Rising bubbles

After a hugely successful IPO, SodaStream CEO Daniel Birnbaum has set his sights on taking market share from Coca Cola, no less.

The IPO of SodaStream International Ltd. (Nasdaq: SODA), the company that developed a system for making sparkling drinks at home, which has won the title of IPO of the Year, brought back forgotten memories.

We were children. Our parents tried to wean us off Coca Cola, and bought a system from the company (then known as Soda Club) which was mainly for producing sparkling water and raspberry soda. The start was promising: we got excited at the noise the thing made as it produced the sparkle, and about the fact that we could have fizzy drinks without making the trip to the local store. We even began to become used to the different taste, but at some point I don't remember exactly when - the system was put away in the depths of the store cupboard at home, and we went back to cans. Soda in its various forms came into use only for removing particularly stubborn stains, and now, to be honest, I'm not sure whether I would buy the system for my own home.

"The Israel consumer doesn't understand SodaStream in its current format," says Daniel Birnbaum, CEO of the company, in an exclusive interview with "Globes." "This is an 'old economy' company, with products that are no longer relevant," is how he tries to explain why its success in the US capital market raised eyebrows in the Israeli investment community. "When you expose SodaStream to a foreign investor, say an American, the company is perceived as innovative, with a technological anchor, and, no less important, as relevant."

Relevant or not, SodaStream is a hot item. Mega-hot. In early November, in an IPO on Nasdaq, it raised $125.3 million at $20 per share, making it the eighth largest Israeli IPO of all time over there. In less than four weeks, the share price doubled, though it has since subsided to $33, giving a market cap of $607 million. These figures make SodaStream, for the time being at least, one of the biggest Israeli companies by market cap on the US capital market, and one of the most successful flotations there.

Birnbaum, speaking from the company's offices in New Jersey, has no difficulty explaining how SodaStream attracted so much attention from US investment institutions. "I found an open door and attentive ears," he says.

But the success of the IPO was presumably also thanks to the rising market.

Birnbaum: "That may be so. We planned the IPO at the start of the year, when things were a little more difficult. Fortune smiled, and we launched it in a fairly fruitful week on the primary market. Nevertheless, not all the IPOs made that week were as successful as ours, and so I don't think that we rode a wave, with no connection to the company and its products."

Several reasons can be found to explain why investors flocked to SodaStream, but there's no doubt that one of them was its financial results. SodaStream, which has been operating in its current format for 19 years, had revenue of €68.7 million in the first half of 2010 (most of the company's revenue derives from activity in Europe, and it therefore reports in euros), representing year-on-year growth of 50%. Net profit €4.2 million, compared with €472 thousand in the corresponding period.

SodaStream, it emerges from talking to Birnbaum, sees itself as player in the same market as giants like Coca Cola and Pepsi, the global carbonated beverages market, which had a turnover of $206 billion in 2008, of which soda water accounted for $27 million. "If we do our work right, we can take a certain market share in the beverages market, perhaps even from giants like Coca Cola," Birnbaum says.

Is it not a little pretentious on your part to challenge a giant like Coca Cola?

"Perhaps, but the investors believe its possible, as I do."

Birnbaum stresses that SodaStream's beverages, unlike those of Coca Cola and other manufacturers, answer three important needs, hence the enthusiasm about the company. "The first need is healthy nutrition. More and more people are switching to low-calorie, low-sugar, low-sodium food and drinks, and the company's beverages answer that need. The second need is environmental, that is, consumption of products that don't require storage and recycling and don't damage the environment like plastic bottles, and the third need is financial saving. Consuming a soft drink produced by SodaStream is much cheaper than the traditional beverage."

Birnbaum's last claim is debatable. SodaStream's activity is based on four product units. The first product is the system itself, the price of which in the US varies from $79 to $199. The second is the carbon dioxide balloon, which costs $15 for a refill to make 60 liters, or $25 for 110 liters; the third is one of the flavors - $5 for 500 ml of concentrate (enough to make 12 liters of drink); and the fourth is the container bottles - $15 for two additional bottles beyond the first one. In other words, you have to invest quite a bit to maintain one of the company's home systems.

"The US consumer consumes double the quantity of soft drinks that his European counterpart consumes," says Birnbaum in explaining the potential of the US market, to which the company will direct most of its efforts in the coming year. But in the end, it's the taste that counts, and it's not certain that the American consumer will be prepared to adopt something that tastes different from Coca Cola or Pepsi.

"That's true, and for that reason we are doing taste tests that compare our product with those of companies like Coca Cola. Coca Cola is a super-brand, and I know that I can't compete with the taste of Coca Cola or Pepsi. I'm aware of that. We have a cola with a different taste, and it presumably will not be to the liking of anyone already addicted to Coca Cola's beverages. However, there are very many people who are not addicted to the specific taste of Coca Cola."

Until it succeeds in convincing the American consumer, if it ever does, that there is such a thing as a cola besides Coca Cola, the company will continue to consolidate its activity in Europe, which accounts for most of its sales. Sweden leads the way on the continent (Birnbaum claims that a fifth of all households in Sweden have the company's product), and SodaStream is also active in Germany and in New Zealand. Activity in Israel is negligible, and, in trying to explain this, Birnbaum returns to the Israeli consumer's erroneous perception of SodaStream: "Israelis are prejudiced about the company; the gap between perception and reality is unique to the Israeli market."

Despite this, he has not given up. "Perhaps, in the future, we will bring the SodaStream message to Israel too," he concludes, in a heavy American accent.

Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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