For almost 2 years now, Capital Ladder Advisory Group has been delivering dedicated research and information regarding SodaStream International LTD (NASDAQ:SODA) to the Seeking Alpha community of investors and readers. Our goal has been to dive deeply into the SodaStream story to see what, if anything is so compelling for investors. We have certainly found many reasons over this stated time period to feel that, not only is the product line and category compelling, but as the leader and innovator in the category SodaStream will continue to remain an interesting story for the foreseeable future.
SodaStream didn't launch in the United States until late in 2009, and only achieved wide distribution in 2012, therefore it took the company a good deal of time to rid itself of the "fad" theory. Indeed the company has enjoyed strong double digit growth in the U.S. every year since going public in 2010. With a strong foothold in over 48 markets currently, the company will be looking toward future growth by expanding both new markets and existing ones. As the leader in the home carbonation category, the company has a firm understanding of what it takes to be successful in the category long term. We will discuss these ideas and successes as we move along.
It's every publicly traded company's objective to garner investor interest and with that objective comes the added challenge of communicating with investors in a relevant and impactful way and in accordance with all SEC regulations. Many investors gather their respective information on a particular company through SEC filings, quarterly reports and investor presentations. However, there is a large and growing group of the investor class that would like to communicate with company management directly; these investors have specific questions they would like to have considered and answered by the company executives. SodaStream has been well-engaged with its investor base since going public in November 2010 and the management team understands the value of the opportunity to educate not only consumers, but also analysts and investors. The company is aware that many thousands of people subscribe to content related to SODA, and has agreed to offer the first-ever of its kind one-on one interview exclusively for the SA platform. So without any further ado, it is Capital Ladder's great pleasure to lead the question and answer session with Yonah Lloyd, chief corporate development and communications officer for SodaStream.
Seth Golden: "Good afternoon Yonah, we certainly appreciate this innovative and thoughtful way of talking to the investor class and laud your acknowledgment of the Seeking Alpha platform as a viable tool for investors. Our first set of questions will focus on the topic of expansion.
1. SodaStream plans to expand into Mexico and India in the near future. Can you give us an update on these new market expansion efforts and what retailers in the regions you are looking at partnering with for distribution?
Yonah Lloyd: Yes, we are gearing up to enter Mexico, one of the top two countries in the world for soda drinking per-capita, along with the USA. Scott Guthrie, our new Regional GM for the America's region, has overall responsibility for North and South America, and we recently hired a new VP Business Development for Latin America, Marc Reintjes, to lead our expansion into Mexico and other untapped markets in the region. There are many retailers in Mexico that are opportunities, including retailers they share with the US. And given the more obvious opportunity, this market is being prioritized ahead of India for now, which is still being reviewed before we can commit to a timeframe.
Seth Golden: 2. Last year, one of the company's goals was to get deeper into the DIY sales channel, especially with the Samsung(OTC:SSNLF)/SodaStream partnership. You're anniversarying this partnership with the refrigerator which employs the use of a SodaStream CO2 cylinder; what are the steps SodaStream is taking to get the CO2 deeper into the DIY channel where these refrigerators are being sold? Also, are there other refrigerator manufacturers that are looking to partner with similar products using SodaStream CO2 presently?
Yonah Lloyd: The Samsung refrigerator has been very successful so far. It launched last spring in one model, in one country (the US), and in two stores, neither of which was a DIY store. Less than a year later the sparkling refrigerator is now available in 5 countries today, at over 3,500 doors, and entering 10 more countries as the year progresses, including thousands of more doors that can potentially carry our CO2, as well as other SodaStream products. In addition, Samsung will be including the branded "Powered-by SodaStream" carbonation feature in up to four different refrigerator models. Because many of the refrigerators are sold as US DIY stores we see this relationship as an opportunity to add those retailers as new CO2-exchange locations. We are in discussions with DIY chains right now and I am confident that we will succeed in adding them during the course of this year. We definitely believe that the large home appliance sector is going to seek to add a carbonation feature in the appropriate products, whether a refrigerator, a faucet, or something else. While it is premature for us to make any specific comments, we do believe that as the leader in home carbonation technology SodaStream will be a part of these future offerings.
Seth Golden: 3. There aren't a lot of retailers outside of grocery and drug left to explore in the U.S., so what is the key to expanding into these channels in a meaningful way? It seems as though SodaStream Canada is already heading into this channel, so why is SodaStream USA seemingly behind schedule?
Yonah Lloyd: We have consistently stated that the US market will begin selling our consumables at grocery stores in 2014, and expand more meaningfully through 2015, and also drug and convenience stores. So we are very much on schedule, and it is based on two basic components. First, given that the sell-through velocity expectations by grocery/drug stores is high, we need a large enough installed base to justify our presence on those shelves. And we believe we are approaching the necessary level later this year, and of course growing into 2015. Second is capacity. We are building a 1-million-square-foot production facility right now in order to meet the expected consumer demand. The facility will begin production in stages this year and be fully-functional next year, so we will be able to better support such a large door expansion in the US and still support all of our other world markets.
Seth Golden 4. China was mentioned as an expansionary market on the latest conference call. Would you say this is a market the company could expand into in the next 12 months?
Yonah Lloyd: We have watched as the at-home per-capita carbonated beverage business has grown in China over the past few years. There is no dominating soda brand there, so the timing to enter that market is excellent. However, like Japan, India and Brazil, the regulatory environment for importing products is quite challenging. We are still in the process of getting clearance in China so I prefer not to put an absolute date out there, but it is possible that we can enter this year.
Seth Golden: Thank you Yonah! Our next topic of conversation concerns growth drivers for the home carbonation category.
1. There are many reporters, investors and analysts who don't seem to have a firm understanding as to what it takes to succeed in the home carbonation category as this is a new category and difficult to get a firm handle on. So what are the keys to success when it comes to flavors, CO2 and the machine?
Yonah Lloyd: Home carbonation is a very new category in many countries, including the US, so a strong combination of Demand Creation and Distribution are two important elements to success. Educating consumers about the category itself, the various benefits it brings, and about our brand in particular, is a significant task in the early years of building any market. Having already built markets to high levels of household penetration (10% - 25%) and usage, like France, Sweden, Finland, Australia, Israel, Switzerland and others, we are uniquely positioned with the experience in building this category. And our first-mover advantage in close to 70,000 stores gives us a natural barrier to entry because retailers are hesitant to manage more than one exchange system and have no incentive to try and manage two pools of cylinders. Additionally, we use surveys and other methods to learn how to best message the key benefits to consumers in each country. SodaStream offers tremendous versatility to our users, as well as cost savings, health, convenience and an environmentally-friendly product. Different benefits resonate differently by country, so it takes several years to learn how to focus on what matters most. With flavors it is easier for us, as we have several manufacturing locations and can produce the proper portfolio based on the market's needs, as well as introduce new concepts almost at-will. Plus, we have partnered with many excellent beverage brands, such as Ocean Spray, Kool-Aid, Country Time, Welch's, Crystal Light, SunnyD, V8 Splash, Skinnygirl, Eboost and others. When consumers see familiar brands that they love it helps them feel more comfortable with the product, and offers them new ways to enjoy their favorite drinks. As for soda makers, we have several award-winning units that offer great functionality in a beautiful design, and we will continue to innovate and improve the user experience.
Seth Golden 2. So on the soda maker front you have the "Play" coming out in June for $89.99. Does the company have a feel for what the right number for soda maker styles in the market is?
Yonah Lloyd: SodaStream has recently started a consolidation of our soda maker portfolio in order to present a more familiar design signature that will be easily recognized as our brand. In addition, reducing our SKU count will help drive efficiencies in our supply chain. Older models such as the Fizz, Dynamo, Pure and others will eventually be replaced by models based on the Source, and the Play is the first of these new models. We are also planning an electric version of the Source for early next year.
Seth Golden 3. There are V8, Sunny D, Welch's and Del-Monte flavors coming out this year, but can you tell us about the Stevia flavors and the new squeeze dosing syrup form factor which are going to be new products also? Will squeeze dosing be available this year or 2015?
Yonah Lloyd: Stevia is actually one of several "natural sweeteners" that SodaStream is using across our flavors. These ingredients are not easy to work with, especially in our highly concentrated products, but we finally can state that we have launched the first round of Stevia-sweetened flavors. As you know, we recently launched a single-serve dosing solution called SodaStream Caps, which delivers the same consistent quality beverage each time in our 1-liter format. The "Squeeze" dosing is related more to the very popular liquid-enhancer category that started 2 years ago with Mio and has really taken off, with dozens of brands now offering liquid drops of their products. With the Squeeze product the user literally squeezes the amount of flavoring they want into the sparkling water, whether it is in a cup, a glass, or a pitcher. We plan to launch some of our flavors as Squeeze options in early 2015.
Seth Golden: Thank you again Yonah. It sounds like the portfolio of products continues to grow every year with thoughtful innovation that is aimed at "what the consumer wants". Our next topic of conversation then will bring us to what the competition is doing in the category.
1. So now that you've seen the Bevyz Fresh platform and have a degree of understanding as to what the Keurig Cold platform will do, what does SodaStream think the competition is overlooking when it comes to being successful in the home carbonation category, and what makes it different from the at-home hot beverage category? Is there a difference between home carbonation and single-serve hot beverages in the home by way of a brewer like that of Keurig or Nespresso?
Yonah Lloyd: Seth, you cannot open your fridge and pull out a hot cup of coffee. You have to go through some kind of process to make it. But you can easily do so with soft drinks, which are cheap and available 24/7, very close to home. There is no real "problem" with getting soda, so any "solution" really needs to offer an even better experience all-around. All-around includes convenience and price. From what we understand, the per-cup serving pricing expected from the "single-serve" competitors is far higher than what people pay today. Now if the convenience was really amazing, then perhaps there is a trade-off. But inserting a capsule and waiting 45 seconds or more for a single-serve cup is actually far less convenient than the few seconds it takes to enjoy a less-expensive one as a can or bottle from your fridge. With SodaStream it only takes a few seconds to make the drink, and it also costs less than the pre-packaged versions. And, importantly, SodaStream empowers consumers to prepare the drink exactly the way they want it…more or less bubbles, higher or lower flavor and sweetness intensity, and with a tremendous variety of drink options from sparkling water through cocktails. So while there is lots of "buzz" around the concept of a push-button soda system at home, the real test will be when the products are marketed. We firmly believe that the vast majority of consumers will prefer to make personalized soda by the bottle for less cost, and in a few seconds, rather than by the cup, at greater cost, and waiting around 45 seconds. And I haven't even mentioned the environmental benefits.
Seth Golden 2. There's been little discussion about SodaStream's future home carbonation platforms and how they might be different or have the ability to offer the consumer more choices other than sodas. What can you share with investors regarding the future of home carbonation through SodaStream's research and development initiatives? It's been said that SodaStream is working toward alcohol carbonation and/or other liquid carbonation; can you give a little more color on these initiatives?
Yonah Lloyd: Wherever there is a pipe of cold, running water SodaStream aims to be the company that adds the bubbles. We have already proven our capability with the Samsung "sparkling refrigerator," and we are working on similar opportunities for other water environments, including faucets, office and food service venues. And yes, we do have a working "single-serve" system in development where you get your soda by the glass, along with hot and cold non-carbonated water. In addition, we see the alcohol industry as a natural extension of our technology. We recently did a pilot test with Campari in Italy where we packaged their product with ours and marketed it as a full Campari Spritz in-a-box. The sellout was fantastic, we ran out of stock very quickly and produced more to help meet the demand. So we know that our entry into this industry will be positively received. We do have a project in place for a carbonation system next year that will offer tremendous benefits to bartenders as well as people at home, making it easier and more fun to create all kinds of cocktails and other mixed drinks.
Seth Golden: I always put myself in the consumers' shoes as I think of the new products for home carbonation or cold beverages using a brewer system. I ask myself, "Do I need to spend this amount of money and if I do, where is the payback". By performing a cost/benefits analysis on the competing systems there doesn't seem to be a benefit for the consumer on competing platforms. The consumer will always be in the negative versus store bought sodas or cold beverages. Additionally, the average cost per liter is cheaper with a SodaStream than the potential competitors based on the information available. This brings us to our next topic of conversation, mature markets.
1. Germany and France are growing very rapidly year-over-year. What are the underlying factors behind their rapid growth and what have been the levers the company has used to evoke such growth year-over-year? Advertising, new products, new product placement?
Yonah Lloyd: As I noted earlier, Demand Creation is a key element in success with a consumer product, especially in a new category. There are many good reasons to own our system, and in each market we strive to find the main one to communicate to consumers. Our business in Germany has grown very nicely over the past 2 years, despite the fact that we have been in the market for over 10 years and have not entered a material number of new doors. It is primarily due to a successful marketing campaign that drives home the key message for that market, which in this case is convenience. Similarly in France our distributor there has been very successful in generating consumer interest by appealing to very specific local consumer values. Market surveys to assess these decisions, along with other forms of consumer feedback and trial-and-error are methods used to learn what and how to communicate to the end-user. In the Americas we recently hired a new, very experienced GM for the entire region, Scott Guthrie, and his focus right now is to go through the process and determine how best to position the brand in order to generate the strongest interest, and ultimately the most sales. Remember, there is no textbook for launching a product that disrupts the huge beverage industry so we need to carve our own path. We are confident that we will "crack the code" in the US as we have elsewhere and once we do we will certainly maximize this knowledge to accelerate our growth curve. SodaStream represents the future of the beverage industry, in the US and worldwide.
Seth Golden 2. The United Kingdom is a mature market that doesn't get a lot of attention for SodaStream in the media. Last year, the company went into the ready-to-drink aisle right next to major beverage brands at Sainsbury locations. What can you tell us about the U.K. business and what are the expected growth drivers for this market going forward?
Yonah Lloyd: SodaStream was actually invented in the UK, so the awareness level is excellent. However, the peak performance for the brand was 30 years ago, when it was advertised as a fun gadget, without any longer-term benefits. You can see exactly what I mean by viewing this 1980 TV commercial here:
Clearly this type of advertising is no way to build a long-term brand. So while we have the benefit of being a well-known entity, there is a challenge to revive a serious product that may be perceived as a toy given the history. We are in the process of rebuilding our business in the UK, such as with the in-store placements near other beverages that you noted. The distribution in the UK is excellent and now we are focusing on repositioning the brand to generate consumer demand.
Seth Golden 3. SodaStream purchased the rights to the Italian market last year. With 9 months having past, where would you say the company is with respect to turning that business around? What has the company done differently since acquiring the market from the distributor?
Yonah Lloyd: We are successfully growing our business in Italy since we took over distribution. Readers may recall that we had been waiting for our partner there to engage consumers with a campaign, but that did not happen, which was one of the main reasons we took over the business. Consumer outreach is critical especially in a new market. After the acquisition we immediately started a re-launch campaign that lasted for 6 months, including TV, PR and related events, and the positive results show that we are in a good position to see continued excellent results there.
Seth Golden 4. What is the biggest threat to your mature markets' business, including the Nordics business presently?
Yonah Lloyd: Once any country achieves very high household penetration it becomes more of a challenge to continue growing your business. We actually have our largest competition in the Nordics, for over 5 years, yet we continue to maintain a dominating category market share of over 80%. In 2014 we plan on introducing new innovation into the Nordics, where we enjoy our most-penetrated countries like Sweden and Finland. The "Play" model will sell there later this year, bringing a more affordable price to the features like snap-and-lock, auto-lift, and the capability to use both our 60L and 130L cylinders, all within the iconic design based on the Source. We will also launch SodaStream Caps there, which we expect will be well-received by a market already quite familiar with our system. Interestingly the markets where we enjoy our highest penetration, like Finland and Sweden, are also the markets where we experience the most competition. We therefore expect that the pending entry by Coke (NYSE:KO) and Keurig (NASDAQ:GMCR) in the US will help create a tipping point for our category and our brand.
Seth Golden: Thank you; that certainly gives us a greater perspective of mature markets and the direction for which younger markets could be heading in the coming years. That leads us to our final topic of concern, before we open up the conversation and allow readers and investors to ask you questions utilizing the comment section of our article. Once again, we appreciate your recognition of Seeking Alpha and Capital Ladder Advisory Group as a medium for communicating with investors. Our last topic of conversation will focus on partnerships.
1. SodaStream has created partnerships with a plethora of beverage brands over the last 2 years. Most of these partnerships are with liquid refreshment beverage companies and not the prototypical big soda brands. Is this a strategy the company is employing to acquire the consumer who is trying to stay away from store bought sodas, but likes the bubbles, or is there something more to this partnership portfolio that doesn't get discussed much?
Yonah Lloyd: The consumer is seeking a new type of beverage refreshment. Something better-for-you, and hand-crafted. SodaStream is perfectly positioned to provide these exciting solutions with brand partners, or independently. Adding popular brands to our portfolio of flavors helps us engage consumers who already are familiar with those companies, making it even easier for them to consider becoming SodaStream users. And offering them the opportunity to enjoy the drinks they love but with bubbles added is very much in-line with the industry trends for carbonated products in general. The classic flavors such as Cola are inarguably declining in the US, however non-traditional flavors and new brands are enjoying excellent growth, including brands such as Sparkling Ice and Skinnygirl. And with SodaStream, there is an added benefit of having far less calories, playing into another growing trend towards healthier consumption. We have already sold millions of flavor units with the select few brands that have been on-shelf to-date, and in 2014 we will be adding well over a dozen new SKU's that will serve to capture more and more consumers. These partnerships offer a proof-of-concept that where there is success in bubbling up a traditionally non-carbonated drink, certainly a carbonated brand could do even better with SodaStream, and we believe that this too will happen in the future.
Seth Golden 2. Based on the current partnerships for flavor syrups, it seems as though you have the juice and fruit categories fulfilled in the flavor portfolio. Can you share any thoughts concerning other flavor categories such as teas, ginger ale, root beer and energy drink partnerships; is the company actively talking with beverage companies within these categories to expand the partnership portfolio?
Yonah Lloyd: Yes, all of these are growing parts of the beverage industry and of interest to us…you can add coconut water to your list as well, which has seen significant growth in the past few years. It is important to note that for many of these sub-categories, such as energy, the primary business is on-the-go. So a partnership with SodaStream becomes a truly incremental opportunity to serve the consumer at home where today they typically do not stock up on those drinks.
Seth Golden 3. Most of your flavor partnerships are designated for North American distribution primarily. With the Kraft Foods (KRFT) partnership performing well and the successful launch of Ocean Spray, do you foresee these brands getting product placement outside of North America in 2014?
Yonah Lloyd: We would love to launch Ocean Spray outside the US, and indeed they have quite a popular brand in many countries where we are doing business, so this is certainly on the horizon. And similarly with other brands we have announced. In fact, the Del Monte partnership is actually starting next month in the UK, and then Italy. We are also talking with other country-specific brands that are quite popular in their local markets. This is a tried-and-true strategy that has only just begun here at SodaStream.
Seth Golden: Thank you for your time and consideration Mr. Lloyd. At this time, investors have probably digested the initial question and answer session from the article and probably have some questions of their own to propose. The floor is now open for investors and we would expect the rules which govern the Seeking Alpha comment forum to be respected. If you have a question related to SodaStream's business that you would like Yonah Lloyd to answer, kindly direct e-mail myself using your Seeking Alpha e-mail service and I will forward it to Mr. Lloyd. Allow for 24 hour response time for all queries. Once your question has been answered by Mr. Lloyd, the question and answer will be posted in the comment section of the article for viewers to benefit from the shared Q&A. Keep in mind that only relevant, public information can be shared with investors.
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.