As consumers become increasingly health conscious, they are shifting from classic colas produced by Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) to low- or zero-calorie drink options. This bodes well for SodaStream (NASDAQ:SODA), a manufacturer and distributor of homemade soda makers. With SodaStream's soda makers, soda drinkers can get their daily dose of soda with two-thirds less carbohydrates, calories, and sugar than their regular off-the-shelf counterparts. SodaStream isn't just a great product for consumers--it is also an attractive investment play on the at-home soda market.
The growth rate of any company is largely a function of industry growth and market share gains, particularly the former. The U.S. of carbonated soft drinks (CSDs) market is a very mature market. Since the time the first bottle of Coke was sold in the U.S. in 1886, almost everyone in the country has drank at least a soda in his lifetime. This places a natural cap on how many more cans of soda Coca-Cola and PepsiCo can sell every year.
On the other hand, SodaStream estimates that the U.S. household penetration rate for home carbonation systems is at a low 1.1%. With Sweden's penetration rate estimated at 25%, there is ample room for SodaStream to grow further.
Traditionally, soda drinkers have been fiercely loyal to their chosen brands. For example, when Coca-Cola replaced its classic Coke with a new formulated version in 1985, the backlash from its customers forced it to relaunch its classic Coke within months.
However, with the health and wellness trend contributing to lower CSD sales in recent years, it seems that while consumers have their favorite soda brand, there is nothing to stop them from switching away from sodas altogether. The key is that every soda sale is a one-off transaction -- Coca-Cola and PepsiCo must keep selling the same number of products every year to maintain the same revenue level as the previous year.
In comparison, SodaStream operates on a classic razor and razor blade revenue model. As SodaStream's installed base of customers who bought its soda makers grows, recurring sales of consumables such as carbonation bottles, carbon dioxide refills, and flavors will also increase in tandem. Based on September 2013 year-to-date data, sales of soda-maker units increased 47% year over year, but refill units and flavor units were up by 265% and 139%, respectively. This set of financial numbers is indicative of the annuity-like and highly profitable nature of consumable sales.
Price competition and the proliferation of private labels have dented the profitability of many consumer-product companies. However, soda seems to be a unique product category, where consumers are willing to pay more when they find something that suits their taste.
Unlike product categories like packaged food, personal care, and home care, private labels haven't made much headway in taking business away from the branded beverage giants. As of year-end 2012, Coca-Cola and PepsiCo still have a combined 70% market share of the U.S. CSDs market. In contrast, products from Cott, the country's largest private-label beverage company, accounted for a mere 4.7% of the entire market. This is the strongest indication that soda drinkers are relatively price insensitive.
Furthermore, true to the razor and razor blade model, SodaStream's Fountain Jet soda maker is affordable at less than $100, with the margins made on the "blades" and not the "razor." For example, Switzerland, a more developed home-soda market, boasts of an operating margin in excess of 25% because of a product mix tilted toward consumables (82%).
On the other hand, the U.S. operating margin is significantly lower, at 5% for SodaStream, because sales are split almost evenly between soda makers and consumables. Therefore, SodaStream will benefit from margin expansion going forward, as an increased number of higher-margin consumables are sold.
Foolish final thoughts
With Coca-Cola and PepsiCo suffering from lower CSD volumes, SodaStream is a much more attractive play on the soda market because of its superior growth prospects. In addition, SodaStream has a superior business model vis-à-vis Coca-Cola and PepsiCo, resulting in stable revenue streams and profit margins.