5 Great Insights From SodaStream International Ltd.’s Earnings Call

This year was supposed to be different for SodaStream (NASDAQ: SODA  ) . It has built the most widely recognized global brand in the do-it-yourself beverage market. It has a presence in over 17,000 retail stores in the U.S. alone, including titans like Wal-Mart. And it has teamed up with popular icons of all stripes, from Ocean Spray to Samsung to Hollywood belle ScarJo.

Despite its success, the critics of the home beverage maker remain relentless. The short-sellers have piled on. Naysayers have questioned its durability against the combined strength of newly partnered Coca-Cola and Keurig Green Mountain. SodaStream, meanwhile, has only made the situation worse by turning in two sloppy quarters in a row, including a Q1 that management characterized as a "disappointing start to 2014 financially."

The silver lining for investors is that SodaStream's business remains quite buoyant outside of the U.S. And, as evidenced by the earnings call on Wednesday, management is acutely aware of the company's shortcomings and the challenges that lie ahead.

When addressing recent pitfalls, SodaStream CEO Daniel Birnbaum's words were both humble and fiercely defensive at times. And when it came to discussing the strength of SodaStream's current beverage platform against the competition, he held no punches.

Here are the five insights offered by SodaStream's management team that I found most compelling after listening in on the conference call.

1. Birnbaum discussed how disrupting the soda industry requires humility and a process of trial and error:

Remember there's no textbook for launching the home soda category. ... We have to experiment, we have to make some mistakes ... in the previous fourth quarter we made some mistakes ... in this first quarter we made some mistakes. I think the Super Bowl activity that we did that really took most of our marketing budget in Q1 was not as effective as we had hoped for it to be. We're going to learn from these. ... We're a learning organization, we don't repeat mistakes.

2. New SodaStream Americas General Manager Scott Guthrie announced a retail strategy aimed at reigniting U.S. sales, which were previously bolstered by a relationship with Wal-Mart during the first quarter of 2013:

This coming Saturday, we are kicking off a 20-foot shelf set in 1,600 Wal-Mart stores. For 12 weeks, this incremental seasonal hot-spot section will feature the widest selection of SodaStream products near the front entrance of the highest-foot-traffic retailer in America.

3. Guthrie elaborated on the backbone of SodaStream's business, which is a razor-and-blade model of soda makers and refills that can be a logistically challenging but virtuous relationship for its retail partners:

[G]as refills are the lifeblood of the SodaStream system and continue to grow. Our exchange program is a well-oiled reverse logistics system that drives valuable consumer traffic to our retail partners and represents a very strong barrier to entry to our competitors.

4. Birnbaum remarked on the increasingly competitive landscape due to the expected entrance of Coca-Cola and Keurig toward the end of 2014. Asked whether the Coke-Keurig machine could present a more attractive alternative for consumers due to automatically calibrated -- rather than self-sweetened -- beverages, Birnbaum responded:

I can speak for no other company and I can speak only for SodaStream and myself. The argument that the consumer wants exact dosing is a reflection of the trap that those beverage companies are in, in my opinion. The consumer does not want exact dosing. The consumer wants to be trusted and empowered to make their beverage the way they want with the amount of bubbles they want in the amount of flavor they want, the amount of sweetness, the choice of the sweetener that they want. And that's where there is a complete divergence between the way SodaStream thinks and the way the [overall soda] category behaves. ... Let them continue to give their exact dosing and the right amount of sugar and aspartame. In the meantime we are quick to let you make your soda exactly the way you want.

5. When an analyst asked why SodaStream doesn't offer single-serve beverages -- both hot and cold -- through its machines, Birnbaum refuted the idea that consumers want such an appliance and described why SodaStream focuses its efforts elsewhere:

We already have the capability to do that. We have a carbonated unit that can install into your kitchen and can take coffee capsules if you want. We just don't believe that's where the market is going right now. There are some industries that just don't combine. You still don't have the TV and the DVD combined even though you think you would have expected that 15, 20 years ago. It's not intuitive. ... At SodaStream we want to focus our innovation not on the idea of combining equipment or delivering a beverage in a glass, but on ... delivering a product that is on trend to health and wellness. That's what we believe the consumer really wants. The consumer doesn't want sugar in water anymore. They want a better beverage and that's where we're focusing our efforts.

In short, SodaStream's execs realize that Coke's upcoming machine could loosen their current stranglehold on the American market for a countertop beverage maker. But management also believes this alternative might not actually present a better product. So they're sticking to their guns and focusing on innovation in flavorings and driving home a singular message around health and wellness.

They're also upping the ante on their core product line by debuting a new machine known as SodaStream "Play" that management believes will provide a "much better consumer experience" than its counterparts. New features specific to the Play include the flexibility to accommodate two different sizes of CO2 canisters and either a 1 L or 0.5 L beverage bottle. Given the increased competition, SodaStream's playing its cards close to the chest and management only indicated that the launch date would take place in the coming months. If the Play can reinvigorate machine sales, this could in turn catalyze higher-margin consumables sales. At least that's what SodaStream's hoping for at this point.

Meanwhile, Coca-Cola is lurking in the background, juicing its stake in Keurig to 16% to become the company's single-largest shareholder. Odds are, the soda industry will get become a lot more interesting over the next six months.

SodaStream's upcoming Play machine. Source: SodaStream.

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  • Report this Comment On May 18, 2014, at 11:36 AM, pac1investor wrote:

    Indeed, wise investors do realize Sodastream is a well-undervalued stock, that has met its bottom and only poised to climb higher.

    For SODA Americas leader Mr Guthrie: Given Starsbuck massive presence in American markets, SodaStream partnership with this American icon will be monumental leap in SodaStream distribution and advertising in the Americas.

    For SODA CEO Mr Birnbaum: My take is why not extend SodaStream genius in carbonation drinks to the making of coffee drinks as well---and compete well with GMCR? As we know coffee makes the world, and the world is much all about coffee.

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