If you look at a stock chart for SodaStream (SODA) for the last two years, it looks like a classic boom and bust story. The first half of 2013 must have seemed like a dream as the stock more than doubled. However, when competitive challenges appeared, the second half of the year resembles a nightmare.
With the advent of Coca-Cola's investment in Keurig Green Mountain (GMCR.DL), some might wonder if SodaStream will survive. However, the Keurig Cold is still likely a year away, and SodaStream is facing three significant issues right now.
I thought this was SodaStream's future?
For the last couple of years, SodaStream management has touted that the company's big growth opportunity is the United States market. While the company's international growth has been mediocre at times, SodaStream's U.S. growth has been astounding.
Facing competition such as Keurig Cold in 2015 and potential competition from Starbucks (SBUX 1.00%) dipping its toe into the soft-drink market, SodaStream is facing some serious headwinds . While these are worries for the next few years, there is a serious problem developing in the U.S. market right now.
Keurig Green Mountain seems to have found its growth again, with sales up 10% annually in the current quarter. Starbucks has shown consistent growth in same-store sales in the U.S. market, with a 6% increase in the last three months.
Unfortunately for SodaStream investors, the company's first big problem is in the U.S. market. With U.S. revenue down 28% annually and making up almost 30% of the company's revenue, SodaStream needs to seriously reevaluate its competitive position in the market. What is really scary is that SodaStream is facing these challenges, and neither Keurig Green Mountain nor Starbucks is offering real competition yet.
A broken starter?
The second issue facing SodaStream is the company seems to be in denial when it comes to the sales of its starter kits. A starter kit gives the customer a Soda Maker, at least one CO2 cartridge, pressure resistant bottles, and some sample flavors. These kits are sort of the gateway to the SodaStream experience. Since these kits usually start at about $80, once a customer decides to buy one of these kits they have a significant reason to keep buying the CO2 cartridges and flavors. One of the challenges that Keurig Green Mountain faced in the past was uncertainty surrounding any slowdown in the sales of its brewers. However, Keurig Green Mountain never witnessed a decline like the recent quarter at SodaStream.
Total starter kit sales declined by 25% on an annual basis. Though these kits represent just 27% of total revenue, the problem is much bigger than this percentage. Starter kits represent new customers who are willing to buy into the system. A significant decline in starter kits means lower potential consumables sales down the line.
In addition, though consumables sales were up 15%, this almost matched the increase in portion-pack sales at Keurig Green Mountain. The significant difference is that Keurig machines have sold millions more brewers than SodaStream has sold starter kits, at least in the U.S. market. The bottom line is that SodaStream has a huge opportunity in the U.S. market, and yet consumers don't seem to be getting the message.
Getting back to basics
When a company generates huge revenue and earnings growth the way SodaStream did last year, investors tend to ignore other potential issues. The third challenge facing SodaStream is the company's spending on selling, general, and administrative expenses. Among its peers, Keurig Green Mountain sets the standard for SG&A spending. Now that the company is in a more stable growth phase, SG&A represents less than 18% of revenue. Starbucks seems to be expanding in a thousand directions, and this is partly why the company's SG&A expense uses up 29% of revenue.
SodaStream, on the other hand, spent more than 50% of its revenue on SG&A in the recent quarter, which was up significantly from almost 43% last year. It's no great surprise that earnings fell off a cliff considering that sales were essentially flat and the company's expenses jumped significantly.
Foolish final thoughts
Keurig Green Mountain's brewing system was once called a fad, but an investment from Coca-Cola and consistent growth seem to have put that worry to bed. Starbucks has been through tough times in the past but has found its way back to growth.
The difference between SodaStream and these two companies is fairly significant. SodaStream is suffering in what should be its biggest growth market. Not only is revenue declining in the U.S., but starter-kit sales have dropped as well. When you combine these issues with a higher expense rate, investors have a right to be worried.
SodaStream is having problems, and it doesn't even have to contend with Keurig Cold or potential carbonated-beverage options from Starbucks yet. If things are tough today, tomorrow looks even worse.
