On Oct. 23, beverage company Dr. Pepper Snapple Group (DPS +0.00%) came out with its latest earnings report. Negative headwinds from Aspartame concerns and the general downtrend in carbonated sodas weighed in on the company. Overall, reported sales increased 1% on the basis of price with overall sales volume declining 1% in the most recent quarter. The five tidbits listed below will help you understand Dr. Pepper Snapple Group's current direction amid towering competition from Coca-Cola (KO +0.78%) and PepsiCo (PEP +0.76%).
1. Bright spots
Dr. Pepper Snapple Group's carbonated soft drink volume remained flat in the most recent quarter. Its non-carbonated beverage volume actually fared worse, declining 1% during that time. However, many bright spots helped serve as a buffer against further volume declines. Non-caffeinated brands such as Canada Dry and Schweppes both increased volume in the "high single-digits." Penafiel brand of beverages increased in the double digits. Snapple increased volume 4% receiving help from its tea products, reflecting an overall popularity in teas . Moreover, it looks like people still enjoy Mott's applesauce and apple juice. The Mott's brand expanded volume by 1%.
2. Need to rapidly improve
|
Beverage company |
YOY reported revenue growth (mrq) |
|---|---|
|
Coca-Cola |
(3%) |
|
PepsiCo |
2% |
|
Dr. Pepper Snapple Group |
1% |
*Source SEC filings
Reported top-line growth for the big three beverage companies ranked in the dismal range. Coca-Cola's revenue actually declined 3% in its most recent quarter. Its global sparkling volume expanded a mere 1% versus 3% for non-carbonated beverages. Currency headwinds and restructurings further contributed to Coca-Cola's woes. According to fellow Fool Ted Cooper , Coca-Cola commands more than 40% of the carbonated soda market in North America meaning it still maintains a huge ubiquitous advantage over the other two companies and commands great pricing and distribution power. Coca-Cola is also moving forward with expansion plans in emerging markets.
PepsiCo performed the best in the most recent quarter growing reported revenue 2%. Snacks gave PepsiCo its boost in performance growing global volume 3% in that area versus 1% for its beverages. Consumers gravitate more toward PepsiCo's healthier Quaker Oats than its carbonated soda line. It goes without saying that its strength lies in the snack area for the moment.
Dr. Pepper, which commands a relatively small 16% of the carbonated soda market in North America, represents big beverage's little brother. It needs to rely on its bigger counterparts as distribution partners. Carbonated soda beverages represent 80% of its revenue and the remaining 20% comes from non-carbonated beverages meaning its revenue lacks diversity. Dr. Pepper Snapple Group's reported revenue only grew 1%. Company executives understand it's more vulnerable to industry headwinds than the other two companies and that it needs to keep a tight control on costs through its rapid continuous improvement plan. These efforts explain why its net income increased 21% over the past three years versus a 7% increase in revenue.
In the earnings call, Dr. Pepper Snapple Group executives highlighted further efficiency initiatives including just in time distribution. Its CFO, Martin Ellen talked about a "paycheck effect" where people spend more around the time of their paycheck and less when they don't get paid. Dr. Pepper Snapple Group and its merchandising partners intend to mold its distribution around this pattern. Lean distribution means that Dr. Pepper Snapple Group possesses excess warehouse space that it plans to monetize. The distribution agreement announced on Oct. 31 with Sunny Delight Beverage to distribute its new Sparkling Fruit20 sparkling water serves as an example.
3. Sticking with diet sodas
Dr. Pepper Snapple Group executives remain convinced that its diet sodas will prevail. It believes that consumers still want a low calorie carbonated soda drink and thinks commentary in the media about aspartame represents "hearsay" and not scientific fact. Dr. Pepper Snapple Group wants to change the commentary more toward the facts surrounding aspartame.
4. Emphasis on internal product development
When an analyst asked Dr. Pepper Snapple Group CEO Larry Young about adding non-carbonated products to its portfolio, he emphasized that the company plans to leverage its 58 brands in that direction. He said he wouldn't entirely rule out an acquisition, but the focus will remain inward which is understandable given its balance sheet.
5. Good capital priorities
When asked about utilizing leverage to increase dividends and share repurchases, Larry Young said Dr. Pepper Snapple Group wants to limit capital distribution to free cash flow. This probably represents a good idea since cash only represents 5% of stockholder's equity making cash payments on interest difficult. However, it might represent an even wiser idea to reinvest some of that cash into the business in the form of new product initiatives.
Foolish takeaway
Dr. Pepper Snapple Group's vulnerability remains evident. It really needs to focus more on emerging markets expansion and follow in PepsiCo's footsteps incorporating a diet soda strategy that doesn't include aspartame. It can also cut costs only so far. Dr. Pepper Snapple Group needs to come forward with a cohesive overall strategy to boost its top line otherwise the company and its shareholders may face a dismal long-term future.
