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Can Dr Pepper Snapple's Spirit Airlines Deal Help The Stock?
6/20/2013 9:00:00 AM
Dr Pepper Snapple recently signed an agreement with Spirit Airlines, which allows it to sell Dr Pepper and Diet Dr Pepper on flights operated by Spirit Airlines. The company's Canada Dry and 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 ( CSD ) 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 and 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?
According to Amadeus , 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.