was probably more just a niche (but of limited potential), I believe the market has misread the news that Coca-Cola (NYSE:KO) and Green Mountain Coffee Roasters (NASDAQ:GMCR) will team up to produce their own at-home cold beverage system.

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The obvious takeaway is that with Coke and the Keurig maker in the market, SodaStream will be crowded out. These heavyweights will flex their marketing muscle and undercut their rival's margins. 

What I think the conventional wisdom is missing is that up till now the DIY soda system was very much a niche or fad product, but the promise of some big brand names entering the space means the concept is transitioning into a more mainstream business. Coke and Green Mountain aren't limiting SodaStream's potential -- they're broadening it!

SodaStream says it's only found in 1% of homes in the U.S. compared to some 25% in Sweden, which means there's a huge opportunity still, though there are likely vast cultural differences to account for the difference. Even with its presence in mass retailers like Wal-Mart and Bed Bath & Beyond, the product does not seem to carry top mindshare with consumers, which could be because it's still a relatively small, unknown company that only just recently topped 1 million units in sales for its starter kits.

The introduction of a Coca-Cola pod for a Green Mountain cold Keurig will immediately increase awareness about the concept of at-home beverage making beyond just coffee, which in turn will lead people to SodaStream. Sure, it will lose some customers to a Keurig machine who otherwise might have bought its own system, but it also means more people will consider a SodaStream system than would have beforehand, because a wider audience will be considering it.

SodaStream's advertising and promotion budget amounted to just $22 million, or $15% of its revenues in the September quarter, while Coke is investing $1.25 billion in Green Mountain ahead of its at-home cold beverage system that's planned for the fall. Yes, SodaStream has had a virtual monopoly up till now, and I think its biggest failing was not capturing more of the market in that time. While it will lose some customers to Green Mountain by virtue of Coke's presence, it may also lure PepsiCo back to the rumor-mongering water fountain, where it was said to be interested in buying the DIY shop.

While I still might not be willing to buy into the soda jerk myself, for investors who previously held a bullish outlook on the stock, I wouldn't look at the Coca-Cola and Green Mountain Coffee Roasters announcement as turning its opportunity flat. It may have just given its future a very frothy jolt.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Green Mountain Coffee Roasters. It recommends and 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.

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