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Sodastream International Ltd (SODA): The Bearish Case for This Beverage Company

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In part one we looked at the strong side of Sodastream International Ltd (NASDAQ:SODA); In this post we will take a look at the empty half of the glass (no pun intended). After all, Sodastream has its own share of critics and disbelievers, is headquartered in a volatile part of the world, and has some pretty scary competition to go up against.

Weaknesses

Generic nature of many soda syrups

This "Coca-Cola Killer" is a Great Holiday Growth Stock to OwnBranding is extremely important in the beverage industry and many of Sodastream International Ltd (NASDAQ:SODA)’s syrups are as generic as they come with names like Cola and Root Beer. There are some flavors that have some powerful brands from third parties such as Ocean Spray and Kool Aid, however as I said these are third party brands and aren’t owned by Sodastream.
Which do you think make a better investment, The Coca-Cola Company (NYSE:KO) or the many independent bottlers that Coca-Cola sells its syrups to? While Sodastream may have built a powerful brand as an at-home soda-maker and carbonator provider, I believe it should complete the circle with powerful syrup and flavors brands of its own and focus on marketing those as well as the soda-makers.

Home only use

A look at the latest filing of The Coca-Cola Company (NYSE:KO) reveals that 38% of its revenue was generated by the sale of syrup concentrate to third parties. That means that Coca-Cola generated almost 2/5 of its revenues from sales at restaurants, movie theaters, etc.  Sodastream International Ltd (NASDAQ:SODA) can only act as a substitute for beverages consumed at home. It’s not likely you will see a Sodastream at McDonald’s Corporation (NYSE:MCD) any time soon. People also like to consume much of their beverage intake away from home such as when they are at the beach, at the gym, or at the mall. This is evident by the success of the bottling water Industry; 40% of water consumed in the US is in the form of bottled water.
This reduces the potential market for Sodastream relative to companies such as Coca -Cola or PepsiCo, Inc. (NYSE:PEP) unless Sodastream can provide an innovative way to let people use its products away from home.

CO2 exchange headaches

One of the selling points of Sodastream International Ltd (NASDAQ:SODA) is how it simplifies life for the soda buyer– no longer will a person need to carry on with the chore of lugging over dozens of cans from the grocery store and find the space to store them in the fridge. Nor will that person have to deal with all the garbage that these cans and bottles generate or have to deal with properly recycling them.
That pitch however ignores how much of  a headache CO2 exchange can be. Sodastream CO2 canisters were deemed by the Department of Transportation to be Hazardous Materials (HAZMAT) last February and thus can no longer be delivered by couriers to places of residence. The proprietary valve of Sodastream International Ltd (NASDAQ:SODA) carbonators prevent customers from filling the carbonator with CO2 any way they like. Sodastream’s CO2 carbonators have to be filled out only at authorized third party retailers. The cost of refilling CO2 also eats into the cost benefit that Sodastream provides to its users over buying regular soda as users have to pay a high price to fill the carbonators.
This is a double-edged sword; on the one hand it offers Soda Stream a high margin business that is not easy to duplicate; on the other hand it is a hassle for the customer which can reduce the desire to use the soda-maker in the future.

Threats

Loss of customer interest

If there is one thing that skeptics like to focus on when they criticize Sodastream International Ltd (NASDAQ:SODA) it is that the whole thing may be just a fad — like the pet rock fad back in the 1970s. They say that people one day will just tire of their Sodastream machines and that these soda- makers will be doomed to collect dust on kitchen shelves or worse — in garages, basements, and attics. Critics also like to point out that there is a long history of kitchen appliances who were the hottest new thing only to quickly go out of fashion a few years later. Examples include the George Foreman grill, the bread maker, and crepe makers.

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