SodaStream Deal With Kraft Nice, But Not A Game Changer

Shares of SodaStream (NASDAQ:SODA), the make your own soda at home company, rallied 4.74% on Thursday after announcing a strategic co-branding deal with Kraft (KFT). Under the deal, some of Kraft Foods' branded flavors will be manufactured and distributed using the SodaStream system. This will be the first time a Kraft product will be available for use in a carbonated beverage. Initially, Crystal Light and Country Time will be developed for SodaStream, but there is the potential for more flavors down the road. Both companies were excited about the partnership.

This is a nice deal for SodaStream, but it is not a game changer. Shares had a nice rally today of almost 5%, but they were up almost triple that in pre-market trading on the news. As someone who doesn't own a SodaStream system, this move doesn't make me want to rush out and buy one. However, it is a nice addition to their product mix. As someone who has followed this stock for several months, I considered buying the stock this morning but did not see a reason to purchase it when it was up double digits, percentage wise. Like I said, it's a nice addition for the company, but it isn't a game changer. Not yet anyway.

SodaStream is doing the right things to enhance their business model, but still have a ways to go before they are considered here to stay. Two quarters ago, the company's weak guidance left investors running scared, and the stock lost half its value in a matter of days. Bears argued that the product was a fad, and wouldn't catch on in mass markets. They also argue that SodaStream's products are more expensive than the traditional soda you will find in your grocery store. However, bulls say that the product tastes good, and that growth is just starting to take off. Let's look at some of the key issues facing the company.

Competition with the big boys:

Right now, SodaStream is a nice product, but it's not a necessary one. Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) dominate the soda market, and that's not likely to change anytime soon. I can go down to my local grocery store and pay $1 for a 2-liter of soda, or during special sales like this week, can pay $2 for a 12-pack. That's a decent price. With SodaStream, you have to buy the machine, which costs about $100 at the moment, not counting any coupons. You also have to buy the mixes and the CO2 bottles, which do carry additional expenses. I've heard from some users of the system that overall, prices are comparable to a 2-liter of Coke or Pepsi, but I've heard other users say that they can cost $2 to $3 for a 2-liter. If the latter is the case, I'm not going to pay for it. Give me my 2-liter of Sprite (Coca-Cola) or Mountain Dew (Pepsi) for $1. If the SodaStream system does get cheaper down the road, and the company really starts to take off, it might be interesting to see if one of the big boys flinches and strikes a partnership with SodaStream, like Kraft did today. SodaStream has its own cola drink, but if it could partner up with Coke or Pepsi, that would be a game changer.

Getting into new retailers:

When I looked at the company's product during last year's holiday season (2010), I found it in some small stores, but the predominant location was Bed Bath and Beyond (NASDAQ:BBBY). Bed Bath and Beyond is a favorite location among SodaStream customers, because they send out lots of 20% off coupons, which enables customers to buy the drink mixes and C02 refills, as well as the initial machine, at discounted prices. However, SodaStream did get their product into Costco (NASDAQ:COST), and I'm interested to see how that distribution is going. There seemed to be some issues with the initial Costco push, and SodaStream seemed to be on the short end of the stick. Next month's earnings report should give us more clarity. Another discussion came up this morning on CNBC, one that I have talked to investors about before. If SodaStream can get its products into Wal-Mart (NYSE:WMT), it would be a total game changer. The prices would have to be extremely competitive, to fit into Wal-Mart's business model, but it would be a great accomplishment for SodaStream. It might cost the company a little on margins, but the revenue boost would be tremendous. If they get into Wal-Mart, this stock will soar.

Diversifying the revenue mix:

The following table shows their revenue mix from various locations, based on the company's revenues in the first nine months of the year.

Revenue Mix 2010 2011
Western Europe 67.16% 55.82%
Americas 15.44% 25.54%
Asia-Pacific 5.08% 5.99%
Other* 12.33% 12.66%
*Other includes Central, Eastern Europe, Africa, Middle East

As you can see, Western Europe still accounts for a large portion of their sales. This seems troublesome to many given the economic distress that region is under. If you count the rest of the European numbers, the percentage is even higher. SodaStream has done a nice job though of expanding around the globe, and I expect that if I update this chart to include full year results (when we get them), the Americas number will be closer to 30%. They are also expanding their product line into the Asia-Pacific region, and I would think that could eventually become 10% of their business. Diversification is a key for this company, and the European percentage should come down as we move forward in time.

In terms of product lines, the revenues derived in the third quarter from soda makers and consumables were roughly a 50/50 split. Over time, the company's revenues will depend more on the consumables, as more and more people will already own the machine. Sales of soda makers was up 60% year over year, with the company selling 717,000 units in the third quarter. They obviously had a huge push for the holiday season, and will want to sell as many of the machines as possible. CO2 refills increased 22% in the third quarter to 3.2 million, and flavor sales increased 8% to 4.4 million.


SodaStream is very early in their growth stage, and they are only expected to do about 212 million Euros in revenues this year. Revenues are expected to grow by 32% in 2011 and 23% in 2012. They are a small piece of the large soda market now, and probably won't be a major factor for several years. However, they are growing, and if the product continues to catch on, watch for a major move by Coke or Pepsi sometime down the road. The company has done a great job of getting into the US, and if it can have strong sales from Costco, look for Wal-Mart to eventually add their products. It's a logical move. They are still heavily dependent on Europe right now for sales, but they are expanding globally. It probably will be another year or two before they have a fair balance of geographical sales.

As for the stock, it's trading for just half of its 52-week high, as that bad guidance statement and conference call burst a bubble. Last quarter's results were good, and guidance was above expectations. That should have helped the stock, but it really didn't. We've only seen the stock start to move in the past week or two, and Thursday was the first time since late September we've seen the stock trade above $40. I would be careful with the name since there is a high short percentage, and it can fall quickly, as we've seen several times in the past few months. We should see earnings from the company in the first week or two of February, and that will be the next critical point for the company. If holiday sales were great, the stock may start to trend higher again. However, a bad report will put serious questions into the name. I liked this stock at $30 in the past month, but I don't love it into earnings if we get up to $45 or even $50. I'd be happy to get long if we trade down a few points, but I'm not entering at this level. Not until I see the next earnings report. SodaStream has the potential for great long term growth, but they are still working out some growing pains at the moment

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.