Why SodaStream International, Ltd. Is Sinking in America

Over the last year, Americans have lost their thirst for SodaStream's (NASDAQ:SODA) at-home carbonated beverage machines. The company recently indicated that yet another quarter would pass with lackluster results in this crucial market -- and there was no sugar coating this time around. SodaStream's CEO Daniel Birnbaum was frank: "We are very disappointed in our recent performance... [W]e have not succeeded in attracting new consumers to our home carbonation system at the rate we believe should be achieved."

SodaStream intends to change directions with branding and marketing, doubling down on a message about the relative health and wellness aspects of its products. But there's mounting evidence that Americans just aren't that interested. What if SodaStream's product is too novel, its refill process too cumbersome, and its value proposition too lacking for America's mass market to catch on?

The more I look at SodaStream's predicament, the more I'm convinced that this could be the case. And if the company refuses to acknowledge this reality, the consequences could be awful for shareholders.

Source: SodaStream.

What went wrong

Those even remotely familiar with SodaStream know what this company is up against in the U.S. beverage industry. Its advertising budget is dwarfed by Coca-Cola's and Pepsi's. Meanwhile, both Coke and Pepsi have more than 100 years of developing a relationship with America's taste buds -- and our emotion-driven buying habits -- which SodaStream simply can't replicate that overnight.

Given those two facts alone, the famous value investor Charlie Munger might quip, "SodaStream's a one-legged man entering a butt-kicking contest." And this wouldn't seem far from the truth.

What's particularly vexing, however, is that SodaStream was, at one point, thriving in spite of these obstacles. From 2007 to 2013, sales in the Americas grew at an average annual growth rate of 95%, catapulting this region from 4% of the company's total sales to 39% of sales in that relatively short time frame. Incredibly, that same market is now the anchor that's expected to drag down the company's overall growth from $144 million in 2013 to $125 million this year.

So, what happened? Well, I must admit that TheStreet's Herb Greenberg might have hit the nail on the head with this one -- at least as it stands today. Back in January, he surmised that an early profit warning meant the SodaStream story was going "flat." He went on to note that he believed that SodaStream machines were "an all-in product, where nearly everybody who is going to get or give a SODA machine has done so or will."

SodaStream's marketing has been savvy, but the product seems to appeal to a niche American audience. Source: SodaStream.

Now, there was hardly a well-established trend at the time to back up this claim; but since then, we've seen this story play out almost verbatim in 2014. Heck, not even the Hollywood diva Scarlett Johansson seems capable of resuscitating this flat beverage maker today. Perhaps SodaStream is, in fact, an "all-in product," and a vast untapped American market is destined to remain untapped for quite some time.

On an anecdotal level, this sort of makes sense. I have yet to come across an owner of a SodaStream who wasn't a fan of the product. In fact, most of them are ardent fans. Although this is hardly scientific evidence, it coincides with the findings of the hedge fund investor Whitney Tilson, who revealed similar personal survey results in his bullish case for SodaStream earlier this year.

On the flip side, however, very few non-SodaStream disciples who I meet seem convinced this is a product they need to add to their kitchen shelves in the near future. It's just not in the cards for whatever reason. And that paints a very black-and-white picture of SodaStream's loyal consumers versus an untapped, but seemingly uninterested, potential market.

At some point in the past year, the low-hanging fruit disappeared for SodaStream, and I think it might be very difficult to persuade an uninspired audience. Yes, we love soda -- so much so that the average American drinks twice as much soda as bottled water. But, no, we don't all love making it ourselves.

First off, a SodaStream machine is an unfamiliar device. Can you remember a time when Americans embraced a soda maker in their kitchens? Neither can I. This differs from coffee machines, for example, which have seemingly been around forever. Given SodaStream's 100-year history in Europe, however, it's a slightly different story: SodaStream continues to thrive in its original market. I'm not not saying SodaStream is necessarily a "fad product" in America; but it looks like it could be a slow-and-steady ride to widespread adoption.

Even new products like the Play seem to have brought very little spark to the SodaStream brand. Source: SodaStream.

Second, making home soda is an unfamiliar and cumbersome process. There is no other product I use where I have to revisit the store regularly to refill a highly pressurized gas canister. A propane grill would require such a process, but I don't have one. And when I have, I've found it cumbersome.

Europeans might not. They tend to visit stores more frequently, but buy fewer groceries in one fell swoop. Perhaps a small gas canister refill is a bit less of a hassle. Not to mention the fact that Europeans walk more than Americans, a natural deterrent to hauling 24-packs of soda to and from the store. The "What's more cumbersome?" equation is perhaps completely reversed on the other side of the pond.

Third, carbonated water consumption in America is lower than the rest of the world. As I've pointed out before, carbonated water is the one beverage where SodaStream can save consumers some serious coin. It seems -- with a nudge from Coca-Cola -- that our thirst for sparkling water is increasing; but only time will tell whether this is a habit that sticks. For now, the value proposition of a do-it-yourself device is less evident to soda sippers.

The takeaway for investors

In America, SodaStream was once soaring, and now it's fighting to stay relevant. Why the sudden change of fate? Perhaps SodaStream hit a ceiling here because it's such a new -- and foreign -- product.

Research highlighted by The Atlantic recently described why we collectively tend to resent entirely new concepts -- even game-changing products like the iPhone. Studies show that virtually everyone has an "innate bias against novelty." And everything about SodaStream is new and different to a market that is accustomed to picking up a 12-pack of Coca-Cola at the store and calling it a day. As The Atlantic also points out, "The difference between a brilliant new idea with bad marketing and a mediocre idea with excellent marketing can be the difference between success and bankruptcy."

As SodaStream looks to rejuvenate its marketing effort, investors are hoping management has something "brilliant" up its sleeve. At this point, I'm not sure I want to hang around to find out.