Can SodaStream Rebound in the All-Important American Market?

In the midst of the 2013 holiday season, retail traffic was slumping. For SodaStream, the leading manufacturer of at-home beverage machines, it was a make-or-break quarter for the company, and CEO Daniel Birnbaum was caught between a rock and a hard place.

After the fact, Birnbaum described his dilemma during the company conference call: "[W]e had to make a choice and we had to make it under the gun -- of where we focus on. Top line or bottom line?"

Ultimately, SodaStream opted to boost the top line with heavy promotions, which ate away at the company's margins. Needless to say, it's hard to imagine the internal debate was incredibly difficult. In recent years, SodaStream's focused relentlessly on the North American market. The company's future, to a large extent, rests squarely on its ability to connect with the American consumer.

How to make it in America
For starters, there's a laundry list of reasons that SodaStream might struggle to make that connection in America.

Initially, Americans were completely unfamiliar with the whole CO2 canister-swap process. Second, the industry titans Coke and Pepsi have been nurturing a relationship with us for well more than a century. Meanwhile, SodaStream's working with a paltry advertising budget when compared to the Goliath beverage companies it's up against.

Nevertheless, SodaStream's growth, driven by key partnerships, crafty marketing, and word-of-mouth around its machines, has been nothing short of impressive. As shown in the chart below, the Americas region has swelled from 4% of sales in 2007 to 39% as of year-end 2013.

The Americas represents the company's second-largest market overall, raking in $218 million in 2013. As of year-end, that's only $50 million shy of sales in SodaStream's core Western Europe market. What's more, SodaStream posted an average annual revenue growth rate of 95% since 2007 in the Americas. It's safe to say that the naysayers who wrote this product off as a fad are now biting their tongues.

Furthermore, such robust growth makes the company's overall annual growth rate of 29% -- a respectable number on its own -- look meager in comparison.

The problem with rampant success, of course, is that expectations can grow just as quickly as revenue. And instead of shining in the latest quarter, the Americas market dragged on this high-flying soda company.

How to fumble a fourth quarter
Despite generating plenty of buzz from its SuperBowl ad starring Scarlett Johansson, SodaStream really dropped the ball operationally to wrap up 2013.

Faced with lackluster sales on the all-important Black Friday, leadership decided to ramp up promotional support to boost purchases through key retailers. As SodaStream scrambled to reconfigure products for new selling channels -- including TV shopping and e-commerce -- all types of inefficiencies resulted. Furthermore, the product mix tilted away from the high-margin gas refills and foreign currency rates weighed on margins. When it was all said and done, each of these stumbling blocks caused the company's gross margin to wither from an expected target of 53% to 42.4% during the period.

To be frank, it's not the bottom-line result the company or investors are looking for. And, on top of that, the top line wasn't all that impressive, either: SodaStream's revenue in the Americas grew a modest 16% during the fourth quarter.

Now, SodaStream's faced with the difficult task of returning to historical levels of profitability while also selling as many soda makers as possible before Coke and Green Mountain Coffee Roasters debut their competing soda machine, which could come as early as October.

When analysts probed management about whether they would continue to sacrifice margins to boost household penetration, leadership responded with an emphatic "No."

According to Birnbaum, SodaStream's machine garners "higher loyalty and stickiness, [and] higher usage rates among the user" when it's sold at a premium versus a discount. Birnbaum also remarked, "Price-cutting and accelerating household penetration at the expense of margin is not part of our plan. We're doing other things, but not that."

It's a reassuring comment, but implies the company needs to return to near-perfect execution to pull off a turnaround in the surging American market. Only time will tell whether that's feasible.

Where do we go from here?
The good news for SodaStream investors is that the runway still stretches for miles. Currently, a SodaStream machine is on less than 2% of America's countertops. But the company's studies -- taken with a grain of salt, of course -- show that roughly 15% of American households have the "intent" to purchase a SodaStream down the road. That's a step beyond mere brand awareness.

The bad news is that the Israeli-based company is going through some obvious growing pains. Just after a controversial debate over its brand spokesperson, SodaStream's dealing with powerful competitors, finishing construction of a crucial new manufacturing facility, and coping with margin pressures and foreign exchange fluctuations during an all-important year.

If nothing else, we'll learn a little about what this company's made of as the future unfolds. Hopefully, it's more than bubbles and water.

SodaStream's Source machine. Source: SodaStream.

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