10 Reasons SodaStream Can Succeed Without Pepsi

Shares of SodaStream (NASDAQ: SODA  ) should come with a warning label: "May induce nausea from time to time."

The roller-coaster ride of 2014 began when the bubbly beverage maker's stock nosedived 26% on a prediction of flat results for the fourth quarter. It continued when the company -- by most measures -- botched a multimillion-dollar controversial ad campaign. And if that wasn't unsettling enough, the $47 billion beverage giant Coca-Cola (NYSE: KO  ) just decided to step on SodaStream's turf by teaming up with the coffee-pod maker Green Mountain Coffee Roasters  (NASDAQ: GMCR  ) .

SodaStream Source. Image source: SodaStream.

Investors like me are pulling our hair out wondering where this fizz maker will be a week from now, much less several years. Yet SodaStream's long-term prospects are worth discussing in light of recent events. Clearly, the challenges are mounting, but does the do-it-yourself soda leader need a partner-in-carbonation like PepsiCo (NYSE: PEP  ) to succeed? Many analysts and media outlets think so. I think not.

Here are 10 key reasons SodaStream can succeed without Pepsi.

1. Coke validated the DIY market, which is more than a fad. Instead of worrying about the king of soda, Coca-Cola, stealing SodaStream's thunder, investors should recognize the real implications of the latest announcement: At-home soda is decidedly more than a fad. With SodaStream squarely at the front of a recently legitimized industry, who needs Pepsi?

2. Pepsi's getting left behind by Coke. Pepsi's a massive company with a great understanding of the snack and beverage market, but its clout in soft drinks has faded in recent years. In 2012, Pepsi's carbonated soft drink, or CSD, sales volumes declined 2.5% after a fall of 3.9% in 2011, according to Beverage Digest. For perspective, Pepsi controls 28.1 percent of the CSD market versus Coke's massive 42 percent share. And Pepsi's weakness in soda isn't just a recent trend. From 1995 to 2012 the original Pepsi cola brand market share fell from 15%  to 8.9%. It now trails behind both Coca-Cola original and Diet Coke.

3. The underdog story fuels SodaStream. SodaStream is a classic example of David to the Goliath of the cola industry in Coke. Thus, SodaStream's strengths lie in its ability to do more with less. In 2012, for example, SodaStream spent $74 million on advertising versus Coca-Cola's budget of $3.3 billion. Yet SodaStream built a SuperBowl ad campaign that garnered more than 5 million hits on YouTube. How? By playing to its strengths as the underdog, a strategy that would go by the wayside if it teamed up with Pepsi.

4. SodaStream needs a partner that pops. As noted, Pepsi is faltering in sodas. Meanwhile, SodaStream boasts an average three-year revenue growth rate of 43%. What SodaStream needs is a partner on the upswing as well. A better bet than Pepsi might be the natural soda maker Reed's. Reed's posted an average revenue growth of 26% during the past three years while its stock rose 186%!

5. SodaStream has a head start. SodaStream already has a leg up on Coke and Green Mountain. The latter two will not have an at-home soda maker on shelves until at least October. Meanwhile, SodaStream's in 7 million homes and 60,000 stores around the world. SodaStream's established a reputation for quality and worked toward educating consumers on this newfangled idea of do-it-yourself soda. Convenience, familiarity, and trust go a long way in a consumer market that might be reluctant to change decades-old habits

6. It holds a small slice of a huge beverage market. SodaStream estimates that the global beverage retail market is worth $260 billion, whereas the company currently generates only $530 million in revenue. SodaStream could double and still only corner 0.62% of that total market. If the company believes it has a competitive product, why call Pepsi for help? 

7. Healthier options are increasingly important. The future of soda, as odd as it might sound, will most likely trend toward healthier alternatives to traditional colas like Coke and Pepsi. As a 2012 Deloitte study revealed, "health and nutrition" ranked No. 1 on a list of "key issues driving the industry forward," according to 93 top food and beverage executives. SodaStream claims its products generally have one-third of the sugar, calories, and carbohydrates of their rival store-bought brands.

8. SodaStream is in the driver's seat. As a first-mover, SodaStream's in a unique position in a budding industry. SodaStream, in contrast to Pepsi and Green Mountain, controls all aspects of the at-home soda maker business. In the words of SodaStream's chief communications officer, Yonah Lloyd: "[W]e manufacture the whole system. So we have a lot of know-how and by the way that also means a lot of cost advantage over someone else who would like to try to enter what we do, but have to rely heavily on third-party manufacturing." In other words, Coke and Green Mountain will face a steep learning curve at first.

9. SodaStream empowers the consumer. Consumers today want to customize products to suit their needs. We're witnessing this in everything from 3-D printing to Nike's Flyknit sneakers. That's exactly what SodaStream brings to the table: the ability to choose ingredients, carbonation levels, sweetness levels, and so on. A collaboration with Pepsi would probably lead to less flexibility. Coke, for example, plans to tightly control exactly how much syrup and carbonation is dispensed in its at-home beverages.

10. SodaStream could capitalize on the craft-soda movement. As my Foolish colleague Ted Cooper describes, a craft-soda movement is under way, and it looks a lot like the craft-beer movement. Whether craft soda will explode like craft beer is unclear at this point, but it shares a lot of the same ingredients for success: high quality, natural products, richer-tasting beverages, century-old recipes, and even buy-in from beverage industry leaders such as Starbucks. If the soda industry is about to be disrupted, should SodaStream hitch its wagon to a legacy brand like Pepsi or join in on the craft craze?

In some regards, SodaStream seems like a fresh face at a stodgy country club cocktail ... er ... cola party. But you have to remember that this company has been around since 1903, so it's hardly a newcomer to the soda biz. After a century of going it alone without the help of the "big soda" leaders, it's difficult to imagine that SodaStream will take the plunge now and team up with Pepsi. And there are more than a few reasons to believe SodaStream can succeed regardless of the competition.

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Read/Post Comments (4) | Recommend This Article (7)

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 11, 2014, at 6:44 AM, etita98 wrote:

    SS will always remain a niche player because most people do not want to hassle with flavored capsules and CO2 replacement bulbs.

    KO acted out of desperation when it bought into GMCR, the Cola biz. is on the decline due to changing tastes and health reasons. NOTHING will reignite the love for Cola and is it rapidly becoming obsolete. The writer of this article was deft in taking a contrarian view as if SS will soon become on its own the Netflix of the soda biz., not really!

  • Report this Comment On February 11, 2014, at 10:42 AM, john795806 wrote:

    SodaStream definitely had a rough quarter, but bear in mind that soda is a seasonal business, and this record cold winter didn't do anything to entice consumers to a cool fizzy. It's one hot summer away from a rebound. The fizzy market is shifting, but it's not going away. Specialty carbonated beverages are all over the shelves now--I certainly buy more of them and less of the traditional drinks. This is SodaStream's niche. It's also why Coca-Cola moved into it with GMCR. Those marketing experts aren't stupid!

  • Report this Comment On February 11, 2014, at 2:34 PM, dcgatlanta wrote:

    Really good article. I like SS positioning itself with the craft sodas. If I'm a Coke drinker, do I really care about homebrewing? Probably not. But I can see having an inventory of craft sodas ready to brew on my countertop.

  • Report this Comment On February 11, 2014, at 3:59 PM, TMFBoomer wrote:

    @etita98

    SodaStream's a niche player in the U.S. but in other countries, like Sweden, it has 25% household penetration. SodaStream's made the process of homemade soda as convenient as possible from what I can tell, but you're right that it's still a bit more work than grabbing a 12-pack. I have another article to come on AquaBar which could simplify all of your drink making at home in the near future.

    @john795806

    The soda business is seasonal, and that's why I think SodaStream's looking to diversify with hot beverages through AquaBar this year. It's yet to garner much attention, but expect a big rollout in the coming months.

    @dcgatlanta

    Thanks. And I'm totally on-boad with that. In fact, my favorite root beer is Virgil's, made by Reed's, and I've yet to find a worthy competitor. Wouldn't it be so much easier to try all of the great craft sodas out there if they were readily available on your kitchen counter?

    Isaac

    @TMFBoomer

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