SodaStream Aims Its Marketing At The Plastic Bottle

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For soda drinkers, the days of having to buy, lug, store and recycle thousands of soda cans and bottles per year may finally be over.

Israeli firmSodaStream International ( SODA ) provides a home-based solution for those who are ready to save on the cost of buying soft drinks, enjoy the convenience of creating a variety of carbonated drinks at home and reap the health benefits of drinking sodas that contain fewer calories and more natural ingredients.

Their innovative SodaStream machines allow users to carbonate water at home and add a variety of flavors that are similar or better in taste than conventional sodas. The company also sells carbonating bottles, CO2 cylinders and flavors.

With this convenience and cost savings also comes an environmentally friendly product, the company claims.

"An average American family uses 2,000 bottles and cans in their home every year," said Soda-Stream's CEO Daniel Birnbaum. "It's an incredible number. It's probably the highest amount in the world. In Europe, most homes will use about 1,200 to 1,500 bottles and cans at home in one year."

It Takes Oil To Make Bottles

The environmental cost of making the packaging of these bottles is very high. Water is necessary for manufacturing and it takes four times the volume of the package to make a plastic bottle, explains Birnbaum.

"It uses oil to manufacture and globally, sources such as the EPA claim that the world burns about 100 million barrels of oil just making soda bottles and cans in one year," he said. "And 100 million barrels is a lot of oil. It's 20 times the amount of oil that spilled in the BP spill in 2010.

"So, what SodaStream is doing is telling that story. And consumers now have a choice. They might not have had a choice five years ago, but now there is a choice. All you have to do is open your tap, you get fresh water out of your tap, and now you can transform that into your favorite soda in seconds."

The brand has been around for more than a century, but the firm relaunched the product in 2007 and went public at the end of '10.

Today, the company has more than 5.5 million consumers in 45 countries and distributes its products via 60,000 retail stores worldwide. In the U.S., it has a presence in 15,000 retail locations, including major retailers such asBed Bath & Beyond ( BBBY ),Williams Sonoma ( WSM ),Macy's ( M ),Target ( TGT ),Wal-Mart (WMT) andCostco Wholesale (COST).

Europe is a more established market, generating 49% of SodaStream's revenue. In the third quarter, sales rose 31% from the prior year in that region.

"The company has a long and successful history in Europe, where even today the company is posting meaningful growth despite high levels of household penetration in several markets and an established retail presence across the geography," states Canaccord Genuity analyst Scott Van Winkle in his research report.

The Americas generated 33% of total sales with an 80% year-over-year burst. It's a promising market for the company, as its consumer penetration is much lower in the U.S.

"(The U.S.) is representative of the biggest soda opportunity that we have," said Birnbaum. "Just last quarter, we sold over 2 million of our syrups in the U.S. alone, out of just over 7 million worldwide."

"The company has benefited greatly from outsized distribution expansion in the U.S. as retail buyers looked for real innovation in a moribund housewares category as lift from Keurig coffee makers started to wane," wrote Deutsche Bank analyst Bill Schmitz Jr. in his report.

Asia-Pacific is the other major emerging market. SodaStream launched in Japan in 2011. Next year, the company plans to enter India. China may follow.

The global market for carbonated soft drinks and sparkling water is estimated at more than $260 billion, with major players such asCoca-Cola (KO) andPepsi (PEP) dominating the scene. SodaStream views this as a tremendous opportunity to expand its footprint. In addition, it enjoys a 90% market share in almost all of its markets.

As part of a new global advertising campaign, the company launched an ad featuring hundreds of soda bottles and cans disappearing with every use of the Soda-Stream machine. While the campaign successfully ran in the U.S., Sweden and Australia, it was censored by the U.K. advertising body due to its risk of "denigrating" the bottled drinks market.

While SodaStream was able to run a different ad, this incident provided the company with even more publicity. The banned ad's views on YouTube jumped from 50,000 prior to the ban to more than a million within a few days of the ban and 2.5 million most recently.

SodaStream offers 150 different flavors. Most have two-thirds less sugar and calories than leading brands. It also does not use high-fructose corn syrup, preferring natural cane sugar instead. All-natural mixers are sweetened only with cane sugar. Diet versions use Splenda or Stevia, while its flavored water syrups use unsweetened all-natural flavor essences and contain no calories, preservatives or artificial ingredients.

In addition, the company has entered into co-branding agreements in its flavors segment with major players such as Kraft, Breville andCampbell's (CPB). It now offers Kool-Aid, Crystal Light, Country Time and V8 syrups. Management expects more partnerships in the future.

Benefits Of Israel

SodaStream has 20 production facilities in nine countries. Five of those are in Israel. The company is building a new 1-million-square-foot facility in Israel, with the first phase expected to become operational by the end of 2013. It also received a grant from the Israeli government for this facility.

Being headquartered in Israel provides the company not only with an advantageous corporate tax rate of 10% or less, but also the ability to enjoy Israel's free-trade agreements with Europe and the U.S.

Its balance sheet is strong with no debt. Gross margins stood at 54% as of last quarter. The company raised its revenue and profit guidance for 2012.

The company has seen some competitors enter the market, primarily in northern Europe, as well as Cuisinart in the U.S.

"We welcome that type of competition," said Birnbaum. "It demonstrates that the category is legitimate, it will help expand the entire category. Because at the end of the day, we want home soda making to replace packaged soda."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BBBY , M , SODA , TGT , WSM

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