SodaStream (SODA, Financial) products are sold in over 64,000 retail stores in 47 countries including home and electrical appliance stores, hypermarkets, supermarkets, department stores and convenience stores.
For the last couple of years, SodaStream management has touted that the company's big growth opportunity is the United States market. While the company's international growth has been mediocre at times, SodaStream's U.S. growth has been astounding.
Where the Problem Lies
Unfortunately for SodaStream investors, the company's first big problem is in the U.S. market. With U.S. revenue down 28% annually and making up almost 30% of the company's revenue, SodaStream needs to seriously reevaluate its competitive position in the market.
The second issue facing SodaStream is the company seems to be in denial when it comes to the sales of its starter kits. A starter kit gives the customer a Soda Maker, at least one CO2 cartridge, pressure resistant bottles, and some sample flavors. These kits are sort of the gateway to the SodaStream experience. Since these kits usually start at about $80, once a customer decides to buy one of these kits they have a significant reason to keep buying the CO2 cartridges and flavors.
Total starter kit sales declined by 25% on an annual basis. Though these kits represent just 27% of total revenue, the problem is much bigger than this percentage. Starter kits represent new customers who are willing to buy into the system. A significant decline in starter kits means lower potential consumables sales down the line.
Shares of home soda-machine company are hitting new 52-week lows, with shares down more than 50% over the past year. With its push into the United States suffering major setbacks SodaStream's growth story has hit a snag.
Problems in the U.S.
SodaStream's growth story hinges on strong growth in the United States. The company has been selling home carbonation systems in Europe for decades, and in fact sales outside of the United States are still going strong. In the most recent quarter, sales in Western Europe rose by 17% year over year, while sales in the Asia-Pacific region jumped by 28%. But sales in the Americas plummeted by 28%, a massive decline in what is supposed to be SodaStream's most important market.
Part of the problem was excess inventory left over from a tough holiday season. Sales of the company's starter kits, which include a machine as well as some flavors and carbonators to get started, plummeted by 28%. Sales of consumables did far better, rising 15% year over year, and the company still expects to grow total sales by 15% in 2014 despite basically flat revenue during the first quarter. This suggests that the company expects to work through its inventory issues relatively soon.
Final Thoughts
SodaStream now trades at a P/E ratio of around 17, and the stock is certainly far less expensive than it was in 2013. But SodaStream has no competitive advantage in the United States. It has no double-digit percentage install base like it has in certain European countries.
The company basically admitted they had a tough time selling sodamakers and was forced to cut prices to move inventory, a clear sign they were having channel inventory issues. And these channel stuffing issues showed up clearly in the Q1 2014 results.
There's also the industrywide problem of declining soda consumption, which has fallen to levels not seen since the mid-1990s, and according to Beverage Marketing, because of consumer worries about sugar's contribution to obesity, artificially flavored diet sodas witnessed a near-7% drop in dollar sales in 2013 alone.
With SodaStream's underlying business trend deterioration of sodamaker inventory channel issues, distribution saturation, and weak sell-through, I find it highly doubtful sales will re-accelerate in the second half of 2014 as the management is guiding. The only material difference will be a marketing messaging change to health & wellness, which will not be enough to change the tide.
