 | |
- close
- close
|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
WIKI ANALYSIS
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.[1] The company became publicly traded and independently managed on May 7, 2008 when Cadbury Schweppes (CSG) spun apart its American Beverages division.[2]
DPS, like other soft drink makers in the United States, is facing a marketplace where demand has seen lukewarm growth since 2002 as consumers shift towards healthier sports drinks, energy drinks, and/or cheaper drinks such as bottled or tap water.[3]Along these lines, in the third quarter of 2008 consumption of soft drinks declined by 3% while sales of water filters increased by 16%.[4] 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.[5]
Other firms, such as Pepsico (PEP) and Coca-Cola Company (KO), have been able to mitigate the effects of a declining US 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.[6] 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.[7] 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 sweetner that is aimed towards winning back consumers who may have stopped drinking Pepsi or Coke for health reasons.
Company Overview
DPS is organized into four main segments that are delineated primarily along the lines of the products that each segment manufactures and sells. In order to measure the performance of each segment Dr. Pepper and other carbonated beverage firms uses two main metrics: Net sales and Underlying Operating Profit (UOP).
| Definition | 2008 | 2007 | |
|---|---|---|---|
| Net Sales | Similar to gross revenues, net sales measures, in dollar terms, the amount of products that is sold by DPS over a certain time period. | 4,369 | 4,347 |
| Underlying Operating Profit | UOP is a measure of income from operations that excludes certain additional accounting expenses that are unique to the beverage industry but not reflective of future firm performance. One example is the exclusion of the impairment expense related to a firm's intangible assets.[9] | 668 | 731 |
Beverage Concentrates (% of Revenues: 20.27%, % of Profits: 65.02%)[8]
The Beverage Concentrates division of DPS is responsible for the manufacturing of the syrups and concentrates used to make fountain drinks, and consists primarily of carbonated soft drink brands such as Dr. Pepper, Canada Dry, 7UP, and A&W Root Beer. In 2008, the fastest growing brand was Canada Dry which saw sales growth of 8% following the launch of Canada Dry Green Tea. Sales of Dr. Pepper remained relatively flat while sales of 7UP declined by 3%. Overall, the Beverages Concentrate is the most profitable division within DPS accounting for less than one-fifth of sales but more than two-thirds of profits as a result of the low marginal cost associated with the ongoing production of soft drinks.
Finished Goods (25.39%, 23.20%)[8]
The Finished Goods division of DPS is responsible for the actual production of the products that originated in the Beverage Concentrates division and also includes many of the non carbonated, or juice brands managed by Dr. Pepper such as Hawaiian Punch, Mott's, and Snapple. In 2008, the highest performing brand in this divison was Hawaiian Punch which saw double digit increases in sales due to a newly crafted promotional campaign.[8] The worst performing brand turned out to be Snapple which saw sales decline 10% as DPS decided to cut and completely revamp its advertising surrounding this brand during the economic downturn. Overall, while this divsion is neither the largest or most profitable division in DPS it is the fastest growing, experiencing a growth rate of 5% in 2008.[8]
Bottling Group (47.78%, 2.71%)[8]
This division is responsible not only for the manufacture, bottling, and/or distribution of finished beverages managed by DPS but also third party owned brands seeking a distribution platform. Overall sales in the division declined by 4% in 2008 but this was offset slightly due to greater intersegment sales as DPS sought to increase the manufacturing of company owned brands by the division.[8] In 2008, DPS also lost a distribution agreement with Hansen Natural Corporation which had been responsible for almost 10% of revenues prior to its contract termination.The bottling division garners the highest proportion of revenues and lowest proportion of sales due to the low profit margins and high capital expenditures associated with the bottling and distribution of soft drinks.
Mexico and the Carribbean (6.56%, 9.07%)[8]
Unlike the other divisions which were segregated based on brands and responsibilities, the Mexico and Carribbean division of DPS represents the manufacturing, bottling, and distribution of both concentrates and finished goods in these geographic regions. While this division is the smallest segment of DPS, it saw sales and profits increase more than 3% during 2008 with only one brand, Aguafiel, seeing revenue declines as a result of increased price competition.[8]
Trends and Forces
Shift in consumer preferences towards healthier and cheaper drinks will decrease DPS revenue
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.[10] 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.[11] 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.[12]
Development of a zero calorie sweetner by Coca-Cola Company (KO) and Pepsico (PEP) offers a distinct competitive advantage
In December of 2008, the FDA approved a new zero-calorie sweetner, derived from the stevia plant, which has long been viewed as the holy grail in the manufacturing of carbonated soft drinks.[13] 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 sweetner will initially only be used in new drinks launched by Dr. Pepper's two competitors. Additionally, many regulatory and gustatory hurdles remain as the sweetner is still banned in many countries abroad and can leave an unpleasant licorice-like aftertaste in certain circumstances.[14] In any case, the introduction of a zero calorie naturally derived sweetner gives DPS a distinct technological disadvantage that will hurt sales moving forward as consumers look for healthier products that do not sacrifice taste.
Pending legislative policies aim to institute excise taxes on non-diet drinks, potentially reducing demand
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.[15] 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.[16]
Concentration of sales in only North America will hurt revenue growth as competitors enter foreign markets
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).[2] 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.[17] 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.[18]
Competitive Analysis
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.[19] 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.
| Net Sales | UOP | Net Income | Employees | |
|---|---|---|---|---|
| Dr Pepper Snapple Group (DPS) | 4,369 | 668 | 106 | 20,000 |
| Coca-Cola Company (KO)[21] | 24,818 | N/A | 4,812 | 90,500 |
| Pepsico (PEP) [22] | 30,522 | 5,722 | 4,423 | 185,000 |
Market Share Analysis
A significant majority of the beverage industry is controlled by Coca-Cola Company (KO) and Pepsico (PEP) with Dr Pepper Snapple Group (DPS) and Cadbury Schweppes (CSG) largely capturing the rest of the market. Due to a lag in the release of data, the annual market share information for 2008 will not be available until the end of the first quarter in 2009. As a result, it is impossible to segregate the market share that solely belongs to DPS since it became its own independent company in the second quarter of 2008. However, it is possible to rank the brands owned by each company in terms of market share and in 2007 Dr. Pepper ranked 6th in the world.[23]
| % of Market | Number of Cases (millions)[24] | |
|---|---|---|
| Dr Pepper Snapple Group (DPS)/Cadbury Schweppes (CSG) | 15.0 | 1491.3 |
| Coca-Cola Company (KO) | 42.8 | 4241.1 |
| Pepsico (PEP) | 31.1 | 3082.8 |
| Cott (COT) | 4.8 | 476.6 |
| % of Market | Number of Cases (millions)[24] | |
|---|---|---|
| Coke Classic | 17.2 | 1707.3 |
| Pepsi-Cola | 10.7 | 1059.8 |
| Mountain Dew (Owned by Pepsi) | 6.6 | 659.6 |
| Dr. Pepper | 5.9 | 585.9 |
References
- ↑ Company Website: Operations
- ↑ 2.0 2.1 The Motley Fool 5/7/2008: "Dr Pepper Fizzles Away From Cadbury"
- ↑ Brandweek 1/2/09: "Beverages: As Hot Spots Cool Off, Cola Biz Refocuses on Fizz"
- ↑ New York Times 10/14/2008: "Tap Water's Popularity Forcing Pepsi to Cut Jobs
- ↑ Barron's 1/12/2009: "Soft Drink Makers Underestimate Excise Tax Threat"
- ↑ Forbes 9/3/08: "Coca Cola Sees Juicy Prospects in China"
- ↑ SmartMoney.com 1/7/2009: "The Plan for Coke: Q&A with CEO Muhtar Kent
- ↑ 8.00 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 8.10 DPS 2008 Third Quarter 10Q
- ↑ Impairment of intangibles refers to an expense that may be charged relating to the value of a firm's brand. Since these intangibles often form a large proportion of assets for beverage firms the impairment charge is excluded in order to calculate a more accurate measure of income
- ↑ Forbes 1/14/09: "Ahead of the Bell: Dr. Pepper Snapple Estimate Cut"
- ↑ Press Release NewsWire 1/14/2009: "Sugar Backlash Opens Door For All-Natural Sports Drink"
- ↑ San Francisco Chronicle 1/14/2009: "Fussy Eaters? They Learn By Example"
- ↑ New York Times 12/17/08: "FDA Approves 2 Sweetners"
- ↑ Chicago Tribune 1/6/2009: "Soft Drinks Wait for OK on Sugar Substitute"
- ↑ Wall Street Journal 12/24/08: "The Next Wave of State Taxes'
- ↑ Albany 6 News 1/1/2009: "Trans Fat Ban Takes Place in Albany"
- ↑ iStockAnalyst 9/18/08: "PepsiAmericas Signs Agreement with Dr Pepper Snapple Group to Further Boost Crush Brand Distribution"
- ↑ New York Times 2/8/08: "Overseas Snack Sales Help PepsiCo Meet Expectations"
- ↑ Blogging Stocks 1/14/09: "Coca-Cola(KO): Your soft drink is the road to happiness"
- ↑ Yahoo Finance: DPS Competitive Comparison
- ↑ Coca Cola Company: 2008 Q3 10Q
- ↑ Pepsi Company: 2008 Q3 10Q
- ↑ 23.0 23.1 23.2 Beverage Digest 2007 Report
- ↑ 24.0 24.1 A case is comprised of 16 regular 12 oz. cans of soda
| ||||||
|
|
