Dr. Pepper Snapple Group (NYSE: DPS) is the third largest flavored carbonated soft drink company, by annual revenue, in the United States with 24 manufacturing and 200 distribution centers across 13 states. The company became publicly traded and independently managed on May 7, 2008 when Cadbury Schweppes (CSG) spun apart its American Beverages division.
DPS, like other soft drink makers in the United States, is facing a marketplace where demand has seen lukewarm growth as consumers shift towards healthier sports drinks, energy drinks, and cheaper drinks such as bottled or tap water. The most dramatic manifestation of consumer health concerns regarding soft drinks, though, has been a proposal put forth in the state of New York that would impose an 18% excise tax on all non-diet soda sales.
Other firms, such as Pepsico (PEP) and Coca-Cola Company (KO), have been able to mitigate the effects of a declining U.S. market through expansion of their sales abroad in regions such as Asia, where demand is still growing and consumers are not as sensitive towards health. Due to a lack of operations outside of North America and decreased consumption of soft drinks in North America, DPS will face a distinct competitive disadvantage as competitors solidify market share in markets abroad. Larger firms are also able to invest more money in R&D and, in 2008, both Pepsico (PEP) and Coca-Cola Company (KO) announced the FDA approval of a new zero calorie sweetener that is aimed towards winning back consumers who may have stopped drinking Pepsi or Coke for health reasons.
Dr Pepper Snapple Group varied portfolio of flavored (non-cola) carbonated soft drinks (CSD) and non-carbonated beverages (NCB), including ready-to-drink teas, juices, juice drinks and mixers. DPS has three segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. The Company’s brand portfolio includes CSD brands, such as Dr Pepper, Sunkist soda, 7UP, A&W, Canada Dry, Crush, Squirt, Penafiel, Schweppes and Venom Energy, and NCB brands, such as Snapple, Mott’s, Hawaiian Punch, Clamato, Rose’s and Mr & Mrs T mixers. DPS operates primarily in the United States, Mexico and Canada and it also distributes the products in the Caribbean.
Second Quarter 2010 Results
Dr. Pepper Snapple Group reported diluted earnings of $0.74 per share compared to $0.62 per share in the prior year period. Year-to-date, the company reported earnings of $1.09 per diluted share compared to $1.14 per share in the prior year period. Excluding a separation-related foreign deferred tax charge in the current year and a net gain on certain distribution agreement changes in the prior year, the company earned $1.14 per diluted share compared to $0.99 in the prior year-to-date period.
For the quarter, sales volume increased 1% on solid branded sales growth. Contract manufacturing reduced sales volume growth by one percentage point as the company continued to de-emphasize this business. Net sales increased 3% reflecting sales volume growth, foreign currency benefits and revenue recognized under the PepsiCo, Inc. (PepsiCo) licensing agreements. Favorable pricing trends in Beverage Concentrates were offset by increased promotional activity in Packaged Beverages. Segment operating profit (SOP) increased 5% reflecting net sales growth and supply chain efficiencies offset by a $12 million increase in marketplace investments as well as increased productivity office costs. Reported income from operations was $310 million compared to $297 million in the prior year period.
The Company’s Beverage Concentrates segment is principally a brand ownership business. In this segment it manufactures and sells beverage concentrates in the United States and Canada. The key brands include Dr Pepper, 7UP, Sunkist soda, A&W, Canada Dry, Crush, Schweppes, Squirt, RC Cola, Diet Rite, Sundrop, Welch’s, Vernors and Country Time and the concentrate form of Hawaiian Punch.
Beverage concentrates are manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers. These brands are sold by the bottlers, including Packaged Beverages segment, through all retail channels, including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
The Company’s Packaged Beverages segment is a brand ownership, manufacturing and distribution business. In this segment, it primarily manufactures and distributes packaged beverages and other products, including its brands, third party owned brands and certain private label beverages, in the United States and Canada. Key NCB brands in this segment include Snapple, Mott’s, Hawaiian Punch, Clamato, Yoo-Hoo, Country Time, Nantucket Nectars, ReaLemon, Mr and Mrs T, Rose’s and Margaritaville. Key CSD brands in this segment include Dr Pepper, 7UP, Sunkist soda, A&W, Canada Dry, Squirt, RC Cola, Welch’s, Vernors, IBC, Mistic and Venom Energy.
DPS sells the Packaged Beverages’ products both through its direct store delivery system (DSD), supported by a fleet of more than 5,000 trucks, including sales representatives, merchandisers, drivers and warehouse workers, as well as through its Warehouse Direct delivery system (WD), both of which, include the sales to all retail channels, including supermarkets, fountain channel, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
The Company’s Latin America Beverages segment is a brand ownership, manufacturing and distribution business. This segment participates in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories, with a focus in carbonated mineral water and grapefruit flavored CSDs. Key brands include Penafiel, Squirt, Clamato and Aguafiel.
In Mexico, DPS manufactures and distributes its products through the bottling operations and third party bottlers and distributors. In the Caribbean, it distributes the products through third party bottlers and distributors. In Mexico, it also participates in a joint venture to manufacture Aguafiel brand water with Acqua Minerale San Benedetto.
As consumers become more health conscious and rein in spending amidst the economic crisis, beverage companies, such as DPS, are faced with conditions that force them to market and launch new products meant to entice customers even as credit and cash become scarce. Moreover, sales of carbonated beverages have declined since 2002 as consumers are increasingly monitoring their diets and consumption of sugar. Most conspicuously, school systems across the country, in states such as Colorado, California, and Connecticut, are instituting complete bans on the sale and advertisement of soft drinks on school grounds. These measures significantly hinder DPS and other companies' abilitiy to build brand loyalty amongst its youngest customers, whose tastes will often not change for many years.
In December of 2008, the FDA approved a new zero-calorie sweetener, derived from the stevia plant, which has long been viewed as the holy grail in the manufacturing of carbonated soft drinks. Unfortunately, DPS did not play any role in the development of this new sweetener, which will be marketed by Coca-Cola Company (KO) and Pepsico (PEP) under the name TruVia and PureVia, respectively. Due to the strong sensitivity that consumers have regarding any alteration to the taste of established soft drinks, the new sweetener will initially only be used in new drinks launched by Dr. Pepper's two competitors. Additionally, many regulatory and gustatory hurdles remain as the sweetener is still banned in many countries abroad and can leave an unpleasant licorice-like aftertaste in certain circumstances. In any case, the introduction of a zero calorie naturally derived sweetener gives DPS a distinct technological disadvantage that will hurt sales moving forward as consumers look for healthier products that do not sacrifice taste.
Like tobacco and alcohol, soft drink sales are potentially subject to an excise tax which would lead to a significant decrease in demand as consumers shift towards products that are not subject to the tax and, therefore, cheaper. In 2008, both Maine and New York, in an attempt to find new ways of raising government revenue amidst the 2008-2009 recession, issued formal bills proposing the institution of an excise tax on all beverages containing less than 70% fruit juice. While the Maine proposal did not pass into law, the future of the New York proposal is far less certain, with strong advocates on either side. Moreover, New York has often been ahead of the policy curve in terms of health promotion: New York City became the first to institute a broad ban on trans fats and the entire state continues to have one of the highest tobacco excise taxes in the country.
DPS is unique amongst its competitors in that it sells all of its products in the United States, Mexico, and the Carribbean. However, while it is possible to find Dr. Pepper and Snapple on store shelves around the world, none of the money from these sales benefits DPS, since the rights to DPS's brands abroad are effectively owned by Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG). Both companies originally purchased the Dr. Pepper trademark from Cadbury Schweppes (CSG), allowing them to distribute the soda using their more extensive manufacturing and distribution networks. Such licensing agreements involve one time payments, are valid for a set time period, and do not typically include provisions that would allow the original seller to gain a proportion of any future income. As a result, DPS is less effectively able to compensate for declines in demand since it sells a majority of its products in only one market. In the long run, this approach places DPS at a competitive disadvantage, as both Coca-Cola Company (KO) and Pepsico (PEP) have made significant investments abroad in order to capture rapidly growing markets in countries such as China and India.
The carbonated soft drink industry is driven largely along the lines of both brand loyalty and price with consumers rarely shifting from one brand of soft drink to another. As a result, firms in this industry typically unveil multi-million dollar global ad campaigns in an attempt to increase consumption amongst established customers and gain market share amongst those individuals who may have never tried their product. Dr. Pepper's major competitors in this industry are Coca-Cola Company (KO) and Pepsico (PEP) both of which have extensive global operations that offer them a distinct competitive sales advantage.
Dr Pepper Snapple Group's main competitors are Coca-Cola Company (KO), Pepsico (PEP), Nestle (NSRGY), Kraft Foods (KFT), Cott (COT), Coca-Cola Enterprises (CCE), Pepsi Bottling Group (PBG), and PepsiAmericas (PAS).
|% of Market||Number of Cases (millions)|
|Dr Pepper Snapple Group (DPS)/Cadbury Schweppes (CSG)||15.0||1491.3|
|Coca-Cola Company (KO)||42.8||4241.1|
|% of Market||Number of Cases (millions)|
|Mountain Dew (Owned by Pepsi)||6.6||659.6|