Dr Pepper Snapple Group, Inc. Is About to Go Flat

If its own misgivings about the use of aspartame in its Core 4 TEN beverages weren't enough of an incentive to change direction, perhaps convenience stores telling Dr Pepper Snapple Group (NYSE: DPS  ) to please, please, please get rid of the low-calorie soft drinks will finally get the beverage maker to act.

Ever since the 10-calorie carbonated sodas were launched last year, they were met with disappointing sales. At precisely the moment when consumers were making a big move to either energy drinks or healthier beverages, DrPepper Snapple introduced a line of soft drinks infused with artificial sweeteners like aspartame, high-fructose corn syrup, and acesulfame potassium, or Ace-K. It may have put up a brave front in the third quarter to say the Core 4 TEN program was "bringing consumers back" to carbonated soft drinks, but the facts tell otherwise.

Soda sales fell 0.6% in 2013 to $28.70 billion, according to industry group IRI, while they were down 1.8% in volume, but it was really bad in the back half of the year as dollar sales fell 2.5% and plunged 3.6% in volume. December's numbers were even worse.

There's growing concern on the part of consumers over what these beverages are made of, and though each of the biggest soda makers is heavily reliant on carbonated soft drink, or CSD, sales for the bulk of their revenues, none is more dependent than Dr Pepper, which gets 70% of its revenue from CSDs, versus Coca-Cola's 60% and PepsiCo's 25%. 

Because PepsiCo (NYSE: PEP  ) derives most of its revenues from its Frito-Lay snack foods division, soda sales represent a smaller portion of the pie, but Dr Pepper is almost wholly reliant on the fizzy stuff such that the declines have assumed panic levels at the beverage maker and that's why it's almost trying to will sales higher.

But Wells Fargo thinks it's all for naught, because its analyst surveyed some 15,000 convenience stores and found that three-quarters saw the Core 4 TEN program generating poor repeat sales. Where the C-stores were itching to give more space to energy drinks, not least because they provided higher margins compared to CSDs, a majority indicated they would be removing Dr Pepper's low-cal line come spring. 

That's a devastating blow to the drink maker. While Coca-Cola (NYSE: KO  ) also offers juices, water, and even a new dairy product, and Pepsi has its snacks unit as well as its Naked juice brand, which alone saw a 25% increase in sales last year, both can point to growing soda consumption internationally even if it's on the decline here at home. Pepsi and Coke derive between 50% and 60% of their revenues internationally, but Dr Pepper Snapple generates 90% of its revenues from the U.S.

One beneficiary from the changing taste will be Monster Beverage (NASDAQ: MNST  ) , whose line of Monster energy drinks is proving popular, despite deepening worries about the health risks associated with consuming the supercharged beverages.

Dr Pepper Snapple has placed a lot of the blame on either "misconceptions" about the safety of artificial sweeteners like aspartame, but the Wells Fargo analysts thinks Coke and Pepsi, which serve as suppliers to the C-stores for the beverage maker, played a role in not pushing hard enough to get its TEN beverages on store shelves. 

But as soda consumption declines generally, diet sodas more broadly, and those containing artificial sweeteners particularly, Dr Pepper Snapple, whose shares are up 13% year over year and are 20% higher from recent lows, is about to go flat as it figures out investors are no longer sweet on its low-calorie brand.

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  • Report this Comment On February 02, 2014, at 10:23 PM, demonroach wrote:

    Someone please tell me why DPS gives out a dividend when the company is less than 5 years old and in a declining industry?

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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8/28/2015 4:01 PM
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