The world's middle class -- the driver of consumer goods sales -- is growing larger. By most estimates, the world's population will grow around 1 billion during the next 20 years, and most of this growth will be in the middle class. This is a clear opportunity for a company like SodaStream (SODA) to introduce millions of potential consumers to in-home soda. Today, global soda sales are in the hundreds of billions of dollars -- and that's a number that's likely to keep growing.
However, the carbonated beverage business is actually shrinking in North America. The downward trend appears to be driven by a few factors, including changing consumer tastes and perceptions -- both true and overstated -- that soda is unhealthy. This is happening right as SodaStream's major push to expand in the U.S. has stalled. Heck, it's more than stalled: Sodastream's sales in the Americas declined 14% last quarter, and this was an improvement from the whopping 28% decline from the first quarter.
Here's the result:
The question today is twofold. Can SodaStream reverse course in the U.S.? Can it still be a great investment without success in North America? Let's take a closer look.
Decline in U.S. soda sales an ongoing trend
Here's what a Google search for "carbonated beverage sales" delivers:
Just searching for "carbonated beverage sales" tells the story. Source: Google search.
The trade journal Beverage Digest issued its report of 2013 sales in March, and reported a 3% decline in U.S. carbonated soft drink volumes. This isn't a one-off either -- soda sales have fallen so far in the past several years that they're now back to the same levels as 1995.
Think about it this way: An entire generation has been born, grown up, and is now in college since the last time U.S. soda sales were at 2013 levels. Furthermore, there are about 50 million more Americans today than there were in 1995. This growing disinterest in soda could be playing a larger role in SodaStream's lost traction in the U.S. than anyone realizes.
But, there's enormous growth potential
The U.S. market is still enormous, and it's not going to dry up overnight. Even after the decline, the equivalent of 107 billion 16-ounce servings were sold last year. That's more than 13 billion gallons of soda. For a company like SodaStream, which only generated around $76 million in total sales in all of the Americas in the first half of 2014, there's still an enormous amount of potential for growth, if it can reestablish some traction.
Scarlett Johansson will help SodaStream's branding efforts. Source: SodaStream.
SodaStream is making efforts to find that lost traction, too. In April, the company named Yaram Evan Chief Commercial Officer, a role that is designed to leverage his background and expertise in sales and marketing. This came just days after the launch of several new products aimed at consumers looking for low-calorie beverages that are also free from artificial ingredients.
This marked the fourth major product launch in 2014, all of which are targeted at consumers looking for healthier alternatives. The first three are licensing agreements with popular consumer brands, including Skinny Girl, Sunny D, and Welch's. This marks a small -- but deliberate -- shift in how SodaStream is marketing its product, moving away from the focus on cost and environmental benefits, and squarely on consumer interest in healthy alternatives. Scott Guthrie, General Manager for the Americas, emphasized this on the Q2 earnings call:
[Carbonated beverage] volumes continue to decline as consumers are finally taking a stand against traditional packaged soda, and are seeking better solutions for them and their families. Clearly, consumers are fed up with nine teaspoons of sugar per can of soda, and the use of artificial sweeteners like aspartame. With healthier, more natural, less caloric flavors, SodaStream is the solution, and this will be the main focus of our consumer messaging in the U.S. and Canada in the back half of 2014.
Will this strategy pay off? Only time will tell.
International growth just as important as the U.S.
While investor focus seems to be heavily weighted to the American market, the long-term success of SodaStream is just as tied to its ability to expand in multiple markets. In the first half of the year, sales in all markets except the Americas grew 19%, while sales of flavors and CO2 refills increased 9% and 22%, respectively, in the first half, showing that SodaStream owners are continuing to use their machines. Even the U.S. market has continued to see growth in sales of CO2 refills, though there has been softness in flavors.
Sodastream is making efforts to improve its international product, as well, signing a deal with Del Monte for international markets. So far, it has launched flavors in both the U.K. and Italy. SodaStream has also taken a play out of its U.S. playbook for the European market, as well, teaming up with Tefal to provide CO2 refills for its soon-to-be released home soda maker, similar to how it works with KitchenAid for the U.S. and Canadian market. As a matter of fact, the KitchenAid soda maker will be coming to Europe and Australia in late 2014, as well.
Looking ahead, is SodaStream a buy today?
In 2013, the Americas market accounted for less than 39% of SodaStream's sales, and the decline in U.S. sales of soda makers in 2014 reduced the percentage to 29%. Whether the company's efforts to reignite U.S. growth pan out or not, its growth in other markets probably makes the company worth a hard look. Total sales are growing in every market except the U.S., and sales of CO2 refills are growing in every market. Either the U.S. will be a huge boon, or the company will just outgrow the need for it to be successful.
With either outcome, today's relatively low price-to-earnings ratio of around 22 looks like a good value. The company had less than $600 million in sales in 2013, and it's essentially priced for hardly any growth at all. I think that's shortsighted based on the long-term opportunity.
Will SodaStream shares get back to 2013's prices again? I think eventually they will, but it's going to take time for the U.S. story to play out, or international growth to make that less important.
