Dr. Pepper Snapple: 2013 Year In Review

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Dr Pepper Snapple ( DPS ) is a leading manufacturer and distributor of carbonated soft drinks ( CSD ) and non-carbonated beverages ( NCB ). In 2013, the company's shares gained just 11%, lagging not only the S&P 500′s 29% rise, but also PepsiCo's 21% and Coca-Cola's 13% advances. One of the main reasons for this slow growth is the recent soda slump, which has affected the company's North America CSD business. To add to its woes, Dr. Pepper Snapple has undergone ten consecutive quarters of flat to negative growth in the fast growing NCB division. The only bright spot for the company is its Latin America business, in which volumes increased 6% through September.

We have a $50 price estimate for Dr Pepper Snapple , which is around 3% above the current market price.

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Latin America Drives Growth

Amid CSD woes, sales of Dr. Pepper's Latin America division have increased over 12% to $346 million. Accompanying a double-digit rise of the flagship brand Dr. Pepper and an 8% increase in sales of Clamato juice, the company's bottled water brands grew, aided by heightened promotional activities and product innovation. Sales of the flavored sparkling water brand Penafiel increased by 10% and those of Aguafiel mineral water rose by 8%.

The bottled water market in Mexico provides potential growth opportunities due to widespread concerns over the safety of tap water andthe inconvenience and expense of boiling large quantities of water. The per capita consumption of bottled water for Mexicans was 248 liters in 2011, compared to just 110 liters for the U.S. This market is expected to become the world's largest bottled water market, growing from $9 billion in 2011 to $13 billion in 2015.

Danone and Coca-Cola have managed to capture more than half of the Mexican bottled water market with their brands Bonafont and Ciel respectively. PepsiCo also has a share of over 13% in this market. Therefore, Dr. Pepper will have to look to strengthen its foothold in this market by accelerating investments in marketing and innovation. The company also faces the threat of small local companies, which account for ~15% of the total volumes.  It thus must look to further develop its distribution channels and penetrate deeper into this region.

CSDs In North America Continue To Fall

Growing consumer health concerns over the consumption of carbonated drinks continue to compress soda sales, especially in the developed world. Consequentially, Dr. Pepper's CSD volumes declined by 2% through September. Low/no calorie fizzy drinks have also been targeted for the use of harmful artificial sweeteners which cause health problems along with sugar cravings, dehydration and even weight gain. These reasons are why the newly launched low calorie TEN variants of Dr Pepper's Core 4 brands (7-Up, A&W, Sunkist and Canada Dry) remained flat during the first nine months. In fact, the diet drink segment is the most underperforming segment of the overall liquid refreshment beverage (LRB) market. The continual decline in demand for both regular and diet CSDs might impede growth in the North America CSD division, which constitutes almost three-fourths of the company's valuation.

Going forward, Dr. Pepper will look to leverage its strong brand reputation and faithful consumer following to spur growth in CSDs. The company invested around $30 million in its TEN product launches over the past year, and will look to increase marketing spend to improve CSD sales.

Dr. Pepper Struggles In The NCB Market

While consumers move from sugary CSDs to healthy natural alternatives such as ready-to-drink (RTD) teas, energy and sports drinks and bottled water, Dr. Pepper seems to have fallen behind. Although the company has a formidable share of ~17% in the U.S. CSD market, it hasn't performed as well in the NCB market. In the fast growing segments such as RTD teas, bottled water and energy drinks, the company has a limited presence. The volumes declined by 4% in this division through September. Sales of the juice brand Hawaiian Punch declined by 10% due to low promotional activities and ongoing criticism of high-sugar beverages.

As the market slowly shifts from fizzy to non-fizzy drinks, Dr. Pepper Snapple will have to further penetrate the NCB market in order to maintain its market share in the overall beverage industry. In addition to stepping-up investments in the current product line-up, the company will look to expand its brand portfolio to attract sales. For example, Dr. Pepper has a distribution agreement with Bai 5, a coffee-fruit based low calorie drink, which grew by a whopping 400% to reach $20 million sales in the last year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CSD , DPS , KO , NCB , PEP

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