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Every once in a while a product or company pops up that has real potential, but may only be a fad. For investors this can be a very slippery slope. If the product is a fad, the equity takes off only to correct back down just as quickly, oft having retail investors buying too high, and then losing. SodaStream (SODA) was a company on the teetering edge of being a fad. The big question now is whether or not it will become mainstream.

About 18 months ago Demian Russian of Market Playground told me about this little company that had a product which allowed consumers to make their own soda at home. At the time I thought to myself that soda was cheap enough, and while novel, the concept of making your own soda may have a difficult time penetrating a market dominated by giants like Coke (COKE) and Pepsi (PEP). After all, Coke and Pepsi are massive brands with loyal customer bases and can gobble up market share in huge chunks.

Time passed, an then earlier this summer my 12 year old son stopped me in a Wal-Mart at the SodaStream display. He then went on to tell me that one of his friends have this at their house, it is cool, saves money, the drinks taste good, and we should get one. I responded that perhaps one day we will and continued on with my shopping. As we progressed through the aisles, I could not help but reflect on the conversation that Demian Russian and I had regarding SodaStream and then think about the simple words my son used when we simply walked by the SodaStream display. Needless to say, when we went to the checkout line we had a SodaStream machine and about 5 beverage syrups in the carriage.

Upon arriving home we set up the machine and made our first 1 liter batch of soda. I will admit that it was pretty cool, but still was not sold on the concept of this product going mainstream. Certainly the company had expanded into retailers like Wal-Mart, and had a decent following, but as yet, I was simply not convinced that SodaStream would be anything more than a prolonged fad.

As the summer passed, and as we made a wide variety of beverages in the SodaStream machine I became more and more convinced that SodaStream had a decent little niche in the market. I enjoyed making beverages a liter at a time, I enjoyed the ability to have a wide selection at my disposal, and enjoyed the fact that my refrigerator was not clogged with three different 2 liter bottles going flat because they were not consumed quickly enough. While this may all sound subjective (and it is), I find that if I myself like a product that others likely will as well. The consumer experience is HUGE with any retail product. If consumers accept a product it can thrive.

Beginning in late summer and early this fall I started to see SodaStream commercials on television. The company had advertising geared toward the quality and taste of the product as well as a campaign aimed at the benefits for the environment. After all, SodaStream bottles are re-used time and time again, while 2 liter bottles clog up landfills. I was impressed, but still not convinced of whether we were looking at a fad or a mainstream product. As Thanksgiving rolled around I became more and more convinced.

I travel a lot in my line of work and found myself doing holiday shopping in New York, New Jersey, Connecticut, Rhode Island and Massachusetts. What I found is that SodaStream products seemed to be moving off of the store shelves in a speedy fashion. It seemed that no matter where I was that people were gravitating to this little carbonation machine and selection of syrups. It appeared to me that SodaStream was indeed going mainstream. Am I a day late and a dollar short? That depends. Certainly the stock chart, courtesy of Yahoo Finance, is quite telling.

(click to enlarge)

Over the past couple of years the equity has had a peak near $80 and a low of about $27. SodaStream currently trades at $44. The bottom line is that if the product is successful it should be able to appreciate from these levels, especially if the product gained traction in Q4 with holiday shopping.

In my opinion SodaStream is going to have an impressive Q4 in sales based on the channel checks and brief surveying that I have done. In fact, the company will very likely set records this quarter that will gain mainstream attention. We can see that by simply looking at the progress this year alone. SodaStream has been aggressive in advertising all quarter and it appears that this has the company gaining impressive traction at retailers. In fact the company has also announced its first ever SuperBowl commercial to air during the big game On February 3rd.

Does this make SodaStream stock a buy? That is the million dollar question. In my opinion the answer is yes ... \at least in the shorter term. SodaStream has nearly tripled over three years, and is poised to see it rise yet again in 2012.

  • 2009 - $10 million
  • 2010 - $13 million
  • 2011 - $28 million
  • 2012 - $36 million through 3 quarters

While the company seems to have caught on, there are challenges that investors will want to be aware of.

Remember earlier when I said that the likes of Coke and Pepsi are industry giants? Well, what happens if they take notice? In point of fact it happened this summer when Coke sent SodaStream a cease and desist notice for some SodaStream advertisements. So far SodaStream seems to have won the battle in that issue, but is there a war brewing? What happens if Coke or Pepsi decide that they want to sell syrup directly to consumers? Syrup that can be used in a SodaStream system?

The concept of SodaStream is brilliant yet simple. Any fountain soda is simply carbonated water and syrup. Go into any fast food restaurant and you can see the system in action. SodaStream simply took the idea and brought it into the home. Coke and Pepsi already make syrup. What is to stop them from simply packaging syrup into smaller containers that consumers can buy? The answer is nothing. The implications could be huge for SodaStream.

Consider that Coke and Pepsi have massive amounts of shelf space in retail stores, grocery chains, and convenience stores across the nation. The way things are now SodaStream syrup is a product I pick up at Wal-Mart or Staples. I do not find it at my local grocery store. What if Coke or Pepsi sold syrup at thousands more locations than SodaStream does? With SodaStream I get a more generic "Cola" or "Lemon-Lime." Coke and Pepsi can bring to bear brand names that consumers are already well aware of, and get them to consumers at MANY MORE locations if they decide to enter the sector. Coke and Pepsi own valuable shelf space and SodaStream has valuable consumer traction. It will be interesting to see how this plays out.

To be fair, SodaStream does have some major players on board. Kraft Foods (KRFT) has syrups for Country Time Lemonade and Crystal Light beverages in the SodaStream arsenal. Perhaps that would be the ultimate goal of SodaStream. The question is whether a partnership with the likes of Coke and Pepsi becomes a necessity to either SodaStream or these beverage giants. Time will tell, but investors should contemplate that idea.

A small critique I have of SodaStream involves its effort to be an environmental friendly company. No, I am not saying that what they are doing is bad. It simply needs improvement. The ad campaign about how many bottles are saved is great. My critique is with the carbon dioxide cylinders. These cylinders are what carbonates a beverage. When the gas runs out it needs to be replaced. Upon removing the expended cylinder from the device, it has a great sticker telling consumers to recycle, and for more information go to sodastream.com. The problem is that when I get to the website there is precious little information about how exactly I go about the recycling process. Slightly frustrated, I brought my empty cylinder to Staples (SPLS) and, while the retailer did take back my bottle and supply me a new one at a less expensive price, only one person knew how to accomplish that transaction at the register. Simply stated, the website and retailers could use a bit of a tweak to perfect this aspect of the company.

The bottom line is that SodaStream should be setting up for a great 2013, but investors should keep a close eye on the overall sector. SodaStream will not likely see competitors in the hardware side of the business, but they could see the consumable part of the business (the syrup) face some challenges. If others jump into the syrup business it could put a dent in one important and recurring revenue stream. SodaStream looks to have great potential with its current business model, but I am not so fond of it if they begin to lose the recurring syrup side of the business. Now that SodaStream is mainstream it is more important than ever to pay close attention to the sector.

Source: Has SodaStream Gone Mainstream?