“There’s no textbook for launching the home soda category, we have to experiment, we have to make mistakes.”

– Daniel Birnbaum, CEO, Sodastream

And make mistakes Sodastream has. Despite growing revenues over 400% since 2008, including a 29% increase in 2013, growth has now stagnated in 2014. Once touted as Sodastream’s largest growth opportunity, sales in the Americas have plummeted 28% in the first quarter of 2014, contrary to double-digit growth figures in both Europe and Asia/Pacific. Compounding the slow America growth is the slow growth of starter kits sales, which has declined 25% year over year. To make matters even worse, Coca-Cola and its partner Keurig Green Mountain is set to enter the at-home carbonated drink market with Keurig Cold in the beginning of 2015.

The stagnation of both revenues and profitability has sent shares sliding over 43% in 2014 alone, with over 36% of outstanding shares being shorted. It is clear that the company’s stagnating revenue growth, thin margins, and changing competitive landscape are major concerns moving forward. The million dollar question seems to be: Is Sodastream a flash in the pan, soon to be trampled beneath the likes of Coca-Cola and other beverage giants?

The Sodastream Experience

The Sodastream machine offers significant benefits to consumers when compared to traditional soda cans; customizability, cost-savings, and health benefits. Sodastream empowers consumers to make soda the way they want it: from customizing the level of carbonation in the beverage to the amount of syrup flavoring. By purchasing a starter kit, the consumer gets the Sodastream sodamaker, a full CO2 canister, and 3 flavorings, all for a price of less than $100. Ongoing operating costs include refilling CO2 canisters ($15/60L), and purchasing new flavorings ($5/12L). Partnerships from large brands such as Ocean Spray, Kool-Aid, and Welch’s offer consumers a large selection of different flavors to choose from. Sodastream is almost 30% cheaper on a per liter basis than traditional soda. For carbonated water, purchasing a Sodastream machine will save a user almost 70% per liter. And the real convenience comes from the ability to create sparkling water, juices, iced teas, energy drinks, and sodas all in the same machine.

Despite these cost-savings, Sodastream’s main advantage over traditional canned soda is clear: Sodastream cola has a third of the sugar, carbs, and calories of traditional Coca-Cola and Pepsi. Soda consumption is one of the main causes of high obesity rates in many first-world countries, and consumers have responded by drinking less soda. Sodastream soda is made only with cane sugar, and contains none of the highly stigmatized high-fructose corn syrup associated with intense weight gain. The relative healthiness of Sodastream products serves as a clear point of differentiation for the company moving forward, and should be even more compelling in the future as consumers continue to seek healthier alternatives to canned soda.

However, the healthy-nature of SodaStream is not a new concept. Despite promoting these benefits in various marketing campaigns, Sodastream has been unable to capitalize in the US. While these factors are still relevant, the company needs an overall shift in their strategy to defend against impending competition.

A (Green) Mountain Sized Competitor

Up until this point in time, Sodastream has faced little direct competition in the at-home carbonation space. With Keurig Green Mountain partnering with Coca-Cola to release the Keurig Cold in 2015, this competitive landscape will be significantly altered. Keurig has proved capable in revolutionizing the at-home coffee market, and is looking to replicate that success in the at-home carbonation space.

Backed by the brands of the Coca-Cola family, Keurig is hoping the popularity of these brands is enough to capture market share from Sodastream in key geographical areas like Europe and the Americas. While existing Sodastream owners are not likely to switch to Keurig due to the cost of switching, the issue lies with household penetration of Sodastream machines in several large markets. In the USA, less than 1% of households own a Sodastream machine, compared to 25% in Sweden. To put this in perspective, Keurig has a household penetration rate of roughly 13% for it’s coffee makers in the United States. It’s clear Sodastream must devise a strategy to increase household penetration rates in several key countries globally, including the United States (which comprise over 30% of Sodastream’s revenues, despite the low household penetration), before Keurig’s product reaches the market.

Profitability Has Gone Flat

While both Sodastream’s and Green Mountain’s offering require the purchase of an appliance, Sodastream’s patented carbonator is unique to the company. When a user runs out of CO2 in their carbonator, they are able to take it to one of 60,000 retailers globally that will exchange their carbonator for one filled with CO2. This network is Sodastream’s most valuable offering.

Retailers have been purchasing less starter kits due to having high levels of leftover inventory from the holiday season. This inventory situation has still yet to rectify itself, and will continue to cripple sell-in figures for the remainder of 2014. Indeed, both Q1 and Q2 sales have experienced decreased units sold in 2014, by 22% and 16% respectively. However, a bigger problem than declining unit sales may have been occurring prior to 2013’s overload of holiday inventory. The average number of CO2 refills per starter kit has been on a steady decline since 2007, implying less use of the appliance from the end consumer. The sale of these high margin consumables are the lifeblood of the company, and less use is a serious problem that will only get worse with impending competition.

Considering this potential decrease in margins, profitability will also be a large concern for Sodastream. In 2013, the company only managed to convert 7% of revenues into net income, despite a gross margin of over 50% on its products. What is more troubling is the contribution to marketing, given that 33% of all costs fall under this category. This further exemplifies the fact that a focus on marketing the benefits of the SodaStream machine alone will not be enough to expand its presence in the lucrative US market.

Thinking Outside the Can

Increased sales of starter kits via promotion will be an unlikely solution for Sodastream’s impending competition. The company is already spending twice as much on SG&A than Keurig, and are still unable to stimulate meaningful growth. Since so much money is already being committed to promotional costs, growth will have to come from a strategic shift.

Sodastream’s financial success is contingent on the sale of the consumables associated with the starter kits, which boast significantly higher margins. Their new strategy must be twofold: the company must find a way to increase starter kit sales, and also find alternative ways to leverage the carbonator exchange. Sodastream has thought outside the can before, and it’s about time they do so again.

Adding Bubbles

In order to better saturate these countries, Sodastream should look to expand its operations by looking beyond the at-home carbonation space into the at-work carbonation space. Similar to how coffee machines are ubiquitous in offices around the globe, Sodastream should look to build B2B relationships to get their carbonators in office spaces. Sodastream could look to sell their products to employers who value employee morale, on the basis of increasing health in the workplace. Considering the margins on carbonators are over 85%, Sodastream would have the potential to further develop their carbonator exchange program to better cater to businesses, without making the cost of the service prohibitively expensive. Similar to how Culligan replaces water in office buildings, Sodastream should exchange carbonators right at client offices. Entering the office space would increase starter kit sales as companies buy the Sodastream machines, and the greater number of people using the machines compared to a household would help increase carbonator refill sales. If Sodastream is able to gain traction in the workplace, users would also be more likely to purchase a machine of their own once they become familiar with the product.

However, even if B2B relations increase starter kit sales, the appliance is likely in the mature phase of the product cycle. Emerging competition will only compound the problem. Even expanding into more countries, like Sodastream plans to do in Mexico, are not the long-term answers. If Sodastream is to increase profitability and grow revenues, it must find alternate methods to grow sales of consumables, specifically, the CO2 exchange. Therefore, in order to better leverage the CO2 exchange program it has spent 10 years developing, Sodastream needs to get its carbonators in as many places as possible. Product innovation will be Sodastream’s salvation.

Sodastream already has a partnership with Samsung, whereby they have developed a fridge that is able to carbonate water, powered by Sodastream carbonators. Integration of carbonators into other products is essential if Sodastream is to be successful in the future. While establishing additional partnerships with major appliance brands, such as LG or Whirlpool will be important, Sodastream’s next big integration should focus on plumbing manufacturers. Partnerships with companies like Kohler and Pfister will be essential to create a carbonated faucet, using carbonators similar to Samsung’s refrigerators. Considering Sodastream users find the most savings via carbonated water, this added level of ease of use would further promote sales and use of the valuable carbonator network. The carbonator faucet would decrease competitive risk of Keurig Cold in Europe, given the much larger market for sparkling water. Also, through the addition of an in-faucet filter, such a partnership could help increase similar sales in new markets, such as their planned expansion to Mexico, where high-end refrigerators may be out of reach of potential customers.

If Sodastream is able to better exploit its carbonator exchange program through both B2B business and product innovation, revenues and profitability will increase due to selling more high-margin consumables.

It is clear that Sodastream is a company at a crossroads. Despite strong past performance, the company will need to find alternative ways to grow. While promoting the health factor of its products is still important, it can no longer be relied upon to increase market share with the impending competition from Keurig. The company will need to find new ways to reach consumers through expanding into the workplace, as well as through product and appliance integration. Through this, its world-class carbonator exchange program will be in high demand from appliance companies worldwide, allowing for long-term success of the currently struggling business. If Sodastream can successfully execute this strategy, they will not not merely be the best of the best in the at-home carbonation space. They will be the only ones who do what they do.