No Fizz Left in Dr Pepper Snapple Group Inc.

Falling soda consumption leaves this beverage maker flatter than day-old soda.

Apr 11, 2014 at 10:44AM

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Still struggling with falling levels of soda consumption, Dr Pepper Snapple Group (NYSE:DPS) suffered a further indignity after an analyst cut the beverage maker's rating on Tuesday from market perform to underperform because of its exposure to the U.S. drinks market.

According to Beverage Digest, U.S. sales volumes of carbonated soft drinks fell 3% last year, hitting depths not seen since 1995. As consumers have become wary of the artificial sweeteners soda companies add to their drinks, preferences are switching to juices, health drinks, and even energy drinks, despite their own reputed health risks. Some 88% of Dr Pepper's revenues come from the U.S. far more than its larger rivals that realize only half their sales or less from domestic markets . 

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Furthermore, because Dr Pepper relies more on its second-tier brands -- like A&W, RC Cola, and Sunkist -- than others do, its sales are weakened because backup brands just don't perform as strongly as primary ones, particularly in weak markets. As a result, Dr Pepper's secondary brands suffered sharp declines in volumes.

In its concentrates division, which are syrups sold to bottlers, volumes declined 2% overall, but it was more acute at RC Cola, where they tumbled 7%, while both Sun Drop and Squirt saw volumes fall 6%.

In packaged goods, Dr Pepper felt the sting of a 7% decline in Sunkist volumes, a 3% decrease in 7UP, and a 1% decline from A&W. And it didn't help at all that volumes fell 3% at its flagship Dr Pepper brand.

The beverage maker compounded its problems by introducing a line of artificially flavored drinks just as the backlash against them bubbled up. Its 10-calorie Core 4 TEN beverages, sweetened with aspartame, have failed to gain any traction, and recently, convenience stores were so disappointed with sales, they practically begged Dr Pepper to pull them or else face the prospect of the C-stores doing it themselves when they did their spring resets.

Surprisingly, up until the analyst cut the beverage maker's ratings, Dr Pepper's stock was bubbling up, rising nearly 30% from the 52-week low it hit last October. At 16 times earnings and 14 times estimates, the beverage maker trades at a slight discount to its larger rivals, but considering the risks associated with its exposure to the U.S. soda market and its reliance upon secondary brands for growth, I think it's possible we'll see Dr Pepper Snapple Group go flat fairly quickly, once again.

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