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Sodastream International Ltd (SODA): Why You Shouldn’t Count Out The Coca-Cola Company (KO) Or PepsiCo, Inc. (PEP)

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When I was a kid, I always wanted my own Coke machine. How cool would that be? Want a Coke? Done — and I get my money back.

When I attended college, the guys around the fraternity house talked about how cool it would be to have a drink machine full of beer rather than soda.

Same dream, different product.

A few years back, I invested in a small retail business that came with a Coke machine. Dream come true — for about 15 minutes.

After the work of restocking the machine, dealing with the supplier and employees stealing drinks, the fun became work and the razor-thin margins that resulted from maintaining the machine made it even less fun. Owning your own soda machine is highly overrated.

So, while the do-it-yourself soda phenomenon is propelling the shares of Sodastream International Ltd (NASDAQ:SODA), I’m not enthused. However, I’m still a fan of Coke and Pepsi — the stocks, that is.

Quenching Consumer Thirst

The Sodastream International Ltd (NASDAQ:SODA) concept is similar to the single-serving coffee maker craze, with results to match. SodaStream’s second-quarter 2013 sales were as much as 8 % higher than forecast in North America, Asia and Western Europe. Sales in Central Europe, the Middle East and Africa, on the other hand, were nearly 62% lower than estimates.

While $131 million in quarterly revenue isn’t bad, $12.7 billion sounds better. That was The Coca-Cola Company (NYSE:KO)‘s sales total for the same period. Of that amount, $765 million came from Central Europe, the Middle East and Africa; analysts expected $764 million. The news was even better for PepsiCo, Inc. (NYSE:PEP). For the same regions, the company’s second-quarter sales came in at $1.87 billion, compared with analyst estimates of $1.8 billion.

So while Sodastream International Ltd (NASDAQ:SODA)’s numbers are impressive on a percentage basis and the concept may be eroding some of Coke’s and Pepsi’s market share in the U.S. and Western Europe (atleast psychologically), a home soda fountain may not be on the list for an emerging middle-class family in, say, Ghana.

Flickr/Sean Loyless
According to Forbes magazine, Coke is the world’s third most powerful brand. Pepsi is only No. 27 on the same list.

Middle-Class Explosion

Frontier market middle class is defined as someone earning $5,000 to $15,000 a year. I’m focusing on Africa because it is probably the most underdeveloped and has the most potential of frontier markets.

Demographers consider the ages between 15 and 34 to be the most productive of a person’s life in terms of education, marriage and household formation, which pave the way to consumerism. Today, Africa as a whole represents nearly 900 million consumers, many of which are a member of the all-important 15- to 34-year-old demographic. By 2100, this age group is expected to grow to 1 billion in Africa, putting almost half of the population in a prime consumer sweet spot.

The Brands Are Already Built

About a year ago, I watched a documentary on The Coca-Cola Company (NYSE:KO). What struck me the most were the lengths the company went through to get its product to market. Watching a big red and white truck filled with fizzy, sugary soda driving down rutted clay roads in Africa makes you believe in capitalism. As infrastructure improves, it will become easier to get the product to market, which means there will be more of it, followed by more profits.

According to Forbes magazine, Coke is the world’s third most powerful brand. Pepsi is only No. 27 on the same list. Coke’s brand loyalty is so strong, it makes good sense to own the stock if you’re investing using an emerging or frontier market theme.

PepsiCo, Inc. (NYSE:PEP) is a completely different animal. In fact, thematically speaking, I’m a bigger fan of owning Pepsi shares because of its broader business portfolio.

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