Dr. Pepper Could Lose The Non-Carbonated Beverages Battle In North America

Dr Pepper Snapple (NYSE:DPS) has long been ranked behind Coca-Cola and PepsiCo in the U.S. liquid refreshment beverage (LRB) market. The company has a share of 11% in this market, bolstered by strong performance of its carbonated soft drinks (CSD) division. Around three-fourths of Dr. Pepper Snapple’s value comes from the North America CSD division by our estimates, whereas the North America non-carbonated beverages (NCB) division contributes only about 20%.

However, CSD sales have been declining in the last few years in North America, owing to widespread health concerns over excessive soft drink consumption and obesity. Calorie sensitive consumers are preferring natural and healthier alternatives to fizzy drinks, resulting in growth of the NCB market. Although Dr. Pepper Snapple has a share of ~17% in the U.S. CSD market, it hasn’t performed as well in the NCB market.  In the fast growing segments such as bottled water and energy drinks, the company has a limited presence. As the market slowly shifts from fizzy to non-fizzy drinks, Dr. Pepper Snapple will have to further penetrate the NCB market in order to maintain its market share in the beverage industry.

Our $50 price estimate for Dr Pepper Snapple, which is around 3% above the current market price.

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Huge Potential of The Bottled Water Market

Bottled water is presently the second largest category of beverages in the U.S. in terms of volume, behind fizzy drinks. In 2012, this market was worth $11.8 billion, a 6.7% increase year-on-year. ^[1] Per capita consumption of bottled water has also increased by over 10% in the last five years to reach 116 liters per person in 2012. ^[2]

Recently, bottled water has been the center of several negative campaigns, which have targeted the usage of plastic. However, despite the threat to functional bottled water sales, sparkling bottled water is expected to boost the overall sales in this segment. In addition, the U.S. ranks only eleventh in the global per capita consumption of bottled water, and this provides an opportunity for growth.

Although the U.S. bottled water market has vast growth potential, Dr. Pepper Snapple hasn’t been able to establish itself as a strong competitor in this market. Sales of the company’s Deja Blue brand of water trail far behind those of Nestle’s Pure Life and Poland Spring, Coca-Cola’s Dasani and PepsiCo’s Aquafina. While Nestle Waters America leads the U.S. bottled water market with a 22% share, the brands Pure Life, Poland Spring and Dasani rank within the top ten leading LRB trademarks in the U.S. ^[3]

Fast Growing Sports And Energy Drinks Market

Sports and energy drinks is the fastest growing segment of the overall beverage industry. This market has grown by 12% in 2011 and 11% in 2012, to reach ~$16 billion in revenues. ^[4] In the energy drinks market, Red Bull, Monster and Rockstar together hold more than 90% of the market share. On the other hand, PepsiCo’s Gatorade and G2 dominate the sports drinks market with a share of nearly 75% as of 2011, followed by Coca-Cola’s Powerade, which constitutes over 20%. ^[5]

The absence of any major brands in DPS’s portfolio is preventing the company from making any significant inroads in both these segments. Although the company revamped its energy drink Venom in 2008, the brand failed to gather much success despite its attractive packaging. The launch of Accelerade, a ready-to-drink sports drink in 2007, also couldn’t challenge the likes of Gatorade and Powerade. The combined sports and energy drinks market is expected to further grow by 17% over the next five years to reach 8.5 billion liters by 2017, to generate annual sales in excess of $20 billion.

Both the bottled water and energy drinks divisions are expected to grow at a higher rate than the overall NCB market. Given the present scenario, we expect Dr. Pepper Snapple to lose market share in the NCB industry, as we suspect it will have trouble capturing much of this growth. In order to solidify its bid in the NCB market in the coming years, the company will have to invest heavily in the marketing and developing of its brands in these fast emerging segments.

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1. “Bottled water market“, International bottled water association [↩]
2. “Bottled water 2011: the recovery continues“, International bottled water association [↩]
3. “US LRB market 2012“, beveragemarketing.com [↩]
4. “Sports and energy drinks in the U.S.“, July 2013, euromonitor.com [↩]
5. “In gatorade war, Pepsi seems to have deliberately given up market share to coke“, businessinsider.com [↩]