SodaStream: Analysis

SodaStream International Ltd. (SODA)
 SodaStream is an Israeli company that makes and sells home beverage machines.  These portable machines make flavored sodas out of ordinary tap water, or just seltzer/sparkling water.  In order to make a flavored drink, SodaStream sells these products:
   1. Soda Makers (Beverage Machines):  to make the drinks
   2. Carbonators (and CO2 refills): which make the drinks fizzy
   3. Flavored Syrups such as root beer, colas
   4. Bottles which the Soda Makers fill the soda into
For those unfamiliar with how the SodaStream system works, please take a few minutes to view this company video:

So what’s so special about SodaStream?
We believe there’s a time and a place for everything.  Remember Apple’s Newton?  Well, the time and place (United States) are now ripe for SodaStream.  What we have here is a confluence of factos creating a whirlwind of demand for SODA.  They include:
1.     A self-aware and knowledgeable American consumer
2.     The Greening of America
3.     A weak economic recovery creating more “do-it-yourself” consumers
SODA’s products, for example, contain less sugar, its diet-versions don’t contain saccharin, and consumers can control the amount of flavorings that go into their drinks.  Or like most people do, they can simply drink club soda/seltzer with no sugar at all.  The company even sells an essence flavor that doesn’t contain sugar.  In 10/2009, the company introduced a Sodamaker made with 85% recycled materials.
It is SodaStream’s job not just to manufacture soda machines but to educate the consumer that its products exist, show how they promote health & wellness, and help protect the environment (i.e, fewer disposable plastic bottles).
According to the U.S. Natural Marketing Institute, the “Green”Consumer Market is over $500Bn globally and over $200Bn in the U.S., and growing at a CAGR of 15%.
Overall assigned Rating:
 We believe SODA is a good SRI investment candidate.  Our rating is “7” (out of a possible 10).  This rating incorporates quantitative and qualitative factors, including the corporate, social and responsibility efforts.

The Executive Summary below summarizes key investment factors/risks.  With the goal of maintaining objectivity, every investment is required to have a full list of Negatives, or if you will, “things we don’t like very much.”
 Note: Earnings estimate is diluted, on 20mm shares outstanding, reflecting the 4/2011 secondary share offering.  EPS converted at an exchange rate of $1.40/EURO.
Share Data for SODA reveals a company with moderate to high-priced shares, as measured by the Price to Earnings (P/E) ratio.  The P/E ratio is high, but not huge on a PEG basis.
Note that the company is global, but based in Israel.  So, it’s reporting currency is the Euro, but labor gets paid in Shekels.  However, we report EPS data in dollars, as the shares are traded on NASDAQ.
Market Capitalization of <$2Bn categorize this as a Small-Cap investment, further increasing return potential, as well as risk.  Our overall investment rating is 7, reflecting strong business trends, but higher-than-average share price volatility.  Beta is 1.2x (co. went public in 11/10) however, we suspect it may actually be higher.
Our FY’2011 EPS estimate is based on 33% revenue growth and 73% net income growth, both higher than management guidance (+30%, +60% respectively).
Revenues for Fiscal Year 12’10 were €161mm, up from €105mm the prior year.  Over the last 3YR period, revenue and earnings have grown consistently with the exception of a “hiccup” in 2009 attributed to the Financial Crises.  Data above is on an adjusted basis, which excludes a management fee (to former majority owner Fortissimo Capital) as well as non-cash compensation.
The Balance Sheet improved dramatically over the last year, as the company moved from an LBO to mainstream company.  Shareholders’ Equity is high and much of the company’s assets are in working capital.
FY’10 Cash Flow was weak, after reporting two strong years.  SodaStream reported positive Free Cash Flow in FY’08 and FY’09, but FY’10 FCF declined dramatically due to rising accounts receivables and inventories.  We estimate A/R and Inv will be a $40-$50MM drag on yearly operating cash flow.
SodaStream’s profitability is expected to rise based on simple trend analysis.  However, there are several short-term crosscurrents beneath the numbers readers should be aware of.  Management fees to Fortissimo Capital affected FY’10 reported profits, and this will no longer continue.
Secondly, FY’11 operating margins will continue to be negatively affected by high Sales & Marketing Expenses, as management aggressively ramps-up business in the United States.
Thirdly, we expect the denominator to increase (on Capital) as the company issues common shares.  There was a secondary common stock offering in April 2011, which will increase Equity over 25%, and decrease debt to negligible levels.  Management is expecting 2011 net income to rise 60%, however this may not translate to EPS growth given the dilution effect.

Longer-term Profitability could rise sharply:

SodaStream’s business model is such that longer term (2013-2014) profitability could increase dramatically from 2009 levels even as revenue growth slows.  By 2013, these factors may occur:
·      Selling & Marketing expenses could decline as consumer awareness increases.
·      The proportion of U.S. (i.e. “Americas”) revenue will increase dramatically.  U.S. consumers love getting their “sugar fixes”, and thus, use more syrups than their European counterparts.
·      A larger U.S. market will also benefit margins resulting from the distribution channel.  This is because management has chosen to distribute directly in the U.S.  Direct distribution has higher gross margins as the company typically sells its product at a discount to indirect distributors.
·      The slice of Soda Makers’ share of the revenue pie will decline, as a larger proportion of sales will be attributed to high-margin Carbonators (i.e., CO2 bottles).
·      Optimization of factory logistics, including the new factory being constructed will lower transportation costs.
·      Operating Leverage should help increase earnings at a more rapid clip compared to revenue growth.  This is because SodaStream has a fixed component to its cost structure as the company owns most of its factories.  Further, half of its General & Admin expenses are fixed in nature.
·      The dilution effect on EPS growth should decrease as the company becomes less dependent on external equity financing.
·      Note that the above increase in expected profitability is expected despite our view that Carbonator margins will decline as new competitors enter the market.
 Rather than reiterate the company’s statements, we highlight key data points and conference call comments:
·      Performance was much better than expected by both analysts and management.  So much so that SodaStream raised Revenue growth, from 25% to 30%.  The company sharply raised earnings growth from 40% to 60%.
·      SodaStream is experiencing rising raw materials costs especially for plastics (up 19%) and Sugar (up 14%) but so far has been able to pass through price increase to customers.
·      Profits were boosted by strong consumables growth.
·      Balance sheet debt declined to negligible levels.
·      Operating cash flow remained negative, due to higher inventories
·      The U.S. launch and ramp-up is performing better than expected.
·      Company will launch into the Japanese market by 4Q’11.
·      SodaStream will undergo a “big-box” retailer test this year
Overall liquidity is not high, but sufficient.  SodaStream used a portion of its 4/11 secondary share offering to repay most of its debt.  A small bank line, cash, and minimal debt maturities support liquidity.  However, continued FCF deficit and higher (though transitory) capital expenditures for a new factory.
 Most indicators of leverage are very low (minimal).  Operating Leverage, while difficult to accurately measure precisely, appears high given the company’s ownership of fixed assets.
SodaStream’s FY’10 P/E ratio presents a rich valuation.  FY’11’s is lower given the company ‘s rapid earnings growth.  The PEG ratio of 1.4x would have been lower were it not for a 36% increase in diluted shares outstanding.  In fact, we are forecasting a 70% increase in adjusted net income for FY’11.  The EPS estimate is also subject to the ebb and flow of exchange rates, which we are basing on last year’s $1.4/EUR.
Other measures of valuation such as Price/Book Value, Price/Sales and Enterprise Value indicate SodaStream’s shares are fully valued.  We also examined various Discount Models.  Most indicated SodaStream’s shares were trading below calculated values (about 20% discount, on average).
However, we conducted a Discount Model utilizing FCF, which yielded a share price under $60.  That calculated price is below the current trading price of SodaStream’s shares.  Note that our model used more aggressive growth rates and a lower WACC than typically utilized, and we still could not achieve higher than $60.
This website utilizes CsrHub and Audit Integrity ratings given that they are a good standardizing and benchmarking tool for evaluating a corporation’s Corporate Social Responsibility efforts.  Unfortunately, neither firm (including others such as RiskMetrics) was able to provide ESG ratings.  This is attributed to the firm’s foreign (Israeli) incorporation and since its initial public offering was fairly recent (11/10).
However, what we can do is offer our opinion of the company’s accounting policies and disclosures.  In both aspects, SodaStream appears above average.  Disclosures are good, in fact, they seem better than what we’ve seen from most companies.  This is likely attributed to its incorporation in Israel, which requires additional financial and operational disclosures.  For example, several balance sheet items are footnoted, and detailed further in the company’s Annual Report.
In terms of the Environment, the company’s products are clearly beneficial compared to traditional methods of producing and distributing soda.  For example, the SodaStream method of producing soda eliminates the need for disposable plastic bottles (and cans).  Whilst true that both are recyclable, the fact is that only a small percentage actually gets recycled.  Further, the carbon footprint and pollution created from transporting bottled soda is mostly eliminated using the SodaStream approach.  We say “mostly” because it is true that its refillable CO2 containers do have to get transported to refilling stations.  Management though, is aware of this and is establishing these stations logistically to reduce transportation.
SodaStream’s products also promote what’s commonly called Health & Wellness.”  It does this by using sugar instead of high fructose corn syrup, offering less sugar in its flavors, using less caffeine, less sodium, and using better versions of sugar-substitutes (i.e., Splenda instead of saccharin).  More recently, this author noticed SodaStream is now selling natural flavor essence, something very popular now in club soda.
How could SodaStream make its CSR Reporting better?
As seen from the above, SodaStream clearly has a healthy product and is environmentally friendly.  However, we offer a short-list of recommendations if the company wants to be a truly Socially Responsible company.  Essentially, the company should offer a CSR Report (perhaps integrated into its Annual Report initially).  This report should include key metrics on:
·      Environment:  Data (yearly) on energy consumption and use of fossil fuels.  Systematic programs that are used to reduce toxic emissions.
·      Social: Employee benefits, diversity programs, work/life balance, etc.  Metrics on factory safety. 
·      Suppliers:  Monitoring of labor standards at suppliers
·      Governments:  Policy to address controversies in countries that have weak labor records, etc.
It is important that the CSR report not be a marketing piece about how great the company is.  This is why it should have specific goals, and specific measurements to achieve them.  It should also talk about “bad things” that happened to the company or its chief challenges.  Speaking of which, the last bullet is of particular importance, if not urgent, concern to SodaStream given that its main factories are located in the West Bank (Mishor Adumim) Israel.
The West Bank was occupied by Israel during the Six-Day War in 1967 and the area is the subject of dispute between Israel and the Palestinian Authority.  With the exception of East Jerusalem and the former Israeli Jordanian no man’s land, the West Bank was not annexed by Israel but remained under Israeli military control.  Most of the residents are Arabs, although a large number of Israeli settlements have been built in the region since 1967.  There has recently been negative publicity against companies with facilities in the West Bank.  Several political groups have called for consumer boycotts of Israeli products (including SodaStream’s) originating from the West Bank.
SodaStream participates in the carbonated soda drink (“CSD”) and sparkling water industry.  The industry is in the Maturity stage of its life cycle.  The CSD industry is marked by low growth, high penetration, moderate competition and low revenue cyclicality.  Industry revenues approximate $216Bn globally, according to Datamonitor.  The sparkling water industry (i.e., seltzer, club soda) is $34Bn globally and far more popular in Europe than in the States.  Both numbers exclude soda/sparkling water at restaurants.  According to Euromonitor, the U.S. had the highest per capita consumption of 118 liters in 2010, approximating $39Bn in sales.

 The CSD industry is experiencing flat growth, with most of it occurring in Emerging Markets.  Revenue growth is fairly lackluster in Europe given the troubled economies of Greece, Spain, Portugal and Ireland.  In the U.S., soft drink volumes had been growing in the low-single-digits in the ‘90s.  However, volumes turned negative during the Financial Crises and have not recovered to previous levels.  Name brand soda is also experiencing competition from white-label brands as well as niche drinks such as Energy and Sports Drinks (e.g. Hansen Natural).

YTD 2011 has shown incremental improvement, due to higher marketing spend.  Companies have cited ongoing input cost pressures.  SodaStream noted in its conference call (1Q’11) that Aluminum prices were up 9%, Plastic (+19%) and Sugar (+14%).  Though, all participants have been able to recapture margins via higher pricing.
According to industry expert and Harvard professor Michael Porter, an industry can be analyzed using a Five-Forces Model.  These forces determine how intense competition is within a particular industry.  Industries with low intensity, are considered attractive, as they are profitable.  Below we summarize these forces for the CSD industry.
As readers will soon notice, the soda industry structure is quite strong and oligopolistic.  It is well protected and the threat of new entrants is low given high entry barriers and high promotional activity.  Consequently, we expect there will be some retaliation and an answer to SodaStream’s market share advances.
click to enlarge
 A peer group comparison indicates that SodaStream is much smaller than its brand-name competitors (i.e., Coco-Cola, Dr. Pepper Snapple, PepsiCo).  Its (reported) profitability is also lower than most of its peers.  However, SODA’s forward Price/Earnings ratio is higher than its peer group.
Management Summary:
SodaStream’s management appears highly focused, forthright, and attentive.  In fact, they’re almost scientific about tactical market strategy.  CEO Daniel Birnbaum is not only qualified in education and business experience, but he is a great “front man” for showing off the company’s products.
The existing management is fairly new, having been installed in conjunction with the acquisition and restructuring by Fortissimo Capital in March 2007.  While new, senior managers have had experience working at Nike, Proctor & Gamble, Pillsbury, Kraft and McDonald’s.
SodaStream is now arming for battle at the home turf of the world’s most powerful soda companies.  However, management also brings with it best practices from years of operating and entering new global markets (41 countries as of 1Q’11).
Management appears customer-centric, an important attribute in the Consumer Products industry.  Note that several (four) executives have non-technical, social-type skills that may be giving it an edge above competitors.  Mr. Tali Haim, for example, has a degree in Psychology and had been an organizational psychologist earlier in his career.  After all, this business is really about consumer behavior !
Despite the 11/2010 IPO and 4/2011 secondary share offering, SodaStream insiders retain a significant ownership stake.  We consider this very important in aligning executive interests with those of investors.  As of 8/2011, insiders owned approximately 19% of SodaStream’s shares outstanding.  In addition, Fortissimo Capital (the firm that LBOed SodaStream) continued to own at least 11% of the company’s shares.
SodaStream’s a great company with somewhat richly-priced shares.  Those interested in investing in the company are recommended to purchase on stock price retrenchments in the $50s area.
Disclosure:  The author is long SODA.  This article is neither a recommendation to buy or sell shares in SODA.

Should SodaStream go Single?

Recently, we wrote about the key positive characteristics of SodaStream’s business and financials versus Green Mountain Coffee Roasters’ (“GMCR”)link.

So where does GMCR’s business concept excel over SodaStream? 
Investors are going gaga over the thought of a SodaStream single-serve soda maker similar to GMCR’s Keurig brand that would be marketed to consumers.  However, we believe the economics aren’t viable for the home market.  While SodaStream competes with store bought soda, GMCR  competes with retail store-brewed coffee such as Dunkin Doughnuts, McDonald’s and Starbuck’s.  Given the labor-intensity/rents of in-store coffee,etc., GMCR’s at-home cost remains significantly cheaper compared to store-bought coffee.  For comparison, a *typical k-cup is about $0.60 compared to $1-$2 for retail store coffee.  This represents a discount between 40-75% (see Table 1 below). Furthermore, customer ratings are high (according to reviews).
 *We acknowledge that k-cup price ranges can be huge, from $0.44/unit to over $1/unit.  Prices are even cheaper from indirect sellers such as Ebay.

                            Table 1 <click to enlarge>

While single-serve soda data is not available for SodaStream, its cost-benefit to the consumer will likely be far worse compared to single-serve coffee.  In order to determine whether single-serve soda will be cost-effective, one must first determine if the cost/liter of SodaStream’s soda is significantly cheaper than store-bought soda.  As consumers realize all too well, serving costs increase sharply as serving sizes decrease.

In Table 2 below, we analyzed the cost differences for the consumer between SodaStream’s system versus purchasing soda from the store.  We showed both SodaStream’s advertised cost/liter as well as a more realistic, or actual number.  This number is based on amounts actually reported by consumers on, etc.  Note that Table 1 is an analysis of single-serve coffee while  Table 2 compares cost/liter.  According to the table, at best, the consumer realizes a 23.5% discount to store-bought soda.  At worst, SodaStream consumers actually pay more for soda (and this doesn’t include the labor involved, aka the “fun-factor”).  Note that the prices surveyed for store-bought soda were both for Coke and Pepsi as well as white-label brands.   Presently, nearly all of SodaStreams flavors are white-label/private brands.

                         Table 2 (click to enlarge)

In conclusion, if SodaStream cannot produce a cost-effective product on a per-liter basis, it stands to reason that a cutting-edge single-serve soda machine would not be able to achieve such a goal.

Further, both GMCR’s and SodaStream’s  cost estimates exclude the price of the machines, which sell for  $100-$150 on average.  So then… how would Socially Responsible Investing solve this problem?

 List of Operational Tactics recommended to SodaStream:

1.  The Single-Serve maker and other innovations should be targeted to the “SOHO” market.  This is because the machine would likely be significantly higher priced than SodaStream’s $100 machines, and the soda volumes would be far higher, legitimizing the machine-cost.  Further, the higher volumes would increase corporate profitability as the margins are significantly higher for consumables (CO2, flavors) compared to the traditional home-consumer market.  There is also a fixed-cost component to SODA’s operations further boosting margins. Of course, this would be a direct challenge to Coke/Pepsi, which have soda dispensers in most offices.  The key would be to “fly below the radar” by marketing to “mom/pop” businesses.

2.  Lower the sales price of the beverage machines: The company already makes a decent margin on them and could afford to do this. Reducing the machine price would also strengthen the company’s business model, and increase longer term profits (as the blades bring in higher gross margins compared to the razor-blades).

3.  Outsource beverage machine production:  This could lower machine prices, better match logistically with end market demand and importantly, significantly reduce geopolitical risk (e.g, West Bank, see point 7).

4.  Utilize and leverage core competencies (i.e., technology).  When this writer heard that SodaStream was Israeli, the first thought was Jewish “Silicon Valley” where several innovative companies are based.  SodaStream should license its technology to white-lable brands and boost R&D. This would be a better use of R&D dollars compared to consumer single-serve.  It is requested that management disclose R&D numbers in its financial statements.

5.  Make alliances with soda beverage companies for brand-name & proprietary flavors. The most frequent complaint among users is that several of the flavors are “just aweful.” Many noted that SODA mixes sugar substitutes into their flavors, leaving a horrible after-taste.  We note that consumers’ ratings on SodaStream are worse than they are for Green Mountain Coffee Roasters.  This problem must be immediately addressed to lower long-term customer loss-rates.

6.  Market to consumers an easy way to return the empty CO2 refills.  Netflix can perhaps “lend a hand” on this!  This is the second largest complaint by users.  I would suggest the company negotiate with UPS and offer its customers prepaid envelopes to return the empty C02 refills.  SodaStream should also increase control of its complicated distribution network in the U.S.

7.  Become a truly Socially Responsible Company by investing in local communities, investing in its employee community and by creating a set of metrics to measure the company’s production of greenhouse gases, etc.  The company should acknowledge that transportation costs for refills does create significant greenhouse gases.

Lastly, it should also address the controversies over its West Bank plant location.  SODA’s principal manufacturing plant is located in Mishor Adumim, an area in the West Bank that is the subject of dispute between Israel and the Palestinian Authority.  There has recently been negative publicity against companies with facilities in the West Bank.  And a number of activist groups have called for consumer boycotts of products produced in the West Bank.

Disclosure:  the author is long GMCR, SODA.

    SODASTREAM…Not your grandfather’s Green Mtn. Coffee

    Since SodaStream’s November’10 IPO, several writers have highlighted the similarities between Green Mountain Coffee Roasters (GMCR) and SodaStream (SODA).  Indeed, they have similar *business models, but I believe the two companies should be differentiated. Years ago, GMCR was a shining example of a socially ideal, yet profitable company with heavy emphasis on Corporate Social Responsibility (“CSR”).  The firm was not only good to society and local community, but to its employees and investors as well.  (* Both companies use the razor-razorblade business model.)
    A decade ago, GMCR was a small, earthy-granola company with good (but not stellar) growth flying under the radar of larger heavyweights  Now, GMCR itself is a big wig  ($11Bn market cap) that is on the cusp of competing with some of the most well managed companies – think Starbuck’s, Dunkin Doughnuts.  Ah, before I get criticized for saying Starbuck’s is a competitor (as there’s a big contract with GMCR) I suggest readers take a closer look at that contract’s (lack of) details…Press Release
    SodaStream International Ltd is an Israeli company that makes and sells home beverage machines.  These portable machines typically make flavored sodas out of ordinary tap water, or just seltzer/sparkling water at the consumers’ preference.  In order to make a flavored drink such as a cola, SodaStream sells these products:
    1. Soda Makers (Beverage Machines):  to make the drinks
    2. CO2 refills: which make the drinks fizzy
    3. Flavored Syrups such as root beer, colas
    4. Bottles which the Soda Makers fill the soda into

    SodaStream is not your grandfather’s Green Mtn. Coffee Roasters – it’s better than that!  How then….?

    Key Difference # 1
    Harking back a decade ago, GMCR was showing real earnings – more recent earnings are suspect.  It reported steady revenues and earnings growth, of which was organic (i.e., internal, without acquisitions).  Now,  I’m not quite sure what their earnings really are, or how rapidly the company is really growing given the huge acquisitions skewing reported growth.  For additional information, please refer to this website’s article on Green Mountain, which essentially alludes to the company’s deceptive practices of presenting earnings.

    By comparing GMCR’s pro-forma revenues to reported revenues, one realizes that the company is growing slower than it’s reporting, and that this is attributed to acquisitions.  For example, during FY 1Q’11:

    • Proforma Revenue growth (+54%) was below reported revenue growth (+67%).  See table below for figures. 
    • Note: GMCR also focuses on Non-GAAP numbers when presenting to investors, of which excludes several items including cash litigation expenses.  These Non-GAAP earnings are significantly higher than reported earnings.

    The tables below present GMCR’s proforma condensed income statements for FY 1Q’11 and 2Q’11 (including YTD).  The Securities and Exchange Commission’s Rule 210.11-02 requires that when making an acquisition that the acquiring company disclose what its condensed income statement would look like if the acquisition occurred at the beginning of a reporting period.  This helps investors distinguish between internal and external growth.

    • Oddly, the 1Q’11 numbers were substantially revised in 2Q’11,  without explanation.   We estimate that 1Q’11 EPS were boosted $0.12/share.  In other words, numbers aren’t adding up.  (This is calculated by comparing YTD earnings per share with the previous quarter).  All tables can be clicked to enlarge.
    GMCR 1Q’11 Proforma earnings
    GMCR 2Q’11 Proforma earnings, including year-to-date data.

    Key Difference #2
    SodaStream’s internal, or organic growth, is better than GMCR’s.  Other than an acquisition of assets from a bankrupt company in the Nordic region that got hit with the financial crises, all of SodaStream’s growth is internal.  For example, during FY 1Q’11, both operating income and adjusted EBITDA doubled while revenues grew 50% (all without acquisitions!). 

    Note: company uses the Euro as a reporting currency.  Source: SodaStream

    Key Difference #3
    SodaStream’s financial statements are significantly more transparent compared to GMCR.  In order for analysts to accurately measure and forecast the company’s performance several key metrics are necessary including:

    • Unit sales of Keurig brewers
    • Coffee pricing
    • Unit sales of K-cups
    During 1Q’11, GMCR’s management decided to stop disclosing K-cup data, leaving investors in the dark.

    In this regard, SodaStream is excellent.  The company not only provides data points in its conference calls, but significant data about its business model is disclosed in its government filings.  This allows some comfort when analyzing trends, as SodaStream analysts have to reconcile two different businesses:

    • Soda Makers: aka, the razor
    • Consummables (CO2 bottles, flavors):  aka, the razor-blades
    • Note 1 below is a small distribution business of Brita filters and related products
    Note: Soda Makers and Consumables data sourced from SodaStream

       In the above table, note that CO2 cylinders are also included under Soda Makers (first line) as the company typically includes one or two CO2 cylinders in its “Starter Kit” Soda-makers.  The Consumables line includes both the CO2 cylinders as well as Flavored Syrups, of which the company discloses in separate text.  Unit sales are also disclosed on a quarterly basis (not in the above table).

    Key Difference #4
    Market share, revenue and earnings potential are all greater for SodaStream than Green Mountain Coffee Roasters.  With an $11Bn market cap and nearly $2.5Bn in expected revenue for FY’11, the company is quickly reaching its asset-size capacity.  GMCR is expecting 82%-87% reported revenue growth for FY’11.  We are not saying that the potential is not there for GMCR, but with a U.S. market share of 35%-45% for household coffee makers (depending on whom you ask, or trust..) it will be difficult to continue rapidly gaining share.  At some point, GMCR will effectively become the market, and it’s growth will be limited by the LT growth of the home consumer coffee market.  This growth is likely to be 5%, according to Moody’s. 

    It is difficult to ascertain the addressable market for GMCR, but it is likely below $9Bn (U.S. At-Home market).   This author has seen global numbers for single-serve coffee that were no higher than $4Bn.  However, NPD Group notes that GMCR has only 8-9% of the total number of U.S. coffee drinking households.  However, this percentage needs to be distinguished from the addressable market which we view as far smaller (see $ amounts above).

    For comparison, SodaStream’s beverage market is slow-growing (see chart below) but the total market size is absolutely huge.  According to Datamonitor, the global off-premise soft drink and sparkling water market generated $216Bn and $34Bn respectively in 2009.

    Note that SodaStream is a global company with products selling in 41 countries.  Given that SodaStream’s soda makers are unique products that some consumers will never buy, and given market control by Coca Cola, etc., market share potential (in % terms) is likely limited to 5%-15%.  So far, SodaStream’s highest penetration has been in Sweden where its share is 21%.

    Taking a conservative share percentage of 6% yields an addressable market size of $15Bn (includes soda + sparkling water).  This compares with SODA’s FY’10 revenues of just $227.8MM (converted from Euros).  In global market share terms, this equates to just 1.5% of the addressable marekt.  It is difficult to ascertain SODA’s U.S. market share, it’s most important market.  However, management believes it is negligible (~ 0.25% of the total market). Hence, the potential for SodaStream is huge, so long as the company executes well.

    Disclosure:  the author is long GMCR, SODA

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