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GMCR & SODA - Not As Similar As People Might Want to Think

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August 17, 2011 – Comments (18) | RELATED TICKERS: GMCR , SODA , KO

Coffee and soda.  What is there not to love?  If you are unaware SODA (SodaStream International) has dropped over 50% in stock value since August 1, 2011.  Even though they recently beat estimates - again, they issued some iffy forecast for the near term future and not that great of guidance.  GMCR (Green Mountain Coffee Roasters) on the other hand can't stop going up.  In fact, in the past 5 years from this posting (August 16, 2006 to Now), the stock has jumped almost 3600% with splits.  That is not a typo.  That is, as Jim Cramer would say, MAD MONEY!

Ok, let's look at these two companies not as shareholders but as consumers.  Which stock has a better chance of long-term success?  GMCR is famous for their 1-cup Keurig coffee makers.  They make money on the maker that is usually over $100 or more per unit and they make money on the K-Cups which are $4+ per serving!  Now I am looking at it as a consumer, not as a user.  I use neither companies products and don't plan to.  But let's get serious.  Coffee drinkers are not going away.  In fact, they are interested in coffee for its taste, power, and because a lot are just addicted to the stuff.  I see it in my office all the time.  Some even have a coffee schedule that they follow religiously as they spend $1-2 a cup throughout the day.  These same people are also what I consider "cheap" by the way they talk and by how they dress, cars they drive, etc.  However, coffee is a must for them.  We have these machines at work too and people use them as often as they go to the bathroom.  They can't get enough of coffee and part of that coffee equation includes GMCR.

Then we have SodaStream.  I've visited the website and I know how it works.  Even though market analyst and experts like to group SODA and GMCR in the same sentence, they aren't even close to the same.  SODA relies on you purchasing another expensive luxury device that ranges from $50+ - depending on how much quality you want in your home-made soda.  They also make money from providing you with the soda packets (similar to the K-Cup packets).  However, I have yet to see these things anywhere.  We don't have them at work and I have never heard of anyone talking about them.  Now let's break it down even further.

1) GMCR offers consumers a way to get very good tasting coffee in a smaller serving size at a very expensive price.  Coffee consumers have cash to spend by default.  They love their coffee and can't live without it.  They aren't dedicated to any brand and they will pay up for the new and improved coffee fad.  They are usually middle to upper class and pretty much all rich people enjoy a good cup of coffee.  GMCR provides the machine, packets, and makes money from businesses to purchase their machines for employee use.

2) SODA offers consumers (mostly home consumers) the option to make their own soda.  The soda they make will probably never be close to the quality offered by Coca-Cola or Pepsi products.  It just isn't happening because these two companies aren't offering their secret formula for SODA to profit off of.  Soda consumers are usually dedicated to their particular brand unlike GMCR consumers.  Ever hear of Pepsi vs. Coke fights?  On top of that it is usually the middle to lower class people drinking this stuff.  It is cheap and satisfies taste buds at a far cheaper price than coffee.  On top of that soda drinkers are most likely not willing to drop $50+ on a machine and then more money on the packets, and then try to figure out how to use these carbination devices.  They just aren't.  Furthermore, in a world where businesses are trying to go 'green', offer exercise programs to employees, and maintain some level of health among workforce, they aren't going to invest in a 'soda making machine' when they already got contracts with either KO or PEP or both in vending machine form.  

Bottom line, GMCR is not SODA and vice versa.  They are as far apart as you can get.  Just because they both have run up some and both are making some decent money doesn't mean that long-term, you will see SODA products in the homes of people in the future.  People aren't going to waste time getting a second tier soda when they can get the real thing from either the KO or PEP isle in the store.

Cheers!

18 Comments – Post Your Own

#1) On August 17, 2011 at 12:26 PM, chk999 (99.97) wrote:

I think you hit the nail on the head on SODA. I had a soda syphon that made carbonated water using C02 back in the 60's. It's was a fun toy, but you get tired of it after a while. I don't think they will sell as many cans of syrup and gas as they think.

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#2) On August 17, 2011 at 12:34 PM, DaveGruska (95.96) wrote:

Interesting post, but I'd disagree that people aren't loyal to coffee brands. Fortunately for GMCR, they have partnerships with most of the big names anyway.

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#3) On August 17, 2011 at 12:37 PM, mikecart1 (99.04) wrote:

chk999,

Agree 100%.  It just doesn't make sense when no matter what you do, you could never reproduce the same exact taste of an existing coke or pepsi product.  Also congrats on your current 100.00 rating.  I remember back in the day you were at 99.99 ahah.

streeter123,

I guess it depends on who you ask.  Most people I've run across - especially office mates switch from sale to sale.  Dunkin, MCD, SBUX, etc.  they just go with what tastes good at the moment and price.  GMCR's Keurig is seen as the new thing and mentally they might think it tastes better.  Who knows.  I just know we got those machines on every floor of my company building - and we got a lot of floors haha!

 

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#4) On August 17, 2011 at 12:47 PM, EnigmaDude (95.14) wrote:

"We don't have them at work and I have never heard of anyone talking about them."  That's because you are an American without a global perspective.  The company is based in Israel and its products are very popular in other parts of the world.  They are only just starting to catch on in the USA.

(from Yahoo company profile)

The company sells its products under the SodaStream and Soda-Club brand names through approximately 40,000 retail stores in 41 countries, as well as through the Internet; and distributes its products directly in 12 countries and indirectly through local distributors in other markets. It operates in Europe, North and Central America, Israel, South Africa, Australia, New Zealand, and east Asia.  

And why you would compare them to a coffee company makes no sense really.  You are entitled to your opinion though. I just think you missed the whole point of their growth story.  There are a lot more soda companies out there than Coke and Pepsi.  Ever heard of Hansen natural soda (who also make Monster energy drinks)?  Now that would be a valid comparison.

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#5) On August 17, 2011 at 1:24 PM, TheDumbMoney (38.61) wrote:

1)  Razor-and-blades:  SODA is in fact quite like GMCR in that both are a razor-and-blades model.  Nothing in your post negates that; you are instead negating the perception of SODA's ultimate adoption level. 

2)  All Clasess:  I don't think that soda is drunk by "lower and middle class people."  I think that's totally off-base, I think soda is drunk all up and down the pay and class-scale.  (As is coffee, by the way.)

3)  You Miss Primary Target:  SODA is not designed to appeal to the low-end.  It is designed to appeal to high-end "foodie" type people, the kind of people who are currently writing a million food blogs or who read them, and who buy the "green" message.

4)  Cheapness vs. Ease:  SODA is designed to have a cost-advantage (whether it actually is cheaper is another question).  GMCR is designed to be "easier," for which people pay a gigantic premium to what they would pay to percolate their own coffee.  (Advantage GMCR.)

5)  Modifiability vs. Take-it-or-leave it:  SODA is designed for people who like sodas at varying flavor-strengths.  Many people think regular soda is too sweet.  Many even like soda only very, very lightly flavored ("esther-flavored" soda).  SODA allows you to mix your own preferred strength. 

6)  Workplace?:  The investment thesis does not depend upon getting Sodastreams into the workplace, so I think that is not a relevant point, except insofar as it limits the ultimate adoption rate.  I agree workplaces are unlikely en-mass to adopt SODA products, unless they come up with an independent vending system, and even then it's unlikely.

7)  Greener vs. Wastier:  SODA actually is "greener" in the sense that it reduces the consumption of plastic bottles and aluminum cans.  (The CO2 canister manufacturing process may not be green, but if the Toyota Prius taught us anything, it is that greenies don't pay a bit of attention to upstream and far-off environmental harms, in that case, the battery manufacturing and disposal processes.)  GMCR actually increases waste, in comparison to the standard alternative.

Conclusion:  The only stated similarity is the basic business model.  Other than that, I don't think GMCR and SODA are trying to do the same thing.  I think SODA ultimately has a lower ceiling than GMCR does -- in that sense I very much agree.  But I think its ceiling is quite above where the company is today.  And I think there is a wide middle ground between the "this is the next GMCR!!" position, and the "SODA is a fad and will die!!!" position.  (As is usually the case with young or less-established companies, and sometimes with larger companies, the market seems only capable of taking one of two extreme positions, and most commenters as well.)  While SODA was not a buy at $70/share, I think there is a compelling argument that as the "market" suddenly flips from extreme one to extreme two, there is a developing buying opportunity.  Moreover, most of the things you are saying about SODA were said about GMCR, too:  it would always be limited, big companies would never sign onto its system, etc.  That is precisely why those who did buy saw such huge gains.  

In the alternative, I'm an idiot.  I do have a sh!tty CAPS score, no denying it.

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#6) On August 17, 2011 at 1:34 PM, mikecart1 (99.04) wrote:

EnigmaDude,

"And why you would compare them to a coffee company makes no sense really.  You are entitled to your opinion though. I just think you missed the whole point of their growth story.  There are a lot more soda companies out there than Coke and Pepsi.  Ever heard of Hansen natural soda (who also make Monster energy drinks)?  Now that would be a valid comparison."

I compared them because many articles these year have compared them.  Their stock at one point was moving in correlation with each other.  When GMCR reported good earnings,  SODA's stock went up in anticipation at the beginning of August.  I would only compare them in that they are both up-and-coming niche products in large market segments.  Both coffee and soda are huge markets.  It was stated this week that soda alone has nearly half a trillion market.  I feel though SODA will not have much a part of that.  

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#7) On August 17, 2011 at 1:35 PM, ElCid16 (95.26) wrote:

However, I have yet to see these things anywhere.  We don't have them at work and I have never heard of anyone talking about them.  

That's a good thing.  Not a bad thing.  I wish I got into GMCR before K-cups were commonplace... 

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#8) On August 17, 2011 at 1:51 PM, EnigmaDude (95.14) wrote:

mike - fair enough.  As stated in comment #5 there is some similarity between the 2 companies' business models.  I think that the other points in dumberthan's comment explain better than I did what the differences are between the two and why SODA presents a compelling investment opportunity.  They really are banking on the "green" movement and people's desire to reduce the use of bottles and cans.  It remains to be seen whether that approach will be profitable.

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#9) On August 17, 2011 at 2:38 PM, mikecart1 (99.04) wrote:

dumberthanafool,

You are not dumb haha.   I agree with point 1.  Their business models are very similar in that regard.  Point 2.  I somewhat still disagree.  It is true that all classes with all money do use both products but I will say you won't see poor people sitting in a Starbucks or other higher costing coffee shop to enjoy a bottle of coke.  You don't see stay-at-home moms going through a grocery store with a cart filled to the top with coffee bags - you will often see soda or fruit drinks instead.  Point 3 agree. Point 4 I believe SODA is designed to have a cost-advantage but I can calculate it and prove that there exists none (too long for this article but you gotta trust me haha).

Point 5.  I disagree.  People shifted to Pepsi years ago vs Coke because they like the more sweetened flavor.  Point 6 & 7 I agree.  

Conclusion, I was just pointing out the two together because they are often compared together in many investing articles recently.  You could be right though.  We may just be seeing SODA in its first few stale years like NFLX experienced in the $20's before soaring like a balloon once their business model and market awareness is set nicely for future runs in huge profits.

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#10) On August 17, 2011 at 3:35 PM, David369 (24.79) wrote:

Yeah I think SODA is like NFLX and GMCR.  When both came out the "concensus" was "this won't last".  For NFLX, people said "who would pay for DVDs by mail when you have a Blockbuster just down the street"?  Seemed like it made sense that no one would use NFLX.  GMCR came out against TASSO which was more widespread initially (and are still around by the way).  Somehow GMCR hypnotised people into paying about $1 per cup (less if you shop for the k-cups).  I don't think it is as good as starbucks nor do I think it is much better than Folgers or Max House instant.  I think it is just easier & quicker.  No waiting for the pot of water to boil or the coffeemaker to perk.  Pop a k-cup in and coffee in 30 seconds, pick your flavor from over 200.

Now that is the main difference between GMCR and SODA.  They are both razor & blade concepts.  But, SODA is not easier or faster nor does it have lots of flavors.  SODA is supposed to be healthier because it doesn't use high fructose corn syurp.  It is supposed to be greener, less bottles and waste.  It is supposed to be cheaper, per liter (maybe).  And you can customize the carbonation level and the syurp amount.

The question I see is how long the lazy Americans will mix their own soda before they say to heck with the green healthy saving money system?  I think we will continue to pay for quick and easy (Keurig/K-cups) even if it costs us more.  I can't see that happening with SODA.  I do think SODA will sell a sh.. load here in the US.  I think a certain percentage of people will continue to use it, most won't.  I think Europe and especially Asia will have a higher percentage of continued use.

If you read their recent report, sales are still increasing in Europe and I have heard they have near 20% market penetration there (what does that really mean? define market).  The growth in the US is fantastic and they beat the heck out of analysts estimates. That's better than GMCR did their first year in the US market.  I expect the growth to continue for at least 2-4 years here in the US.  After that, who knows.  I think it will depend on markets in other parts of the world.

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#11) On August 17, 2011 at 3:39 PM, David369 (24.79) wrote:

Oh yeah, apparently Jim Cramer and someone else (forgot who) had a taste off with SODA vs Coke.  Supposed SODA tasted better according to both on a blind taste test.  If I can talk my brother into buying a soda machine (I don't drink soda) I'm going to try it.

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#12) On August 17, 2011 at 5:30 PM, mikecart1 (99.04) wrote:

Good points David369!  I agree with this:

"Now that is the main difference between GMCR and SODA.  They are both razor & blade concepts.  But, SODA is not easier or faster nor does it have lots of flavors. "

I think from experience (since I haven't drank soda in any considerable amount since 9th grade and haven't touched coke except on the rare occasion I'm at the club and it is in you know what haah), that it is harder to differentiate soda flavors than coffee flavors.  Maybe it has to do with the pallette of the human tongue or the fact that soda is mainly the fiss from the carbination that you taste.  You can easier tell the difference between a carbinated coke vs. a non-carbinated coke than you can from coke vs. pepsi.

In the end, SODA has the same chance NFLX does.  It just comes down to how well SODA can 'train' the average American to buy their product.  Reminds me of how AAPL trained the world to buy their mp3 players even though personally I feel they are inferior (had two iPods break this year lol).  

Who knows maybe by 2015, SODA will be at $400/share aha.

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#13) On August 17, 2011 at 5:44 PM, TheDumbMoney (38.61) wrote:

"You can easier tell the difference between a carbinated coke vs. a non-carbinated coke than you can from coke vs. pepsi."

Spoken like a true non-soda drinker!!  :-) 

Obviously one can tell the difference between carbonation and non-carbonation very easily.  But I promise you, in a blind test test I could distinguish Coke from Pepsi, and Diet Coke from Diet Pepsi.  I could even distinguish both Coke and Diet Coke from Coke Zero.  I could even distinguish decafinated Diet Coke from Diet Coke.  I think I probably could not distinguish Pepsi One from Diet Pepsi, since I have drunk very little Pepsi One in my life.  But I can distinguish any diet soda from the sugar-version.  I can also distinguish Sprite from 7-Up, though the diet versions are harder to distinguish.

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#14) On August 17, 2011 at 9:44 PM, jimmy4040 (23.19) wrote:

Its' a story company.  It's not about the product but the stock itself. 

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#15) On August 18, 2011 at 12:38 AM, mikecart1 (99.04) wrote:

Hi jimmy 4040,

What you mean by story company?  That can be taken in lots of ways.  There are other stocks that have a nice story.  SMT (Smart Technologies) have electronic overhead dry-erase boards that are sold to businesses and schools.  In fact, my company has them all over the place.  Not quite in the same scope as SODA, but I think SMT has an ok product but that resulted in terrible stock performance.

I will say though that both GMCR and SODA and whatever has a price to buy at.  If SODA continues to fall I will probably make a small purchase knowing the hype and volatility of the stock.  It also has a very small market cap and if it can last the next few years with better quarters, it could easily go up a lot more than where it is now ($39/share).

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#16) On August 18, 2011 at 11:11 AM, TheDumbMoney (38.61) wrote:

mike,

Whether the SODA system is cheaper than just buying soda depends upon how much you pay for soda otherwise, and on how much soda you use.  Excluding the initial capital purchase of the (overpriced) machine, SODA is a cheaper system than drinking soda, especially since they send you a pre-paid (like Netflix) envelope to exchange CO2 cartridges.  Thus, whether it ends up cheaper or not depends upon how much soda you make with it after buying the machine.  I don't think there is a yes-or-no answer, unless there have been surveys taken about how much people actually end up using the machine.

DTAF

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#17) On August 18, 2011 at 11:33 PM, mikecart1 (99.04) wrote:

DTAF,

Agree.  I will say though for others that question why I related GMCR and SODA, the CEO for SODA was on Mad Money today and he mentioned GMCR several times in his discussion.  He even went on to say that GMCR moved their product into Costco like SODA is doing now and indirectly forecasted that SODA is following GRMR's footsteps.  

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#18) On August 29, 2011 at 7:21 PM, ayaghsizian (97.18) wrote:

dumberthanafool, 

 

I agree with everything you said.  I'm a gambling man and I'm putting my money where my mouth is.  

 

And you're an Idiot on caps, your words, because you don't take two minutes to short 2x and 3x ETFs and things like those that eventually go down.  Your score will go to the 90s in a few days I bet.  Maybe 2 weeks.  

 

Ara 

 

 

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