Tap Into SodaStream

 | Jun 17, 2013 | 5:00 PM EDT  | Comments
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When I was a child, I used to think it would be really cool to have my own personal soda maker in my house. Not the plastic "shake-a-bottle" makers that we see from SodaStream (SODA), but something along the lines of what we see at McDonald's (MCD). Now, we might be one step closer to seeing such a product with SodaStream's new partnership with Whirlpool (WHR). With that said, product innovation might not be where the real upside lies in this deal.

Whirlpool is not exactly what SodaStream investors had in mind. Investors had been hoping and anticipating a buyout from competitors PepsiCo (PEP) or Coca-Cola (KO). In fact, I am not certain that anyone expected a partnership with a home-appliances company; however, it makes sense.

According to the deal, SodaStream will be working with Whirlpool's KitchenAid brand to develop a new home carbonation system, available for retail in the third quarter of 2013. Now, to many, this might not make sense because, after all, why would SodaStream need KitchenAid to develop a new carbonated system? The answer lies in patents and technology, but also in distribution.

KitchenAid is known for its sleek design and it has done fairly well in the single-serve coffeemaker market. SodaStream's patents are protected, but its makers are not what I would call convenient or innovating. KitchenAid can make SodaStream's soda more convenient with more up-to-date technology, making it easier to make and enjoy soda. Thus, we could be one step closer to my at-home soda machine dream.

Personally, I prefer this partnership over a Coca-Cola or PepsiCo buyout. Whirlpool has a wide distribution chain, with its products being sold at countless retailers. KitchenAid, including Whirlpool appliances, are sold at retail stores such as Lowe's (LOW), hhgregg (HGG), Sears (SHLD), Home Depot (HD) and hundreds, maybe thousands, of small appliance stores, not including Whirlpool's outlet stores.

Looking ahead, the distribution channel is so important to both the success and the innovation of SodaStream. The majority of its growth is occurring in the Americas, by 89% during the last quarter compared to 17% in Europe. The majority of this growth is coming from expansion. For example, in 2010 the company's soda machines were only available at Williams-Sonoma (WSM) or Bed Bath & Beyond (BBBY). In that year, revenue was just $208 million, but in 2011, revenue increased $88 million as Staples (SPLS), J.C. Penney (JCP), Costco (COST), Macy's (M) and Target (TGT) were added as vendors. Then, in 2012, the company caught its biggest break with Wal-Mart (WMT) as sales increased more than $145 million.

The point I am trying to make is that the real upside for SodaStream is distribution, not necessarily the deal or the product itself. I expect an innovating product from the partnership, something significantly more advanced than what we currently see from SodaStream. To me, this is an added bonus, and depending on the product, we could see a boost in sales from other vendors.

Overall, SodaStream is moving in the right direction, and it is nowhere near max potential. Currently, SodaStream produces just 0.4% of the revenue seen by Coca-Cola and PepsiCo combined, leaving a large amount of upside. Therefore, the company presents a good investment opportunity, especially considering the rate at which it is expanding its distribution and working to improve its products.

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