It wasn’t too long ago that SodaStream International, the Israeli maker of home carbonated-beverage devices, had lost its fizz. Health-conscious consumers were shunning its soda pop offerings. The boycott, sanctions and divestment movement had targeted the company because of its West Bank factory. Even Scarlett Johansson, who appeared in a Super Bowl commercial for the company, generating a lot of buzz, couldn’t turn things around.
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But SodaStream is back. Its Tel Aviv Stock Exchange shares soared more than 200 percent in 12 months, pushing the company’s market valuation to just over a billion dollars. Last week, the company said profit more than tripled in the fourth quarter as revenue climbed 17 percent, well ahead of what Wall Street analysts were expecting and setting off a rally in its stock. On Tuesday, SodaStream closed down 2 percent at 172.80 shekels ($46.69).
“Consumers are responding positively to our messaging around health and wellness, convenience, and the environment, and are using SodaStream to produce sparkling water in record numbers,” said CEO Daniel Birnbaum.
The SodaStream of 2017 is very different from the SodaStream of 2013. Four years ago, the company’s main market was North America (45 percent of sales then, compared with 25 percent now). In those years, little SodaStream was trying to take on Coca Cola and PepsiCo as a competing brand of soda pop. It appealed to the hearts of consumers with environmentally themed marketing messages that stressed how its reusable bottles were a greener alternative to disposable plastic bottles.
So far, so good — SodaStream had been growing at a relatively fast clip between 2011 and 2013, perhaps too quickly. But it hit trouble in 2014. Its marketing message lost luster and growth halted. Meanwhile, the company began suffering distribution problems in the United States and sales slid.
In late 2015, the company began trading on the Tel Aviv Stock Exchange in addition to its Nasdaq listing. Its valuation then was $320 million. Birnbaum dedicated his speech on the first day of trading to Zionism and coexistence — the company had been fighting back charges it was exploiting Palestinian workers at its West Bank plant — but investors in Tel Aviv welcomed the company with wariness. Many of them had been burned by SodaStream shares, when the company had been valued at $1.5 billion before its stock dropped 80 percent.
But Birnbaum turned the company around. He sharpened its marketing message by repositioning itself as a maker of healthful, low-sugar sparkling drinks. SodaStream now brands itself as a water company in every way, and no longer tries to imitate Coca Cola. The syrups without food coloring and the environmentalism are just add-ons. Sales have flourished. Additionally, the company undertook a major reorganization, merging production at a new site in Rahat in the Negev desert, and returned to profitability.
Revenue grew 14 percent last year to $476 million, although that is still 7 percent below 2014. Net profit grew from $12 million in 2015 to $44 million in 2016, as a result of significant investments the company made in 2015 when it moved the Mishor Adumim factory in the West Bank to Rahat, inside pre-1967 Israel to merge its production lines. The company expects further growth in 2017, but at a lower pace of 5-6 percent and profit growth of 12-14 percent. When accounting for changes in the exchange rates, growth could be even higher — 7-9 percent in revenues and 30 percent in profits.
Razor and blade model
One of SodaStream’s advantages is its business model, which follows the classic razor-and-blade formula — sell them the basic product and customers will have to come back for refills. SodaStream’s home-carbonation devices generate repeat sales for gas canisters and syrups. Each sale of a device starts a relationship with the customer that continues to generate revenue for years afterward.
Likewise, the company has experience in managing a complex distribution network. SodaStream’s gas canisters are not discarded when emptied but rather are refilled, which requires getting the canisters back from customers to the factory. Unlike most manufacturers, its logistical network is bidirectional and has to be run efficiently if it’s not going to take a toll on profits.
Another advantage of the company is the fact that its major investment in relocating and upgrading its production lines are behind it. The main thing was merging all its Israeli manufacturing in Rahat and taking steps to make its distribution and logistics network more efficient. Its $148 million advertising budget last year was spent more effectively than in the past. Costs may have risen by 4 percent over 2015, but they rose far more modestly than revenue, mainly because of greater spending on digital advertising instead of television spots.
As a rare Israeli producer of a globally popular consumer product that operated a plant in the West Bank, SodaStream was for a long time a target of the boycott, sanction and divestment movement. Moving the factory to Rahat undercut the boycott calls, although the company’s recent decision to put an Israeli flag on its products is liable to raise the ire of the boycotters, despite its stressing that Arabs and Jews work together to manufacture its products.
Another problem for SodaStream is its reliance on Birnbaum, who joined the company 11 years ago and is now the dominant figure there. Birnbaum, who is endowed with sharp marketing senses, is the one who was responsible for turning around SodaStream (together with private equity fund Fortissimo). The company is very dependent on his multiple talents to match its marketing messages to market trends.
Likewise, the fact that SodaStream is exposed to exchange rate fluctuations doesn’t work to its advantage. The company manufactures in Israel, so that its expenses are in shekels. On the other hand, 60 percent of its revenue comes from Europe, and its financial statements are in dollars. In light of this, European economic weakness and the strong shekel make the company’s cost structure challenging.
On the other hand, the company does have several opportunities ahead of it which, if properly exploited, could further boost growth. SodaStream operates in 45 countries, but it has not reached its full potential in most of them. It has relatively strong operations in Germany and the Nordic countries, as well as in Switzerland, Austria, Italy and Belgium. Its sales on the North American continent began to recover in 2016 after being depressed for two years, but it still has a long way to go.
One of the opportunities SodaStream has been good at exploiting is the growing consumer preference for healthier eating and environmentalism. From focusing on drinks based on sweetened syrups and imitating products made by Coca Cola and PepsiCo, the company has moved to focusing on creating a unique brand of carbonated water. That may have hurt sales of concentrates, but SodaStream is building on consumers’ reluctance to buy drinks in disposable plastic bottles and putting an emphasis on drinking more healthful beverages — something that will lead to buying more devices and gas canisters.
One of the main threats, which at this point is hypothetical, is potential competition from companies selling similar products. SodaStream has managed double-digit growth because, among other reasons, it has no real competition. Moreover, customers who bought its carbonation device cannot use it without its proprietary gas canisters.
Keurig Green Mountain, in which Coca Cola holds a 17 percent stake, launched a product in 2015 that competed with SodaStream, but it was expensive and complicated, and failed. Producing a carbonation device like SodaStream’s does not look particularly complicated, but safety requirements for filling and producing high-pressure gas canisters are complex. SodaStream has long experience in the designing and manufacturing canisters as well as of bottles that can withstand the carbonation process over multiple refills. Still, the more the company grows, the more likely it is that a rival will emerge.
Even without competition, the company has not been able to get back to 2014 levels, when its revenues reached $512 million. The environmentalist message didn’t hold water (or soda) by itself, so the company added the health message.
SodaStream’s biggest challenge is finding a long-term marketing message that won’t fade away in two or three years. Moreover, a company like SodaStream, which sells its products to tens of millions of customers worldwide, has a hard time maintaining consistent growth because it will always face operational challenges, mainly due to the necessity of collecting gas canisters.
After such a sharp jump, has SodaStream’s share price become too high?
The stock was trading in December 2015 at a multiple of less than one to its revenues that year, and is now trading at more than two. The ratio to 2016 profits is 23, compared with 27 at the end of 2015, which is not cheap for an industrial company. To justify it, SodaStream will have to make further improvements in profitability.
Three analysts who cover the company rate its stock as Market Perform. That was also the recommendation before the latest jump in stock price, but it may no longer be justified because the company expects its rate of growth to slow down this year. Still, profits have surprised for the better in the past few quarters, and if SodaStream manages to generate more cash, that could translate into a higher share price.