2014 has not exactly gone to plan for consumer-beverage upstart SodaStream (NASDAQ:SODA). First, its new brand ambassador, actress Scarlett Johansson, was asked to resign from her role at nonprofit Oxfam because the organization didn't like her association with SodaStream, which leases a manufacturing facility in the disputed West Bank territory. Then, the company announced a profit shortfall in its most recent financial update, triggering a double-digit drop in its share price. However, with its strong top-line growth and a $40 billion market opportunity in the U.S. alone, are investors missing the forest for the trees?
What's the value?
SodaStream is the kingpin of the in-home soda business, with a product history that dates back to the turn of the 20th century. The company has leveraged greater popularity of in-home beverage making, partially due to consumers' concerns about waste and branded products' sugar content, into an installed base of 6 million households and an operating footprint across 45 countries. Much of SodaStream's success can be attributed to its ability to innovate, including the introduction of advanced programmable machines and a broadening array of syrup flavors, including a foray into the tea and juice categories through brand partnerships.
In fiscal year 2013, SodaStream has continued on its growth trajectory, with a top-line gain of 30.1%, aided by strong double-digit sales gains for both its machines and related consumables. Despite higher advertising spending, currently tipping the scales at a lofty 15.5% of sales, the company has used manufacturing efficiencies to generate an uptick in its adjusted operating profitability. The improved profit level is allowing SodaStream to further invest in research and development, including a machine platform targeting the restaurant industry.
Awakening the beverage giants
Clearly, SodaStream is at a major size disadvantage to the beverage giants, namely PepsiCo (NASDAQ:PEP) and Coca-Cola (NYSE:KO), both of which have advertising budgets that are larger than SodaStream's annual sales tally. However, SodaStream is emblematic of a shift in consumer consciousness concerning the health and environmental impacts of branded products, issues that have undoubtedly led to faltering top-line growth in PepsiCo's and Coca-Cola's core carbonated beverage franchises and gradual shifts in operating strategies for both companies.
PepsiCo, for its part, has been diversifying away from the beverage segment for some time, building up a leading position in snacks via its Frito-Lay and Quaker units. Indeed, that diversification has paid off in FY 2013, as a volume gain in its snacks business has offset a decline in its beverage business, allowing the company's overall sales volume to remain flat versus the prior-year period. PepsiCo has managed to increase its operating margin in its beverage business during the current period, but its inability to attract increasing volumes of customers to its trademark sugary beverages likely means the company needs greater product depth in the beverage space if it hopes to avoid market share erosion.
In contrast, Coca-Cola has remained primarily focused on the beverage space, hoping to drive growth through product category expansion, as highlighted by its 2012 worldwide introduction of the Fuze tea brand. The company's push into the still beverage segment has allowed it to grow its overall sales volume in the current period, up 2% companywide, including notable growth for its Honest Tea and Innocent brands in the tea and fruit juice categories, respectively. Like PepsiCo, though, Coca-Cola continues to be weighed down by weak growth for its large carbonated-beverage business, especially in its key North American and Western European geographies.
The bottom line
SodaStream may be down, as measured by its recent stock price performance, but it is certainly not out, as evidenced by a growing international customer base. The company has likely only scratched the surface of its potential in key growth markets like the U.S., where management estimates a potential market of 100 million households versus the roughly 1 million households that own a SodaStream machine today.
Indeed, the beverage giants seem to have finally acknowledged the growing threat of the in-home soda segment. Case in point is Coca-Cola's recent agreement to invest $1.3 billion in Green Mountain Coffee Roasters, a deal that positions the company well for capturing in-home sales when Green Mountain adds a cold beverage machine to its popular Keurig lineup, expected sometime in 2015. While SodaStream's near-term profitability has been hurt by the higher-than-expected costs of its growth initiatives, including its second year as a Super Bowl advertiser, the company's large installed base of users makes it a long-term winner in the beverage space.