Contradictions And Misnomers Discovered In SodaStream Presentation

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Whitney Tilson's SodaStream thesis bears further evaluation.

Consistent contradictions leave investors with greater scrutiny of his investment thesis.

SodaStream's future will have less to do with appliances and more to do with beverage delivery.

In a recent article authored by Whitney Tilson titled, "Why I'm Long SodaStream", the famed investor outlined his bullish case for SodaStream (NASDAQ:SODA) and shareholders of SODA. While I agree with Mr. Tilson's long-term view of SodaStream, we have come to arrive at the same point through different analytics. In this article, I will outline where Mr. Tilson continues to misstate and wrongfully analyze the SodaStream business. In fairness to the highly recognizable investor, SodaStream is a new business model, and its international roots don't lend themselves to be easily viewed along all aspects of the business which operates in over 48 regions around the globe.

First, let's talk about what Mr. Tilson denotes as SodaStream's benefits to the consumer over traditional store bought sodas and sparkling water. You can find these referenced on slide 8 of his presentation (Original presentation first presented in February 2014). The very first statement is unfortunately untrue, presently. The cost analysis being used is outdated given SodaStream's syrup price increase enacted during the second quarter of 2014. For plain sparkling water, yes, SodaStream offers the consumer a huge savings advantage, but for those who like flavored carbonated soft drinks, SodaStream is now on par with store bought sodas on a per liter basis. Let's take a look at the cost equation for SodaStream and store bought sodas.

  1. 60L of gas is $15
  2. Syrup flavor is at least $5.99/12L at major participating retailers
  3. National average 2 liter bottle of Coke (NYSE:KO) or Pepsi (NYSE:PEP) is $1.48 or $.74 per liter
  4. For SodaStream gas $15.00/60L = $.25 per liter
  5. For SodaStream flavor $5.99/12L = $.50 per liter
  6. For a liter of SodaStream flavored carbonated beverage, the cost is $.75 per liter, basically on par with Coke and Pepsi (everyday pricing utilized)

Sadly, the next benefit outlined in the presentation has little to no effect on consumer purchase intent. There is no convenience to making your own soda at home. By its inherent nature, it is more burdensome to make something yourself than to have others do it for you i.e. Coke and Pepsi. Maybe that is one of the reasons why we have restaurants; it is more convenient to have a meal prepared for you than to prepare it oneself. Even if we assume the benefit of not lugging bottles or cans from the store, we can't overlook the cannibalization of this benefit because, and to reiterate, you have to make your own soda now. This is a prototypical straw man's argument being used that when put to the test, fails to produce beneficial results.

With regards to the other stated benefits offered to investors by Mr. Tilson and Kase Capital, I certainly agree that SodaStream is a healthier alternative to store bought sodas due to the different ingredients SodaStream uses. For an investor so readily focused on SodaStream's valuation based on the strength of its European business segments, one would think he should know that in some regions and in a limited basis, SodaStream does in fact use aspartame in its diet flavors which the presentation suggests isn't used on slide 8. Moreover, the eco-friendly factor is a benefit that consumers find advantageous with SodaStream's system.

The next misstatement or wrongful analysis I believe in the presentation comes from the slide below which pins SodaStream within the carbonated beverage category and sparkling water category. He uses this slide to identify the potential market share available to SodaStream. What he and many fail to realize through the evidence of the sell-through rate of SodaStream products and surveys taken by SodaStream users is that SodaStream is a category unto itself. As much as many, including myself, would like to believe otherwise, the sell-through rate does not lie and the surveys are equally objective. Even without the sell-through data one can deduce that there is a market for ready to drink carbonated beverages and a market for homemade carbonated beverages. They operate independently and have different customers which mean they will have different available customers and a different available market share that is indeterminate based on the relative newness of the home carbonation category. By offering the slide below, the presenter is suggesting that the ready to drink/pre-packaged carbonated beverage market is exactly what is available to SodaStream. Let's face the facts; some people, obviously the majority of people, do not wish to make their own carbonated beverage at home regardless of the benefits. They will likely never want to and therefore they are not available customers to SodaStream even though they make up a part of the carbonated beverage market.

I hate to point out the glaring contradiction in the suggestive slide above, but thankfully it has been done already and it basically proves what I stated previously. In slide 9 of the presentation, it depicts precisely who is an ideal SodaStream user. The slide clearly states that the ideal SodaStream user is a household that prefers sparkling water at home and some who add flavor. He goes on to say that SodaStream is not primarily a competitor to Coke, Diet Coke and Pepsi. What brand labels do you see in the slide above? See the contradiction? An additional contradiction to the thesis concerning SodaStream in slide 9 comes from the following statement: "Rather, the best and widest variety of flavors are fruit-based: grape, orange, lemon cranberry, cran-raspberry etc." The presentation claims these are SodaStream's best flavors as opposed to his view regarding SodaStream colas, root beers and Dr. Peet flavors as "horrible". As far as the Americas are concerned, and a good deal of the world, this view is not consistent with SodaStream flavor sales. Don't believe me? Try to find grape or lemon year-round on any retail shelf. Don't get me wrong, the fruit-based flavors do well, but not all of them and they certainly don't perform better than the traditional cola or dark colored flavors sold by SodaStream and sold year-round and on most retailers' shelves. Only up to slide 9 and already there are some greatly misunderstood and misrepresented "ideas" within the investment thesis and slide presentation.

Now let's talk about SodaStream's many partnerships which are outlined as part of the bullish case on slides 14 and 15 of his presentation. While I agree that having these highly recognizable partnerships is a long-term benefit, in the near- to mid-term, they mean little to nothing. First and foremost, let's discuss the hardware partners Samsung and Whirlpool/Kitchenaid (NYSE:WHR).

While both of these partners offer a great product which utilizes SodaStream's CO2 and some aspects of the SodaStream patent portfolio, they simply don't sell many products. The Samsung/SodaStream refrigerator which launched in 2013 and has increased to a second and third refrigerator offering, simply don't sell more than a few hundred units a quarter worldwide. That's refrigerators people! We aren't talking about a $70 soda maker; these are $2,500 and up refrigerator prices. What the presentation doesn't tell you in his Samsung's 10% number on slide 27 is that of Samsung's refrigerator sales, less than 1% of those sales come from its refrigerators priced over $1,500 a unit. The fact is that with only a couple thousand Samsung/SodaStream refrigerators selling annually, the incremental CO2 usage from this partnership doesn't amount to more than a couple thousand bucks for SodaStream using the proposed math on refills, and that is on the off chance that all refrigerators purchased utilize the sparkling beverage feature at the typical usage rate assumed in the presentation and slides. This particular partnership just doesn't amount to much of anything for SodaStream other than the continuation of a slow and steady brand build-out and platform extension which generates extremely limited revenues for SodaStream.

Moreover, the Kitchenaid/SodaStream partnership carries much of the same headwinds as the Samsung partnership carries. The Kitchenaid Sparkling Beverage Maker is $199, exclusively at Bed Bath and Beyond (NASDAQ:BBBY) and sits on the shelf next to the less expensive SodaStream brand sparkling water makers which perform the exact same function as the Kitchenaid product. Based on recent sales data, Kitchenaid sells less than .16 units per week/door. So again, even though it is great to have a well-recognized brand partnership with Kitchenaid, it simply doesn't amount to much in the way of actual revenues for SodaStream.

With regards to SodaStream's plethora of flavor partnerships, unfortunately most aren't regarded as traditional carbonated beverages. With that being said, some have done well as consumers' taste buds are ever changing and evolving to enjoy a plethora of new taste experiences. Even more unfortunate is that with sell-through of syrups being less than hoped in the recent calendar year; most retailers are resisting additional flavors. Some of the newer flavor partnerships will not launch until FY15. The partnerships that will not launch this year, as previously forecasted by SodaStream to launch this year, are Sunny D, Welch's and Skinny Girl. But again, and most importantly as it pertains to giving weight to these flavor partnerships as part of an investment thesis, almost 70% of SodaStream users don't by flavors; they use the SodaStream machines to make sparkling water. We'll have to see if this statistic changes in the coming years.

As we move forward to slide 12 of the presentation, we come to understand SodaStream's "wide moat", as characterized by Mr. Tilson. I very much agree with this assessment of the SodaStream business, as evidenced by the longevity of a category in existence for over 100 years and consisting of… well SodaStream as the dominant player. This presentation touches on the potential competition for SodaStream via Keurig Cold and Bevyz Global. While I wouldn't lump these two products in the same category, I would recognize them as advantaged in their own individual way with respect to the SodaStream system. Unfortunately for Bevyz, and despite strong partnerships with Cuisinart and Keurig Green Mountain (NASDAQ:GMCR), the product simply hasn't been able to find its way onto retail shelves.

My prediction back in March of 2014 was that the Bevyz product line was too expensive and didn't meet the needs of the consumer. For this reason, I didn't believe it could be commercialized and would find itself very limited distribution. The Bevyz Fresh machine is the most technological home carbonation/beverage system, but unfortunately that technology comes at a price that retailers found distasteful and thus it failed to enter retail doors this year as the company had promised earlier in the year. I won't detail the additional issues with the Bevyz machine at this time, as I have done so in the past. All that technology and no place to go! So what is Bevyz Global doing with that technology? Well, they are selling it to other product manufacturers who are enamored with the technology and hope to get a product on the shelf. Now let's take a trip down memory lane to see what Keybanc's Akshay Jaggdale had to say about the Bevyz Fresh and Keurig Cold in March of 2014.

Green Mountain Coffee Roasters faces new competition from Bevyz, a privately held company that is expected to launch its first At-Home beverage system that serves hot, cold, sparkling and still beverages all in one small machine. The launch is expected on March 15th.

Bevyz is the only system/company we know of that is attempting to commercialize an At-Home beverage system that produces hot, cold, sparkling and still beverages in one. We tried a broad range of products in a private viewing and came away impressed by the technology and were surprised by the small footprint (11.5" x 12" x 14") of the machine. From a technology perspective, we see Bevyz as a strong #2 player in home carbonation behind GMCR; however, we believe it will take multiple years for the company to build a sizable installed base, and further technology advances are required for the system to become mainstream.

Following our meetings with Bevyz, we continue to have a positive view of the home carbonation category. We believe the GMCR/KO deal validates our positive thesis of the category and establishes GMCR as the leader. Although we appreciate SODA's strong marketing and distribution capabilities and first mover advantage, for the stock to work and its system to be become more mainstream, we believe it is critical for leading beverage brands to partner with the Company, which we now think is less likely given that we rank SODA behind GMCR and Bevyz from a technology perspective. The GMCR/ deal and the strong alliances Bevyz has built with some of the leading players in the global beverage industry (both equity stakes and product tests) seem to point to GMCR and Bevyz as the emerging leaders in the home-carbonation industry, in our opinion.

There are so many things wrong with the Keybanc analyst's notes that it is quite scary if you are a Keybanc client. I tested the exact same product from Bevyz, but fortunately, I have a more concrete foundation on the pulse of the home carbonation category. Additionally, I knew the right questions to ask Ariel Sterngold, Director of Business Development at Bevyz, during our meeting. It should be reiterated that Keurig Green Mountain is an investor in Bevyz Global, so the analyst is misrepresenting the potential relationship between Keurig Green Mountain and Bevyz Global in his first statement. Maybe the analyst didn't ask the right questions?

Bevyz Fresh, produced by Cuisinart, will likely never be a commercialized product for many reasons despite its strong use of technology in its platforms. Even with PepsiCo and Keurig Green Mountain as investors in Bevyz Global, the product line is going nowhere of consequence. This very much leads me to question Keybanc's total understanding of how the home carbonation category works in the consumer space, especially with Keybanc's predictive statements concerning GMCR and KO's relationship. The potential for disappointment, again, is quite high for the Keurig Cold.

Mr. Tilson states that the Keurig Cold, like the Bevyz product, is barely detectable. Well, of course it is barely detectable because it isn't planned to launch until late 2015. It would behoove him to know this. I expect the Keurig Cold, as recently demonstrated and tested, to perform just as the company aims for it to perform. Keurig Green Mountain CEO Brian Kelly has stated that the Keurig Cold will be able to produce a Coke that you would expect to achieve directly from Coca-Cola bottles and cans. The problems or obstacles that the Keurig Cold faces are beyond the suggested misunderstanding regarding any chemical composition. The obstacles are more closely correlated to the common problems faced by those attempting to enter the home carbonation category and not limited to the short list below.

  1. Most users of home carbonation systems purchase them to create sparkling water, not flavored water.
  2. Most surveys from consumers indicate the reason not to purchase a home carbonation system is the cost of the system and the lack of convenience of the systems.
  3. If the consumer can buy a Coke with no problem and at a reasonable cost absent a machine, why in the world does the consumer need the machine? Since when was it a problem to buy a Coke or Pepsi.
  4. A Keurig Cold machine does not address a problem and offers few if any benefits.
  5. Like Bevyz, a Keurig Cold will be single-serve and disadvantageous for families. It is far less convenient to have a stationary single-serve machine during dinner that dispenses one glass at a time. The convenience of the typical 2 liter bottle of Coke or Pepsi at the table is hard to compete with, especially when the competition asks you to buy a $150-$200 machine.

SodaStream does have a huge moat. It has the first mover advantage in a growing category. It has the best delivery system for CO2 and the widest distribution network which has proven to be insurmountable for would-be competitors. While some criticize SodaStream for its CO2 canister usage, they fail to realize it is the most effective delivery method for carbonation. Would-be competitors like Keurig and Sparkling Drink Systems (SDS) are using a powder/zeolite reactionary formula for delivering a carbonated beverage. It is similar to that used in Alka Seltzer tablets and zeolites are used in the oxidation process found in kitty litter. While there is nothing wrong with zeolite formulas for delivering carbonation, it is less effective than pressurized, direct CO2 delivery which is absent any reactionary elements. For those whom are mechanically inclined, a comparison to consider is the delivery of fuel in a direct port injection engine. There simply isn't a more effective fuel delivery system.

What this presentation doesn't outline, unfortunately, is that this CO2 moat comes with some forward-looking issues which are starting to raise concern. In countries where SodaStream has reached greater than 10% or 20% household penetration, third-party CO2 refilling is occurring at increasing rates. In Germany, the government has opened the CO2 refilling market to third-party participants where they were once not permitted. Most of the markets where SodaStream has seen its greatest strength have been in Western Europe, and these markets are readily permitting third-party CO2 refilling unbeknown to some. As I said earlier, SodaStream's business is difficult to understand, and with operations in over 48 countries, it is hard to get a firm handle on all of the business.

Don't get me wrong, even though third-party CO2 refilling is and has been happening, it is miniscule in nature and most consumers in these Western European regions trust and continue to use SodaStream as their main supplier for CO2 refills. The main concern comes from the quality of CO2 provided by third-party refillers, most of which go unregulated. All of SodaStream's CO2 cylinders are inspected and must achieve a 98% quality rating to leave its facilities for sale to the consumer. Third-party refillers in Europe go largely unregulated and the risk lay with the consumer in this equation, and if something goes wrong…? During my visit to SodaStream's facilities last year, I witnessed the inspection process myself as viewable in the photograph below:

It's one thing to be able to refill CO2, it's a whole other thing to have the appropriate supply lines to be able to do so in order to fulfill the SodaStream user base needs consistently, and that is where the main barrier to entry lays.

With respect to Mr. Tilson's proposal on valuation and its correlation to the strength of the SodaStream Western European business, what happens when/if Western Europe declines as I have forecasted it to do so during the next 2-3 quarters? How does that change the valuation in Mr. Tilson's eyes or his overall thesis?

In all fairness, investors should recognize that this recent public publication of Whitney Tilson's SodaStream presentation is almost a year old, so naturally his understanding of the SodaStream business may have grown over this period. What is most relevant to investors, in my opinion, and with regards to Whitney Tilson's SodaStream Thesis, is what the presentation does not explore in any detail.

Next year will be a critical year for SodaStream. The company will be executing a delineation of its business from a beverage maker oriented business to a beverage business. The company is accepting that the core of its profitable business, the sparkling beverage maker business, is solidified in existing markets and it will grow into new markets. In October, SodaStream launched sales in the Mexico market at retailers like Sears (NASDAQ:SHLD), Comercial Mexicana, City Market, Sam's and Wal-Mart Mexico (NYSE:WMT). I would expect SodaStream to further develop the Mexican market in 2015. In addition to this market expansion, China could be a potential expansionary market for SodaStream in 2015 which the firm has recently outlined.

Some investors fear SodaStream as an investment based on the current status of sales and pending competition from the likes of Keurig Cold. In addressing these concerns, I would recommend contacting the investor relations department of both SodaStream and Keurig Green Mountain. Ask appropriate questions related to Keurig Cold. I regularly participate in conversations with management and find myself advantaged by attending beverage industry and retail industry conferences which these companies often attend. Some common misunderstandings investors have related to Keurig Cold is that because the product line has a partnership with Coca-Cola it will immediately launch internationally late next year. Unfortunately, this could not be further from the truth. Logistically and profitably, this is not possible nor would it be advisable and Keurig Green Mountain well understands this which is why they will launch the product in a select number of North American retailers in the Fall of 2015. If successful, it will still take a number of years for the Keurig Cold product line to find international distribution and this means maybe one or two other markets. A good perspective on this subject matter would be to compare the Keurig Cold with its predecessor hot beverage platforms. Keurig Green Mountain launched in the UK in early 2014. Almost a full year later and the product line is still solely designated for office/commercial application and has gone nowhere. Keurig is even attempting to gain office placement by adding partner brands for its platform in the UK. Moreover, for those who choose to adopt the platform in the UK, they get to try the Keurig for free with a minimum order through its distribution partner Seymour Valentine.

We all need a coffee maker if we want a hot cup of coffee and yet Keurig is finding it extremely difficult to gain traction outside of North America. Nobody needs a cold beverage maker to make a Coke or other sparkling beverages, so one can see how illogical it is to believe that any international distribution in the next 12-24 months of the Keurig Cold is analyzed correctly. It becomes clearer that there will be no international distribution of Keurig Cold when reading a Keurig Green Mountain quarterly transcript.

While many investors are focusing on SodaStream's beverage maker business, they fail to see what is going on behind closed doors with new products that are not dependent on a sparkling beverage maker. As the company offered to investors earlier this year, their forward-looking plans are to become a beverage company; a beverage company which is not dependent upon the sale of a machine unit. Kraft Foods (KRFT) is a great company and it developed the widely used Tassimo single-serve coffee maker over a decade ago. Sure, some investors immediately think, "Keurig kills Tassimo". Talk about having an Amero-centric point of view. The only place in the world that Keurig kills Tassimo is in North America, but throughout the world Tassimo is a leading coffee brand. To some degree, Mr. Tilson attempts to advance the notion of Amero-centric thinking, as much of the misunderstanding with investors and SodaStream surrounds Americanized point of views. The world is a big place, and Kraft Foods is a big food and beverage company that dove into the small appliance category successfully years ago. SodaStream is presently a small appliance company that will aim to transform into a beverage company in the future. With a profitable small appliance brand under its belt already, this doesn't seem to be the wrong way to go about advancing the company into the future.

Disclosure: The author is long SODA, BBBY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As noted in previous disclosures, I was long shares of PEP since $78 a share. With the stock appreciating to my target level of $100 a share, I have closed this investment and moved capital into other investments. As noted in previous disclosures, I was long shares of GMCR since $136 a share. With the stock appreciating to my $150 target level, I have closed this investment and moved capital into other investments.