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Summary

  • SodaStream's first-quarter results reveal worrying trends about its business with sales dropping in the U.S. market.
  • The Coca-Cola and Keurig Green Mountain partnership is a big threat for SodaStream.
  • SodaStream shares are trading near their 52-week low and a further downside cannot be ruled out.

SodaStream (NASDAQ:SODA) shares have lost their fizz in 2014. The stock is down close to 20% and its recently reported first-quarter results reveal more worrying signs. SodaStream's top line remained almost flat year over year, but sales of its machines and flavor mixtures in the U.S. dropped precipitously.

A worrying trend

Sales of SodaStream's machines in the U.S. were down 69% in the first quarter, coming in at 80,000 units, while sales of flavor mixtures were down 20%. These numbers are quite weak considering SodaStream trades at an expensive 27 times earnings. Moreover, SodaStream is facing increased competition from the alliance of Coca-Cola (NYSE:KO) and Keurig Green Mountain (NASDAQ:GMCR), which could hurt its performance further going forward.

Moreover, SodaStream seems to be losing some momentum in its biggest market -- Western Europe. Sales in this region increased 17% in the previous quarter, on top of a 17% increase in the year-ago period. Hence, SodaStream didn't record much meaningful growth and its growth rate might slow down going forward. In addition, SodaStream's strategies might not be working very well, as its Super Bowl ads that featured Scarlett Johansson didn't trigger much demand in the U.S.

The Coke-Green Mountain threat

On the other hand, Coca-Cola and Green Mountain are moving into the single-serve market together that SodaStream wants to target. Coke and Green Mountain entered into an agreement earlier this year, with the former picking up a 10% stake in the latter. According to CNNMoney --

"The firms will collaborate over the next 10 years to produce Coca-Cola products in single-serving plastic pods, also known as K-Cups, for use with Green Mountain's forthcoming Keurig Cold at-home beverage system. As part of the deal, Coca-Cola is paying $1.25 billion for a 10% stake in Green Mountain, and will help market the new product.

The Keurig Cold system will likely be released in late 2014 or 2015. It will dispense cold beverages "including carbonated drinks, enhanced waters, juice drinks, sports drinks and teas," the companies said in a joint statement.

The Keurig Cold system will bring Green Mountain and Coca-Cola into direct competition with SodaStream, which already produces do-it-yourself soda makers and has seen strong growth in recent years. SodaStream shares fell more than 10% in after-hours trading Wednesday."

Hence, Green Mountain and Coca-Cola's move will hurt SodaStream starting this year when the Keurig Cold system goes on sale. Moreover, Coca-Cola recently upped its stake in Green Mountain to 16%, indicating that the company wants a bigger stake of the Keurig Cold system initiative. As reported by Forbes --

"Most importantly, analyst Scott Van Winkle wrote, "the strongest potential partner in cold beverages is fully engaged with a significant material interest in the upcoming Keurig Cold launch."

Hence, Coca-Cola seems to have solid confidence in this initiative. Also, given Coke's solid brand equity and presence across the globe, it has an upper hand over SodaStream. Coca-Cola is one of the world's biggest brands after Apple (NASDAQ:AAPL), and since it is making a move into SodaStream's territory, the company has reasons to worry.

Up against a giant

SodaStream is trying to fight the Coca-Cola and Green Mountain alliance by strengthening its infrastructure. SodaStream is extremely focused on improving its marketing effectiveness by sharpening its position in consumer messaging, optimizing its current retail state and grow new doors, driving product innovation and SKU rationalization, and finally, expand and leverage its gas exchange accessibility.

However, Coca-Cola is a way bigger entity. As CNNMoney reported --

"Coca-Cola CEO Muhtar Kent said the agreement was part of his company's effort "to identify and stay at the forefront of consumer trends driving the industry."

Green Mountain chief Brian Kelley said the deal "combines The Coca-Cola Company's unparalleled brand, distribution and marketing strengths with GMCR's innovative technology and beverage system expertise."

Thus, because of Coca-Cola's infrastructure, deep pockets and big marketing machinery, SodaStream might not stand much of a chance in the future.

Conclusion

A big drop in sales in the U.S. in the previous quarter, coupled with the lingering threat of Coca-Cola and Green Mountain, will make it difficult for SodaStream to prosper going forward. The stock is already down this year, trading close to its 52-week low, and it won't be surprising if it continues dropping further.

Source: Time To Bail On SodaStream