In an interview with The Wall Street Journal‘s Simon Zekaria, SodaStream (NASDAQ:SODA) CEO Daniel Birnbaum revealed that shipping carbonated drinks on a global basis takes 100 million barrels of oil in an average year, 20 times the amount of oil that was spilled in the Gulf of Mexico. Detractors of SodaStream — 56% of float short as of Oct. 31 — believe its business model is unsustainable. I see things a little differently. In fact, I see it changing the world one machine at a time.
Mankind has been fooling around with fizzy drinks for a long time. I’ve seen movies from the ’50s and ’60s where the drinks were made using some sort of carbonation contraption. SodaStream’s product isn’t innovative like Apple‘s (NASDAQ:AAPL) iPod or Tesla‘s (NASDAQ:TSLA) Model S, but the technology advancements over the past 40 years enable its products to work the way they’re supposed to every time. With starter kits ranging in price from $80 to $200, you essentially need four things to make your own soda: a soda maker, a CO₂ carbonator, a carbonating bottle and soda mix flavors.
My wife and I don’t drink soda pop. However, we both like carbonated water and probably go through more than a half-dozen ones-liter bottles every week. In Toronto a bottle sells for C$1.29 all the way up to more than C$3 for the fancy-schmancy stuff.
More bothersome than the $500 we spend annually on carbonated spring water is the 365 bottles we put in our recycling bin each year. I don’t know what type of recycling program you have, but in Toronto, which has an excellent program, the facilities are often overrun with items that aren’t recyclable, slowing down the process and ultimately reducing the amount that is actually recycled. It’s a problem that doesn’t appear to be getting any better.
Therefore, the only responsible solution is use fewer bottles. Either we go to tap water alone, which isn’t the worst thing, or we buy a SodaStream product and recoup our investment in less than a year. The convenience factor alone makes it worth considering.
Ultimately, though, Birnbaum is right. Coca-Cola (NYSE:KO), Pepsico (NYSE:PEP) and all the other soda manufacturers are polluting the planet, profiting from their actions and doing little to change the way they do business. In June, Coca-Cola sent a cease-and-desist letter to SodaStream’s South African subsidiary for infringing on Coke’s trademark rights and also for using derogatory advertising.
The cause of Coke’s upset: SodaStream’s “cage” exhibits illustrating how wasteful Coke is and why SodaStream is a great alternative. SodaStream is right. Coke can and should do better. Its cease-and-desist letter is an embarrassment to all Coke shareholders.
So far I’ve talked about the environmental benefits of SodaStream. However, it is a for-profit business, so I’d be remiss if I didn’t spend a little time discussing its business model and financial performance.
SodaStream announced its third-quarter results Nov. 7, and they were more than satisfactory. Revenues grew 48.7% to $112.5 million year-over-year, net income by 65.9% to $16.8 million and earnings per share by 66.7% to $0.80. When SodaStream went public in November 2010, it was generating 13% of its revenue from the Americas. Today that’s up to 31% for the first nine months of fiscal 2012.
I would expect the Americas to pass Western Europe as the company’s No. 1 revenue generator within five years. In fact, only its Central and Eastern Europe, Middle East and Africa segment is having difficulties growing, although the region did manage a 37% increase in Q3.
Revenue generation doesn’t appear to be a problem, whether it’s competition from Cusinart’s new sparkling-beverage maker or Coke’s lame effort to shut down SodaStream’s marketing initiatives.
SodaStream’s business operates much like Gillette’s profit-from-the-blade-not-the razor model. In SodaStream’s example, you buy the starter kit and then exchange the CO₂ carbonators and purchase flavor bottles. In the third quarter, starter kits accounted for 43% of its overall revenue with consumables generating 57%. In the third quarter it sold 941,000 starter kits. On an annualized basis that’s 3.6 million machines along with the consumables that come with the starter kit.
There are about 118 million households in the U.S., meaning in 2012 SodaStream will have sold a machine to less than 1% of the households in America. Yet, it will likely have revenues of $289 and $27.5 million in net income this year.
SodaStream has a product that’s environmentally friendly, convenient, cost-effective, health-promoting and customizable. The company’s words — not mine. However, you don’t have to be a rocket scientist to see that its razor/razor blade business model is working. Even if it never sells another machine, SodaStream could probably still make money.
But machine sales won’t stop because Coke and Pepsi and the rest are working from a business model that’s old and inefficient. Each year, just like the cable cutters, enough consumers will come to their senses. When they do, you can bet SodaStream’s market cap will be more than $700 million.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.