Upon reading my previous article, "Ready to Invest in Sodastream for the Long Haul: Part 2," many people commented that my Porter's Analysis was unrealistically favorable. Specifically, these people have cited that SodaStream (SODA) does not have the strong barriers to entry that I have stated. On Thursday, January 26, Wal-Mart Stores Inc. (WMT) announced that it will begin offering the Esio Beverage System, a single serve beverage maker that serves both hot and cold drinks. My critics, no doubt, have been proven correct. Walmart's announcement is a game changer that raises doubts as to Sodastream's competitive advantage.
The Esio beverage maker does not make carbonated drinks. As a result, some writers have been foolish enough to claim that it will not pose a threat to SodaStream. This is certainly true to an extent, but it is important to realize that SodaStream does not only compete with other carbonated beverage makers, but also competes for counter space with any small appliance. Despite their different functions, it is difficult to imagine someone owning both the Esio Beverage Maker and the SodaStream. Furthermore, if SodaStream continues to be successful, it would not be surprising to see Esio add a carbonating product to its line-up. Esio has established a relationship with Wal-Mart, and the addition of such a product would make it a substantial direct competitor to SodaStream. Without patent protection SodaStream's greatest advantage, its impressive distribution network, may become an industry second best.
Though Wal-Mart's announcement raises doubts on SodaStream's long-term competitive advantage, it may increase sales in the near to medium term. Behavioral economics explains a situation where upon the introduction of an inferior product makes the existing one more attractive. This is known as an asymettric dominance effect. The idea of homemade beverage machines, outside of the traditional coffee maker, is still young. If consumers understand Wal-Mart's commitment to Esio as a validation to the worth of homemade beverage makers but also view the Esio machine as inferior, SodaStream may seem more appealing. I believe this to be a likely scenario.
In summary, Wal-Mart's announcement has made holding SodaStream a riskier investment. I change my strong buy rating of SodaStream to a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.