The annual International Home and Housewares Show always proves to be a significant launch pad for new products, innovation and collaboration. Every year, major consumer goods companies and emerging consumer goods companies participate in the show in order to display their latest and greatest products as well as existing product lines which have been proven sales drivers for retailers. Retail buyers from all over the world come to the event in order to meet with the wholesalers/vendors to see these products on display and order the products which they believe will sell in their retail locations or e-commerce sites.
For SodaStream International (NASDAQ:SODA), this year's IHH Show was of particular importance as the show was not entirely centered on the company as it had been in recent years. In the past, the SodaStream platform exhibit had been one of the highest if not the highest attended exhibit at the show. The focus shifted to the emerging competition and overall category growth which has been leading to more and more companies getting into the cold and carbonated home category. SodaStream was still very much the most visited exhibit and tested product line at the show, but others were grabbing retail buyers' attention with new, innovative products. Putting the competition on the back-burner for a moment, let's discuss what we learned from SodaStream at this year's IHH Show and after briefly discussing this year's estimates from the analyst community.
Based on analysts' expectations for the year, SodaStream is expected to show a $.02 per share earnings decline in fiscal 2014 with the bulk of the earnings decline/stagnation to come from the first half of 2014. The first half of the year comes with a lot of headwinds in SodaStream's United States business as severe weather issues have forced close many retail locations at various times during the first quarter. This issue comes on the heels of a poor retail and consumer environment during Q4 2013 which left several large retailers with outsized inventories of SodaStream soda maker units.
Where it gets tricky for analysts is modeling the 2nd quarter. With current estimates in mind and poor shareholder sentiment currently surrounding the stock, I made the trip to the IHH Show and visited the SodaStream exhibit to meet with the company's CEO Daniel Birnbaum. I had the opportunity to spend time discussing the business and its prospects for Q2 and beyond with Mr. Birnbaum as well as other company executives and regional managers. I learned of some wins and opportunities during our discussions with account executives and vice presidents at the IHH Show in open forum meetings and discussion sessions. I even had the pleasure of meeting with SodaStream's recently appointed Americas General Manager, Scott Guthrie.
With headwinds persisting in the United States, SodaStream Canada managed to double its revenues year-over-year in 2013. With that in mind, is it possible for SodaStream Canada to mirror the same outperformance in 2014? By the end of the year, SodaStream Canada soared past SodaStream USA's household penetration rate (HPR) and finished the year with an HPR of 2.4% in Canada. SodaStream's purchase of the Canadian market in late 2012 should have been an indication of the potential in the region and might forecast similar results in Japan as SodaStream will take over the Japanese market on April 1st this year.
Retail account executives and market managers in Canada have strong relationships with retail partners to ensure product displays remain highly presentable and most importantly, in-stock. At Wal-Mart (NYSE:WMT) Canada locations, the lead account executive from SodaStream manages to keep a 98% in-stock level for SodaStream products at the retailer throughout the year and with a constant rate of increasing sales volumes. Being in-stock on key SKUs is essential to, not only promoting the product, but maintaining increasing sales.
Right Fixing U.S. Business
In the 4th quarter of 2013, some lingering issues were highlighted in the SodaStream USA business. Some of the lingering issues are centralized to Wal-Mart. In an effort to remedy issues, SodaStream and Wal-Mart are working together to optimize sales for both companies. Among these operational fixes between the two firms are developmental steps which are being created in order to increase convenience with the gas exchange at Wal-Mart. We will continue to monitor this Wal-Mart operational development as it carries forward.
Moreover, shelf space allocation will be crucial for SodaStream USA in 2014 as the firm has an abundance of new products to launch this year. Failure to reach agreements with retailers to solidify expanded shelf space could hinder revenue growth this year. One specific goal of participating at the IHH Show is to discover whether or not retailers are expanding shelf space for a product or product line.
SodaStream will take over the rights in the Japanese market beginning April 1st. The Japanese SodaStream market has a total of 1,600 doors. Yukie Hirano is the Director of Marketing for Japan as SodaStream currently is looking to hire an Operations Manager for the region. In our discussions with Yukie, we have been made to understand the potential in Japan is only bound by the availability of the product line. Ms. Hirano is in discussions with reputable retailers in the region presently. As we noted earlier, concerning SodaStream's purchase of the Canadian market and the company's knowledge of the opportunity that rests within the Canadian market, we are seeing the early stages of similar intent and knowledge with that of the Japanese market by SodaStream.
As the Director of Marketing, Ms. Hirano's challenges are to broaden SodaStream's distribution and increase awareness for the SodaStream product line. One crucial aspect to achieving these goals will be to assimilate the television commercials about SodaStream Source in Japan with the availability of the SodaStream Source in Japan. The Source is in limited store locations and will more broadly roll-out to additional locations throughout 2014 as retailers add the Source to their product line. Additionally, the use of Facebook as a media tool will be more widely used to communicate and engage the consumer in the market.
SodaStream is still dealing with a lot of red tape to sell into India. This market will come, but the company wants to do it right and deal with the issues now before they get on shelves. Fortunately, the company is not spending a lot of money there right now so it's immaterial from that perspective, but when the infrastructure of the business is fully cemented, the firm will launch sales in the region.
So now that we have India on the back-burner from an investor's point of view, we understand that Mexico will be an open SodaStream market this year as well. Marc Reintjes is the new VP of Business Development for Latin America and he will be spearheading the entrance into this new market. Like Scott Guthrie, Marc also came from Disney (NYSE:DIS) and has over 26 years of experience developing retail points of sale and interest for consumer goods in the Latin American markets.
Advertising and Promotion
SodaStream has found itself in a position of diminishing returns on television advertising and will look to decrease this medium of promotional marketing in the United States going forward. It is difficult to get the better-for-you, eco-friendly, do-it-yourself message across to wide demographics of individuals in a 30-second television spot. In other more homogeneous markets television promotions have worked, but the United States market is too widely diverse in culture and socioeconomics that it has proven too expensive and too ineffective to promote the product line in such a way. Therefore, the company will dedicate more of its A&P budget to what has shown proven results such as social media, in-store demonstrations, community party launch campaigns and social events in the U.S. market. The bottom line is that it is too difficult to disseminate what the benefits of the SodaStream system are in a 30-second television commercial to the U.S. consumer.
The SodaStream Play made its debut at the IHH Show to much fanfare as the retailers enjoyed the design and functionality of the product. Like most SodaStream soda makers, the Play is simple to use and fits nice on the counter top with a small foot print. The parts on the Play are customizable and colors are interchangeable. How does this work? The head of the unit (which is pressed down to activate carbonation) is actually attached to the neck/body of the unit by magnets. The user can simply pull or slide the head off the magnets and the body of the unit this way. The SodaStream Play will debut alongside the launch of V8 flavor syrups in June this year.
The Kitchenaid soda maker debuted at the IHH show and has a unique, retro-design. There are differing materials used in different models. Some have a lightweight plastic shell with aluminum head while others have a similar steel body with steel head with a retail price point of $199.99.
The Kitchenaid soda maker is powered by SodaStream gas and Source snap-n-lock technology. On another note, Nespresso has partnered with Kitchenaid to launch an espresso maker line of products that are compatible with Nespresso capsules.
New flavors, including Stevia flavors will be launched at various times this year in the U.S. market.
As we discussed flavor syrups and partnerships for flavor syrups with Scott Guthrie and Daniel Birnbaum in detail, it is clear the strategy that SodaStream has for itself going forward. The breadth of healthier alternatives to store bought colas is growing by leaps and bounds every year and will see its greatest growth to date in 2014 through Welchs, Ocean Spray, Del-Monte, Cooking Lite, Stevia and V8 flavors.
The simple fact of the matter is that consumers are leaving the traditional store bought cola brands without the help of SodaStream and the consumer is seeking alternatives. Even the word soda has developed a negative connotation over the last several years. SodaStream is more dedicated to empowering the consumer and enabling the consumer to enjoy sparkling beverages without the guilt or negative effects associated with store bought sodas. SodaStream is offering the consumer healthier cola flavors and over 70 different additional flavors and the growth in syrup sales is showing the consumer is adopting the strategy and differentiated flavor offerings. Currently, SodaStream colas represent roughly 30% of total syrup sales. While this is the highest categorical percentage of syrup sales for the company, it does show that the colas are widely consumed, but a healthy percentage of SodaStream syrup sales are distributed among its other categories of syrups.
The new squeeze syrup bottles also debuted this week, but a launch date has yet to be set. Additionally, SodaCaps have proven they have a place in the SodaStream syrup system, but what the company has found is that they are selling more variety packs of SodaCaps than even cola SodaCaps. Going forward, Ocean Spray and Happy Hour SodaCaps will be introduced to the market.
It is no secret that much attention directed at SodaStream lately has been highlighting the threat of competition from the likes of Keurig Green Mountain (NASDAQ:GMCR)/Coca-Cola and Bevyz/Pepsico. Bevyz Global has a staff of 36 employees and is incorporated in Malta.
The Bevyz product is a single-serve, multi drink system which produces cold, hot and sparkling beverages. The product can be plumbed/electric or simply plugged into an electrical outlet. The machine uses a thermoelectric system to cool a 2.7 liter water tank to produce cold beverages. The product is aimed at the premium mass market and will launch online in the coming weeks and at retail locations this Fall. The Bevyz machine will be produced and distributed by Cuisinart at a starting price point of $299.99.
Capital Ladder had a meeting with Bevyz back in early March. We recently had the opportunity to test the product at the IHH Show and meet with Ariel Sterngold, Bevyz head of Business Development and son of the CEO/Chairman of the company. Ariel identifies Bevyz as a technology company as they have been working on this Bevyz platform for the last ten years.
After testing the product and understanding its capabilities, our conclusion is that the Bevyz Fresh machine will hold a place within the developing home carbonation category. The Bevyz Fresh machine is designed for medium carbonation and cannot be customized otherwise by the end-user.
- For the aforementioned reasons, the machine will not have cola flavor pods which need a minimum of 4 volumes of carbonation. Cola is the #1 flavor draw in the CSD category.
- The system will launch with 25 flavors varied between cold and hot beverage pods.
- The CO2 will cost $19.95 for 30L of medium carbonation capability. That compares unfavorably against SodaStream's 60L of customizable, up to high/fountain drink carbonation capability for only $15.
- The flavor pods will cost $.69-$.99 per pod depending on the flavor choice. This price is not inclusive of carbonation cost. Each pod will produce 6-10oz. of drink depending on flavor pod.
- The thermoelectric system needs a constant electrical current or takes several minutes to cool the water inside the water tank.
Bevyz investors with equity stakes in the company include PepsiCo (NYSE:PEP), Keurig Green Mountain, Conair Corporation and Ambev (NYSE:ABEV). The Bevyz system is hoping to eliminate the need for multiple counter-top appliances used to deliver beverages in the home today. With that said, they are doing so at a significantly higher price point than the combination of the average selling Keurig coffee maker and the average selling SodaStream soda maker which could reduce the attraction of a multi-functional beverage brewer system.
SodaBoss is another new market entrant with Israeli corporate officers heading the company. The product line is very similar to that of SodaStream in form and function. The SodaBoss has one existing machine form factor and 12 syrup flavors.
The SodaBoss machine will be priced between $59.99 and $69.99 and uses disposable CO2 bullets priced at $7.99 for 10 CO2 bullets that produce 1 liter each. The flavor syrup taste was quite poor when compared to store bought sodas or SodaStream brand sodas, however, the carbonation was better than that of Bevyz and just below that of SodaStream's carbonation. Based on the company attempting to "knock-off" a more prolific product assortment from SodaStream and limited production capability for SodaBoss, we don't believe the system will gain retail buyer adoption in any meaningful way. Every year a new company comes to the IHH Show with an attempt to "knock-off" the SodaStream product line and retailers simply pass on these product initiatives.
Unfortunately, the Keurig Cold brewer system was not introduced at the IHH Show which likely designates a product launch for 2015. We will update investors on the Keurig Cold brewer as details become more readily available.
The IHH Show proved to be a successful venue once again for vendors and manufacturers around the world to partner with retailers and other vendors.
The competitive threat to SodaStream seems to be more a factor of headline media spin than rooted in factual understanding of the new products in the category from various companies. Given the growing consumer interest for home carbonation on a global scale and the likelihood that competition will serve to sharpen the SodaStream message while growing the total category, we believe that the company will continue to lead the home carbonation market for the foreseeable future. A viable competitor is likely essential for the category to remain healthy and relevant longer term.
Investors reading this article are probably left with many unanswered questions which is why our full scale report has all the questions answered related to shelf space, market expansion, competition and in much greater detail.
Disclosure: I am long SODA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.