Starbucks, Dr Pepper, PepsiCo, and Coca-Cola: 4 Developments to Keep in Mind

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Recent headlines in the beverage industry have revealed some interesting insights about Starbucks (NASDAQ: SBUX  ) , Dr Pepper Snapple Group (NYSE: DPS  ) , PepsiCo (NYSE: PEP  ) , and Coca-Cola (NYSE: KO  ) that may shed some light on their investment potential. Read on to find out the latest news and how it may affect the stocks.

The "F word"
According to an article from the Associated Press, a small brewery in Cottleville, Mo., by the name of Exit 6 Pub and Brewery named one of its alcoholic beverages the "Frappicino" resulting in a cease and desist order from Starbucks' legal department over its trademark Frappuccino coffee product. In response, Exit 6 Pub and Brewery posted a letter saying it will drop the word "Frappicino" and change the name of its microbrew to "The F Word," and subsequently sent a check for $6 in alleged profit to Starbucks. This translated into a wave of social media support for the small business.

Starbucks' shareholders may worry that patrons of the Exit 6 Pub and Brewery will associate "The F Word" with the "big and evil" Starbucks every time they take a drink of the local brew, and that this disdain may spread. Starbucks grew its revenue 12% last year, clocking in just below $15 billion.  Its restaurant experience will probably serve as a catalyst for many years of growth, meaning that this event will bear little significance to its long-term potential as an investment. However, too many public relations missteps can spell doom even for a company of this size. Fortunately, Starbucks was diplomatic in saying it was glad that the Exit 6 Pub and Brewery stopped using the name and stated it wanted "to resolve trademark disputes informally and amicably, and we appreciate them respecting our request to avoid confusion among customers." This gives indication of good public relations capability on Starbucks part.

The diet soda battle
In an attempt to boost sales of its 10-calorie soda product 7UP Ten, Dr Pepper Snapple Group will enlist Chelsea Handler, the host of Chelsea Lately, in the promotion of the diet soda. The message to the public: Don't make New Year's resolutions to give anything up; if you drink sodas like 7 UP Ten, you "still get the full flavor [you] love -- with no guilt."  

Dr Pepper Snapple can use all the help it can get. Declining carbonated soda volume contributed to an overall sales volume decline of 1% in its most recent quarter. Approximately 80% of the company's sales came from carbonated soda sales, and it maintains a relatively small global presence. Dr Pepper Snapple's pace of internal innovation remains on the slow side, lessening the appeal of the company as a long-term investment. 

An edge in potato chips
According to an article in a recent newsletter, PepsiCo subsidiary Frito-Lay received a patent for a "reduced oil potato chip process" through a "low pressure processing method" reducing the oil content of the potato chip. This will enhance the appeal of Frito-Lay potato chips as consumers look for healthier snacks as obesity concerns increase. In the most recent quarter PepsiCo's snack volume growth exceeded beverage volume growth by a 3 to 1 margin. The new process innovation further enhances PepsiCo's strength as a significant snack player.

Reb M stevia gets FDA approval reports that PureCircle, "the world's largest maker of stevia ingredients," has received a "generally regarded as safe" rating from the FDA for its Reb M (also called Reb X), a form of stevia sweetener that reportedly tastes closer to table sugar. According to PureCircle, this sweetener goes a long way in reducing the calories of food and beverages without reducing their sweetness. PureCircle and Coca-Cola formed a joint venture in 2012 to develop such sweeteners and are now working on obtaining intellectual property protection for Reb M. Coca-Cola already uses stevia in Coca-Cola Life beverages in Argentina, according to  PureCircle has a five-year supply agreement with Coca-Cola. This could give Coca-Cola a definitive edge over companies such as Dr Pepper Snapple in the diet soda arena.

Foolish takeaway
  With $2.5 billion in cash and investments on its balance sheet, Starbucks certainly possesses the financial resources for backing PR muscle in dealing with a public sympathetic to small-business trademark offenders. Similarly, Coca-Cola's $17 billion in cash and investments gives it the resources necessary for product innovation. This adds to their appeal as long-term investments. PepsiCo's involvement with snacks will help it overcome weaknesses seen in its beverage segment. Investors may want to shy away from companies such as Dr Pepper Snapple, which lacks the relative scale, product diversity, and financial resources to move the company forward in a meaningful way.

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William Bias

William has been a stock market enthusiast since 1992.

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8/31/2015 4:02 PM
DPS $76.73 Down -0.38 -0.49%
Dr Pepper Snapple… CAPS Rating: ****
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PEP $92.93 Down -0.60 -0.64%
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SBUX $54.71 Down -0.92 -1.65%
Starbucks CAPS Rating: ****