Two niche products have become surprisingly mainstream over the past five years - SodaStream International’s home beverage carbonation systems and Green Mountain Coffee Roasters’ Keurig K-Cup single-serving coffee brewers. SodaStream’s stock has risen more than 100% over the past two and a half years since its public debut, while Green Mountain has racked up an 850% gain over the past five. Why have these two products, which the bears consider fads, experienced such robust, bullish growth?
SodaStream sells carbonation machines, CO2 refills, flavor syrups, and reusable soda bottles for a complete soda-making experience at home. The company emphasizes that it only costs $0.25 to make a can of soda and $0.25 for a liter of sparkling water. It also states that bottling homemade soda in reusable bottles is a more environmentally friendly alternative to purchasing large quantities of soda in aluminum cans or plastic bottles.
SodaStream’s soda makers were invented in 1903, but they weren't well known until private equity firm Fortissimo acquired the brand in 2006 for $10 million. As a result, SodaStream now generates over $400 million in annual revenue and has a market cap of $1.3 billion.
SodaStream operates on a simple “razors to blades” business model, in which the carbonation machines are either sold at thin or negative margins to guarantee future sales of higher margin CO2 cartridges and syrups.
CEO Daniel Birnbaum recently stated that the home soda maker market is still a young one, since SodaStream only has a 1% penetration rate of U.S. households. To achieve more mainstream recognition, SodaStream recently teamed up with Samsung to create a refrigerator with a built-in soda maker. It also recently released a sleek new machine, the Source, designed by famed designer and sustainability advocate Yves Béhar.
SodaStream’s efforts to make soda makers as popular as water filters across the country undermines the very foundation of Coca-Cola and PepsiCo’s business models. Last year, Coca-Cola went on the offensive against SodaStream after the latter pulled a PR stunt, in which the company made a cage of soda bottles including many Coca-Cola and PepsiCo brands.
But not all beverage companies are hostile towards SodaStream. Kraft Foods, on the other hand, has teamed up with SodaStream to produce its Kool Aid, Country Time and Crystal Light syrups for its machines. For Kraft, the partnership was a perfect fit, since those three brands are typically sold as powdered drinks.
During the first quarter, which ended on March 31, SodaStream’s unique product and positive, eco-friendly image paid off. The company reported that its EBITDA rose 22.7% year-on-year to $16.4 million, while net income rose 19.5% to $12.1 million. On an adjusted per share basis, earnings rose from $0.55 to $0.68 per share.
Revenue also rose 33.9% to $117.6 million. Sales of soda makers rose 78%, CO2 refills climbed 101%, and syrup sales surged 119% from the previous year. These sparkling numbers indicate that the company has a bright future ahead as its market penetration increases.
Green Mountain Coffee Roasters
Meanwhile, Green Mountain reinvented the coffee machine, kicking off a revolution in single-serve coffee brewing with the Keurig Single Cup Brewing System. The Keurig, which brews single servings of coffee from concentrated K-Cups, was first released in 1998, but didn’t achieve widespread recognition until Green Mountain acquired the company in 2006 for $160 million. Green Mountain later introduced the Vue, a custom brewer, and the Rivo, a cappuccino and latte system.
Today, Keurig brewers control 75% of the single-serve brewing market, and that single product line and its K-Cups account for 92% of Green Mountain's top line. Just like SodaStream, Green Mountain sells its brewers at cost to generate higher sales of K-Cups. However, Green Mountain has had a tough time convincing investors that its business model is sustainable for several main reasons.
First, its patents for K-Cups expired last year, enabling any competitor, such as Kraft, to create K-Cups for its Keurig machines. This is a major threat to Green Mountain, since it needs to keep selling higher-margin K-Cups to survive. Second, prolific hedge fund manager David Einhorn openly questioned Green Mountain’s accounting practices, sales figures and growth projections, which followed a SEC probe regarding accounting irregularities.
Last but not least, rising competition from Starbucks’ Verismo and Nestle’s Nespresso single-serve brewers are seen as threats to Green Mountain’s dominant market share.
During the fiscal first quarter, Starbucks stated that it shipped 150,000 Verismo devices, much less than the two million Keurigs shipped in the same period. However, Starbucks did not provide shipment numbers for the Verismo during its second quarter earnings report, so it remains unknown if that segment is growing.