Dr Pepper Snapple recently signed an agreement with Spirit
Airlines, which allows it to sell
Diet Dr Pepper
on flights operated by Spirit Airlines. The company's
Mr and Mrs T Bloody Mary Mix
brands are already available on
Spirit Airlines' Menu
. In this article, we look at the potential impact of this
agreement on Dr Pepper Snapple's business.
Dr Pepper Snapple is the third largest Liquid Refreshment
Beverage (LRB) company in the U.S. with further presence in Canada,
Mexico and the Caribbean. Dr Pepper Snapple is a market leader in
the flavored carbonated soda drink (
) segment. Besides CSD, the company is also present in juices,
ready-to-drink (RTD) teas and mineral water. Some of the company's
most valuable brands are Dr Pepper, 7UP, Canada Dry, Sunkist, Crush
See Our Full Analysis For Dr Pepper Snapple
What Drove The Deal?
We believe declining sales volumes, coupled with tough
competition in the North American CSD market is driving Dr. Pepper
Snapple to look for avenues to boost sales volumes. North American
CSD market has been witnessing consistently declining volumes over
the last few years. Per capita annual CSD consumption in the U.S.
fell to 42.4 gallons in 2012 from over 50 gallons in 2005. Deal
with Spirit Airlines is a good idea for Dr Pepper and its diet
partner because of less competition on-board a flight, as the menu
options are limited.
From Spirit's perspective, adding a couple of menu options only
enhances the chances of higher retail revenues, which are rapidly
gaining significance in a highly commoditized airlines industry.
Selling food and beverage items along with other unbundled services
to passengers in order to drive ancillary revenues is an erupting
trend in the Airlines industry. In a recent industry report,
IdeaWorksCompany noted that ancillary revenues surged almost 20%
globally in 2012. At 38.5%, Spirit Airlines' ancillary revenue as a
percentage of its total revenues stood the highest in the
industry. The company generated almost $50 in ancillary
revenues per passenger in 2012.
What Does It Mean For Dr Pepper Snapple?
, the sale of food and other a la carte services makes up around
25% of ancillary revenues for a typical U.S. airline. Data
collected by the U.S. Department of Agriculture and Beverage Digest
suggests that expenditure on CSDs makes up almost 5% of the total
expenditure made on food and alcohol in the U.S. Assuming consumer
preferences do not change significantly while on-board, we can
estimate that soda beverage sales make up ~1.25% of total ancillary
revenues for a typical U.S. Airlines. This implies ~1.5 million 12
oz cans (~140 thousand gallons of CSD) sold by Spirit Airlines
annually at an average price of $2.50. Considering these numbers,
the amount of incremental sales volume that Dr Pepper Snapple can
realize from this deal is not significant at all when compared to
its estimated annual sales volume of almost 2.5 billion gallons.
Therefore, we do not expect the deal to make a significant impact
on the company's ailing CSD business in North America.
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