Dr Pepper Snapple (
) reported a decline of 1% in net sales in the fourth quarter to
round up what has been a challenging 2013.
, category headwinds in carbonated soft drinks (
) and juices impacted the company's top line, which was partially
offset by a favorable product mix and an increase in Latin America
volumes. For the full year, both CSDs and non-carbonated beverages
) declined 2% in volumes. Dr Pepper does business only in the
Americas, with around three-fourths of its valuation coming from
the North America CSD division. As sales of sugary sodas
continue to decline in the domestic market, the company has looked
to derive meaningful growth from its North America NCB and Latin
America divisions. However, the imposed taxes on sugary drinks in
Mexico and lack of innovation in NCBs could further reduce Dr.
Pepper's revenue in the coming year. The company expects its
revenues to remain flat in 2014.
We have a revised price estimate of $48 for Dr
, which is around 4% lower than the current market price.
See Our Complete Analysis For Dr Pepper
Dr. Pepper Reaffirms Its Commitment To CSDs Despite
Amid looming health and wellness concerns over consumption of
fizzy drinks, sales of Dr. Pepper's North America CSD division
decreased by 0.8% year-on-year to around $4.3 billion in 2013 by
our estimates. Volumes of the company's Core 4 brands: 7Up, Canada
Dry, Sunkist and A&W, including the TEN variants of these
drinks fell by 4% in the last quarter over the previous year.
Heeding to the call for healthier sugary drinks, Dr. Pepper had
launched the TEN lineup of its Core 4 brands last year, following
the mild success of Dr. Pepper TEN in 2012. While a 12 ounce bottle
of regular Dr. Pepper carries 150 calories, the TEN version
provides only 10 calories. However, diet soft drinks were the
worst performing segment of the U.S. beverage industry last year
mainly due to safety concerns and bitter aftertastes associated
with artificial sweeteners, especially aspartame, which is used by
most beverage makers including Dr. Pepper.
Despite the discouraging performance of its TEN lineup, Dr.
Pepper has announced further investments in marketing and
innovation in the hope to revive sales of its diet CSD portfolio in
2014. But as consumers slowly shift from sugary drinks to healthier
alternatives such as sports drinks, carbonated water and
ready-to-drink tea, volumes for the company's CSD division could
further decline. In fact, even the caffeine-fueled energy drinks
are taking market share away from CSDs due to their attractive
packaging and successful marketing strategy aimed at targeting
However, Dr. Pepper remains hopeful about its diet soda drinks
business and plans to launch naturally sweetened 60 calorie
versions of some of its brands this year. Although having six times
as many calories as the TEN lineup, the company hopes that
consumers might prefer naturally sweetened sugary drinks, which
still have less than half the calorie count of regular CSDs. In
addition, according to a Nielsen Homescan study, 52% of TEN's
purchases are to consumers who generally don't drink sugary soft
drinks. This means that diet drinks are increasing the overall
market size for CSDs, rather than cannibalizing sales of regular
Lack Luster NCB Portfolio Impedes Dr. Pepper's
Dr. Pepper's NCB volumes declined by 2% last year on the back of
disappointing performances of its core juice portfolio. Sales of
the juice brand Hawaiian Punch fell by 9% in 2013 year-on-year due
to lower promotional activities and ongoing criticism of high sugar
juices. The company has a small presence is some of the fastest
growing segments of the NCB market such as sports drinks,
carbonated water and ready-to-drink tea. This could reduce Dr.
Pepper's market share in the overall U.S. beverage industry in the
future as we expect the NCB segment to constitute about 61% of the
domestic beverage market by 2018, up from 56% in 2012.
However, the silver lining for Dr. Pepper is its national
distribution agreements with some of the small but faster growing
beverage companies. For example, the company has a
distribution agreement with Bai 5, a coffee-fruit based low calorie
drink, which grew by a whopping 400% to reach $20 million in sales
last year. In addition, volumes of Vita Coco, a leading coconut
water brand distributed by Dr. Pepper, surged 37% in 2013. Although
accounting for a very small portion of the beverage industry
presently, sales of coconut water in the U.S. have doubled every
year since 2004. Vita Coco crossed a 100 million in sales in
2011, and continues to grow by leveraging Dr. Pepper's scale and
efficiency in direct store distribution.
Latin America Provides Growth
With both CSD and NCB sales declining in North America, Dr.
Pepper's revenue from Latin America increased by an impressive 11%
in 2013, mostly contributed by Mexico. Due to Mexico's large
appetite for sugary drinks and bottled water bolstered by the
growing middle class and increasing disposable incomes, the company
could continue to derive growth from this segment. The country is a
major consumer of soft drinks, especially CSDs, with over 146
liters of CSDs consumed per person in 2012. In this respect, Mexico
trails only the U.S., which has a massive per capita consumption
rate of 165 liters.
However, the Mexican government imposed taxes on sugary drinks
late last year in a bid to fight health problems. The country has
the world's highest obesity rate of 32.8% apart from a high
diabetes rate of 9%. As this levied tax is expected to increase the
total cost of goods by 2% this year, Dr. Pepper has raised
prices of its sugary drinks in Mexico. Price rise could hamper
demand for the company's CSDs in Mexico in the coming year.
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