SodaStream Analysis

Should Coke and Pepsi Be Nervous?

SodaStream International (SODA) is an Israeli based company that distributes homemade carbonated soda or cola makers. Or you can use it to just make fizzy or carbonated water if that's your thing.

Disclosure: I own shares in both KO and PEP and have no position in SODA.

What is SodaStream?

It's an intriguing idea with some definite appeal: brewing your own soda at home is definitely a lot cheaper than buying drinks from a vending machine or restaurant, and from what I can tell, it's also less expensive than buying brand name sodas at a grocery store.

Then there's the convenience factor of whipping up a fresh 1 liter batch in less than a minute - no need to physically go to a store, no need to lug cans and bottles back home, and no feeling guilty about all that consumption as you survey the mass grave of empties in your recycle bin.

And from the investment side, there's something to be said for a business model where you acquire a customer who is required to keep coming back and order your products indefinitely (the syrups and CO2 containers).

Drawbacks?

I've read a number of online reviews and there's certainly some mixed reactions. The majority of reviews are favorable, citing the reasons above. But most of the unfavorable reviews share a common denominator - the taste of the sodas themselves.

SodaStream currently offers a selection of around 30 different syrups, from traditional and diet colas and root beer to a variety of fruit flavors and even teas. One of the selling points is that their product line is a healthier and greener alternative to brand name sodas.

And therein lies the problem, in my mind.

I don't believe people drink sodas because they just like something cold, sweet, and carbonated. And that they would switch if they could just find a healthier alternative.

They drink brand name sodas for the same dual reason others drink Starbucks - they need the caffeine and they enjoy experiencing the "mini-luxury" benefit that consuming a dominant brand gives them. In fact, I believe there is also a similar dynamic involved with teas.

Why Don't We All Just Drink Water?

If we all made rational, health-based decisions, all we would ever drink would be water, juice, skim milk, and some really nasty and bitter herbal tea.

The psychology of what we drink and why is fascinating. To ingest and consume anything is inherently intimate, but drinking seems especially personal.

What we drink, how we drink, where we drink it, and how much of it we drink is a huge definition of who we are, how we view ourselves, and how we want others to see us (this obviously includes our alcohol consumption, too, or our lack of it).

We all have our favorite foods - and yet it's unlikely we eat that same food every single day. What we choose to drink, however, seems to be much more habitual and even borders on the ritualistic.

Add a little caffeine (or a lot), and you've got yourself a daily routine worth billions of dollars.

It's the Caffeine and the Branding - Not the Carbonation

I don't think it's a coincidence that the most popular non-alcoholic consumer drinks among the general population (i.e. excluding those individuals with a strong fitness and health oriented identity) are all caffeinated - coffee, teas, sodas, and energy drinks.

But caffeine is only part of the story. After all, caffeine levels vary greatly from one category of drink to another. For example, coffee contains significantly more caffeine than colas or tea.

After that, it's all about branding, identity, and psychology.

On a side note, the website 60 Second Marketer has an interesting piece comparing Coca-Cola's brand with that of Pepsi and exploring what each brand represents (in a North American context).

Whether those drinks are carbonated or not, it seems to me, misses the larger point. In fact, the North America carbonated beverage market is actually declining. And yet I'm happy to personally own both KO and PEP (with PEP being one of my core holdings).

That's because, as counter intuitive as it might first appear, I don't believe either of these two behemoth companies are in the "carbonated beverage" business. On the contrary, I believe they are in the much larger "drinking something to make me feel better" business. And more importantly, I'm convinced that both companies recognize this themselves.

And, in the case of Pepsi, they're also a major player in the snack industry (or as I would call it, the "eating something between meals to make me feel better" business).

Coke and Pepsi Products:

Curious how the product lines of KO and PEP stack up against each other? Check out the links below -

Coke boasts a beverage portfolio of more than 3500 products.

Pepsi has their own deep bench of beverages (including Gatorade and Tropicana) as well as food brands FritoLay and Quaker.

SodaStream Analysis - Why I'm Passing on SodaStream

As much as I'm intrigued by SodaStream, and curious to see if homemade carbonated drink making is a trend that gains significant traction in the coming years, I'm not interested in investing in the company.

In the send, SodaStream is a delivery mechanism. To be sure, an innovative delivery system can revolutionize an industry - consider Netflix (movies), Amazon (books), and Apple (music).

But a delivery mechanism is only as valuable as the product or experience that's being delivered - after all, Netflix, Amazon, and Apple didn't attempt to create their own movies, books, and music. They found new, more convenient ways to distribute what was already in demand.

So until and unless SodaStream finds a way to deliver the home creation of brands that are actually in demand, I don't see their business model as being anything other than the novelty of making your own generic soda.

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