Why Competition Is A Net Positive For SodaStream

Last June, rumors swirled that SodaStream (NASDAQ:SODA) was about to face a head-on collision with the globe's most powerful beverage company, Coca-Cola Inc. (NYSE:KO). Upon further investigation, it appears these rumors were false. These particular ones were broadcast via Twitter. But there will be more... The Coke rumor alluded to a similar type machine from Coca-Cola, when in fact, it's just a commercial soda machine used by restaurants. Please read Firstadopter.com's and Seeking Alpha's article for additional information link.

However, the question is not if, but when...And what will be the implications of competition. In my experience, new competition will be a good thing for SodaStream, especially if the competition is from a well-known brand. (Coke is considered the highest rated brand in the world.)

More recently (October 2011) rumors have turned into real competition. But, not from the Big three soda companies. Instead, a small publicly-owned company called Primowater introduced a product called Primoflavorstation. Several Bloggers including commentators to seekingalpha.com imply this is a small, inexperienced, scrappy company. Small... well that's true, inexperienced... not at all!

Primowater's already innovated before with its well known Blue Rhino propane exchange program at 29,000 retail locations. (It was later sold in 2004 to a large gas company). For this upcoming holiday season, the company is retailing two carbonating machines, one will be single serve, the other will be nearly identical to SodaStream's. What I don't understand and challenge readers to question is, How can such a small company introduce such a machine when 1) SODA has patents for this and 2) the Single-Serve does not seem viable from a cost perspective? Well, for one thing, Primo Water Corporation is currently a money-losing business (earnings release & forecast). Secondly, the Soda business was recently purchased for just $13 million, so it may be weakly patented, infringing on SODA's patents or it may be an inferior product. Hence, Primo is not viewed as a viable competitor in my view.

Regardless, my business experience leads me to believe that SodaStream would benefit during the short-to-intermediate term if the big three (e.g. Coke) entered the personal soda-maker market. This is attributed to:

  • Increased consumer awareness that would be generated.
  • Entrance of a large, well respected company would legitimize the new market segment.
  • The entrance of such a large, and adroit company such as Coca-Cola may prevent a host of potential competitors from entering the market. This would likely create an Oligopoly with few large competitors and moderate-to-high profit margins (SodaStream's LT operating profit margin goal is 25%).
  • Home beverage making is considered environmentally-friendly (no need for PET bottles). Consumers may find Coke's marketing strategy of selling both bottles and home beverage systems inauthentic.

Based on (Harvard University's) Michael Porter's framework for competition, we believe SodaStream would utilize two strategies concurrently:

  1. Cost Leadership: SodaStream says its cheaper for consumers to use their system rather than purchasing soda bottles. (Though, we believe savings may not be substantial, link)

  2. Differentiation: SodaStream markets itself to consumers that consider themselves socially and environmentally responsible. Their flavors also have no high-fructose corn-syrup (using sugar instead) and; are thus, also marketed to health-conscious consumers. Also, the company is retailing several high-end models.

SodaStream is an efficient user of technology which it leveraged to break into "new" markets (particularly in the United States). Going forward, it is expected that the company will introduce new products (single-serving, under-the-sink machines). These innovations will likely rate high under a competitive analysis. Please review Porter's writings for additional information. Porter's 5-Forces model is summarized below:

Case Study: Research in Motion (RIMM) versus Apple (OTC:APPL)

And how about a recent example? On 6/17/11, Research In Motion's stock declined over 21% on news that competition with Apple (another huge brand name company) is hurting both top-line and bottom line growth.

The point is that even in the fast-paced telecom/tech industry, it took Apple two years to break the backbone of Research in Motion. Apple's iphone was released on June 29, 2007. However, RIMM's stock price moved from $56 before the release of the iPhone to $66.5 after the phone's release. It then rose 157%, peaking over $144 (Chart) a year after the iPhone was released. Note that RIMM's gains might have been higher were it not for the financial crises.

RIMM Stock Chart: Click chart to enlarge:

RIMM stock price after the intro of the Apple iPhone 6/07. Source: GoogleFinance

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RIMM didn't feel the negative consequences of the iPhone until mid-2009. The chart below shows the percentage moves in Apple shares versus RIMM. For perspective, RIMM's North American market share declined from the low 40s% level in 2007 (50% peak in '08) to 15% this year. More recently, RIMM has begun suffering from iPhone displacement in Emerging Markets (a previously strong area for RIMM).

Click to enlarge:

Source: GoogleFinance

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The difference with the above APPL/RIMM case and a SODA/Coke case is that SODA is both the innovator and the "first-mover." Therefore, it will take time for potential entrants to play "catch-up" with SodaStream.

For example, upon first glance, barriers-to-entry appear low as direct competitors do exist globally. However, not only is SodaStream protected by patents (a portion expire this year) but more importantly, the distribution network required to support SODA's customers is extensive and would take years for most competitors to duplicate. Distribution networks (both to sell the machines and via "reverse logistics" to exchange the empty CO2 bottles) and execution are Sodastream's key entry barriers to competitors - not the patents!

CONCLUSION:

Should SodaStream face new competition, we view this as a net positive for the short-to-intermediate term.

Disclosure: I am long SODA, AAPL.