Dr Pepper Snapple’s Low-Calorie TEN Lineup Can’t Escape The Soda Slump

The soda slump is getting bad to worse in the U.S. The Texas-based Dr Pepper Snapple Group (NYSE:DPS), which relies heavily on fizzy drinks and operates primarily in North America, is the most vulnerable to this growing trend. As consumers continue to shift towards healthier alternatives due to obesity and diabetes concerns, the company is betting on the nationwide launch of the low-calorie variants of its Core 4 and RC brands to reverse some of that. However, it has been observed that the low-calorie sodas are seeing more pain than the regular ones due to health concerns associated with the consumption of artificial sweeteners. This should be a cause of concern for Dr Pepper Snapple as it has been spending heavily behind the launch of its new TEN lineup.

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The Soda Slump

A research paper recently published in the American Journal of Public Health concluded: “Soft drink consumption is significantly linked to overweight, obesity, and diabetes prevalence worldwide.” Market-wide carbonated soft drink (CSD) volumes in the U.S. have declined by ~2.2% over the last two years alone. ^[1]

Dr Pepper Snapple derives more than 90% of its revenues from North America and ~80% of its sales volume is made up of CSDs. The company therefore faces significant headwinds from the declining CSD consumption in North America, unlike more geographically diverse players such as Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP).

The TEN Lineup

Dr Pepper Snapple’s “TEN” offering boasts of just 10 calories per 12 ounce serving with minimal aftertaste of the artificial sweetener. These drinks contain a mix of high fructose corn syrup and aspartame, which reduces both, the amount of calories as well as the aftertaste effect of aspartame. Following the success of Dr Pepper TEN’s initial launch, the company started selling TEN variants of its Core 4 (that include 7-Up, A&W, Sunkist and Canada Dry) and RC brands in test markets last year. With the nationwide launch of its TEN lineup this year, the company aims to attract consumers back to the CSD category.

During the second quarter earnings call, the company executives mentioned that response to the new TEN products has been meeting their expectations so far. They also mentioned that the availability of these new products, as measured by all category volume (ACV), has increased to 76% from 65% in the first quarter, and they have so far been able to secure incremental shelf space from most of the retailers. Moreover, the company claims that more than half the dollars spent by consumers on these newly launched products have been incremental to the CSD category. ^[2]

Low-Calorie Squeeze

Beverage Digest, a trade publication, suggests that the consumption of low-calorie or diet sodas is falling faster that the regular CSDs. It noted that while the sales of regular Coke and Pepsi declined by just 1% and 3% in 2012, their low-calorie counterparts fell by more than 3% and 6%, respectively. This is primarily due to health concerns associated with the consumption of aspartame, an artificial sweetener that contains close to zero calories and is almost 200 times sweeter than sugar. Moreover, it can also be attributed to a growing shift in consumer preferences towards natural or organic ingredients in the U.S. The growing trend recently drove Coca-Cola, the largest player in the industry, to launch an ad campaign specifically focused on defending the use of artificial sweeteners in its diet beverages.

Dr Pepper Snapple’s new TEN lineup is also facing the heat from an industry-wide slump in low-calorie offerings. Despite the new product launch with almost $25 million spent in marketing and promotions so far, low-calorie sales of the company declined by more than 5% this summer. ^[3] This should be a cause of concern for the company as the success of its new TEN lineup in attracting consumers back to the CSD category is the key to future earnings growth.

We currently have a price estimate of $50 for Dr Pepper Snapple, which is almost 10% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. U.S. Beverage Results for 2012, March Beverage-Digest 25, 2013 [↩]
2. Dr Pepper Snapple Group Inc. (DPS) Management Discusses Q2 2013 Results – Earnings Call Transcript, seekingalpha.com [↩]
3. DPS’ TEN Products Struggling?, cspnet.com [↩]