The Machines That Are Making Coke and Pepsi Quake

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SodaCoca-Cola (KO) and PepsiCo (PEP) would prefer if you stopped reading this article right now.

After all, the world's two most popular soft drink companies can't be happy that more and more consumers are sidestepping the soda aisles at the supermarket, choosing instead to conveniently make carbonated beverages at home.

It's easier than ever these days, thanks to the surprising success of SodaStream (SODA). Smaller upstarts, including Esio Beverage System's fledgling platform and bottled water specialist Primo Water (PRMW) with its recently introduced Flavorstation, promise to make this a growing and more dynamic space in the future.

If you don't have a home-based water carbonator, let's go over a few of the reasons that may change sooner than you think.

1. Home-based Beverage Systems Are Easy to Find.

When SodaStream tried to replicate its European success in the U.S. two years ago, the Israeli-based company pushed into houseware retailers. Bed Bath & Beyond (BBBY) and higher-end Williams-Sonoma (WSM) were two of the first big names to begin stocking SodaStream systems and refills just ahead of the 2010 holiday shopping season.

SodaStream was a hit.

After a blowout showing, other retailers began to take notice. Department stores, warehouse clubs, and office supply stores began hopping on the SodaStream bandwagon throughout 2011. Even Best Buy (BBY) broke from its traditional consumer electronics focus to begin selling the system this past summer.

The growth is evident if you pull up SodaStream's latest financials. Revenue climbed 32% to $85.7 million during the company's holiday quarter of 2011, and SodaStream expects revenue to climb 28% higher for all of 2012.

2. Home-Based Beverage Makers Are Easier to Use Than You Think.

The starter systems are stylish, lightweight, and nothing like the huge soda fountain dispensers you see at restaurants.
In SodaStream's case, one simply fills a reusable plastic bottle or glass carafe with a liter of regular tap water. A surprisingly light carbonator tank twists on and is good for 60 liters of sparkling water before it needs to be replaced or exchanged. A few manual presses of the carbonator -- no batteries or electricity required -- turns plain H2O into seltzer.

Fans of sparkling water or mixed alcoholic beverages can probably stop right there, but SodaStream also offers dozens of flavors. A cap-full of concentrated syrup turns the liter of fizzed-up water into your pop of choice. Cola, orange, and energy drink are some of the growing number of flavors and varieties.

Kraft Foods (KFT) will be lending a hand this summer, turning its Crystal Light diet drinks and Country Time lemonade into SodaStream flavors, so there will be more than just brand-less proprietary flavors at your disposal.

3. Sodas Made at Home Are Cheaper in the Long Run.

The starter kits aren't cheap, priced between $80 and $100. Fancier models can fetch twice as much as that. However, the purchases do begin to pay off right away.

The CO2 cylinders initially retail for $30, but at least one is included in the starter kit. They can be swapped out for a filled carbonator after every 60 liters for just $15. In other words, we're talking about just 25 cents for a liter of sparkling water.

Pouring in syrup or any other flavoring of choice will add to your tab, but it ultimately comes out to 25 cents for the equivalent of a canned soda.

There are store brands of canned soda that may be comparable in price. Coke and Pepsi will occasionally have competitive promotional markdowns. However, the convenience of not having to lug soda bottles and cans from the store, store them, and then remember to plunk the empties into the recycling bin may be more material than the unit economics.

4. Fresh Sodas Are Healthier.

Compare Coke and Pepsi to the non-diet SodaStream cola and the differences are substantial.

SodaStream flavors contain about a third of the sugar, calories, carbohydrates, and sodium in the national brands. SodaStream mixes also stay away from high-fructose corn syrup.

An 8-ounce serving of Coca-Cola contains 100 calories, 27 grams of carbs, 27 grams of sugar, and 35 milligrams of sodium. The comparable SodaStream serving is packed with just 34 calories, 9 grams of carbs, 9 grams of sugar, and 2 milligrams of sodium.

It's a more level playing field when it comes to the diet flavors, but for parents with kids consuming non-diet soft drinks, it's one more reason to make the switch to home-based fizzy concoctions.

5. Home-Based Soft Drinks Aren't a Fad.

Consumers may have stayed away initially. A trek out to Bed Bath & Beyond often ends with buying a quesadilla maker or ice cream churner that gets used once before collecting dust in the attic.

Thankfully, the folks who are buying SodaStreams are using them. Revenue on the starter kits rose 24% during the holiday quarter, but consumables -- the CO2 carbonators and flavors -- climbed 38%. In other words, the refills are now selling even better than the systems.

A whopping 20% of homes in Sweden now have a SodaStream machine, and no one consumes soda the way that we do in the United States. Even if we never see that kind of adoption rate, it's clear that making carbonated beverages at home is here to stay.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Best Buy, PepsiCo, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of PepsiCo, Williams-Sonoma, SodaStream International, Bed Bath & Beyond, and Coca-Cola. Motley Fool newsletter services have recommended writing covered calls on Best Buy. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo.

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