Flat Growth Of TEN Lineup And Health Battles In Mexico Could Hamper Dr. Pepper’s Growth

Reeling under declining soda sales and flat growth of its low calorie TEN products, Dr Pepper Snapple (NYSE:DPS) saw its shares rise only 11% in 2013, trailing not only the S&P 500′s 31% rise, but also PepsiCo‘s (NYSE:PEP) 22% and The Coca-Cola Company‘s (NYSE:KO) 14% advances. Dr. Pepper is scheduled to announce its Q4 and full-year earnings on February 12. The company does business only in the Americas, with around three-fourths of its valuation coming from the North America carbonated soft drinks (CSD) division. As sugary sodas continue to face headwinds in the domestic market, Dr. Pepper has looked to derive meaningful growth from its non-carbonated beverages (NCB) and Latin America divisions. However, a lack luster NCB portfolio and recently imposed beverage taxes in Mexico could hamper Dr. Pepper’s growth prospects going forward.

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Latin America’s Health Revolution Might Hinder Dr. Pepper’s Growth

Around 7.5% of Dr. Pepper’s revenues through September last year came from Latin America, most of which were constituted by Mexico. Sales volume in the region increased 3% during this period on the back of strong performances by the company’s bottled water portfolio. The carbonated water brand Penafiel grew by 10%, whereas sales of the mineral water brand Aguafiel rose by 8% through September. ^[1] This rise was bolstered by the growing middle-class and increasing disposable incomes in Mexico. Widespread concerns over the safety of tap water could further drive growth in the country’s bottled water market in the coming future. Going by estimates of Beverage Marketing Corporation, Mexico has the highest per capita bottled water consumption in the world of about 69 gallons (260 liters). ^[2] However, according to a law introduced by Mexico city this year, restaurants will have to install filters in order to serve potable water to consumers, relegating usage of bottled water. As the country looks to fight water borne diseases and work on its safe drinking water problem, this could potentially pour over ambitions of big corporate companies which sell bottled water.

Sales of the company’s flagship drink Dr. Pepper registered a double-digit increase, while sales of the juice brand Clamato grew by 8% through September in Latin America. Mexico is a major consumer of soft drinks, especially fizzy drinks, with over 146 liters of CSDs consumed per person in 2012. In this respect, the country trails only the U.S., which has a massive per capita consumption rate of 165 liters. ^[3] Due to Mexico’s large appetite for soft drinks, Dr. Pepper’s Latin America division is expected to cap off another strong quarter. However, going forward, volumes might be affected by the recently imposed taxes on sugary drinks. In a bid to fight health problems, the Mexican government imposed a tax of one peso (~7.4 cents) on a liter of fizzy drinks late last year, which would raise prices of these drinks. The country has the highest obesity rate in the world at 32.8%, in addition to a high diabetes rate of 9%.

Soda Sales In North America Could Further Decline

As consumers slowly shifted from calorie fueled CSDs to healthier alternatives such as sports drinks, carbonated water, ready-to-drink (RTD) tea and even coconut water, Dr. Pepper’s North America CSD business saw a volume decline of 2% through September. What adds to the company’s woes is that sales of its low calorie TEN variants of core four brands (7-Up, A&W, Sunkist and Canada Dry) remained flat during this period. Safety concerns over usage of the artificial sweetener aspartame coupled with its bitter aftertaste severely hampered growth of diet soft drinks, which were the most under performing segment of the entire U.S. liquid refreshment beverage (LRB) market through the first three quarters. A continual decline in demand for both regular and diet CSDs might further impede growth in the North America CSD division for Dr. Pepper.

Going forward, the company might consider the possibility of using alternatives to aspartame that are considered safer. For example, Coca-Cola’s low calorie brand Coke Life, which is a success in Argentina, uses the artificial sweetener stevia. Dr. Pepper might follow suit and incorporate FDI certified stevia derivatives in its diet offerings, in the hope to spur demand for CSDs.

Small Brands Might Trigger Growth For Dr. Pepper In NCBs

While Dr. Pepper holds around 17% of the market share in CSDs in the U.S., it hardly has any strong brands in the NCB category. Most of the perceived healthier beverages and fastest growing segments of the U.S. LRB market fall under NCBs. This makes it imperative for Dr. Pepper to step up its portfolio in this category in order to maintain its share in the country’s overall LRB market. The company’s NCB volumes declined by 4% through September, with volumes of the juice brand Hawaiian Punch decreasing by nearly 10% amid health concerns over consumption of high calorie drinks.

The silver lining for Dr. Pepper is its national distribution agreements with some of the small but faster growing beverage companies. For example, the company has a distribution agreement with Bai 5, a coffee-fruit based low calorie drink, which grew by a whopping 400% to reach $20 million sales last year. ^[4] In addition, the company distributes Vita Coco, which is the market leader in the coconut water category. Although accounting for a very small portion of the beverage industry presently, sales of coconut water in the U.S. have doubled every year since 2004. ^[5] Vita Coco crossed a 100 million in sales in 2011, and continues to grow by leveraging Dr. Pepper’s scale and efficiency in direct store distribution.

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1. “Dr. Pepper Snapple 10-q“ [↩]
2. “It could happen: drinkable mexico city tap water“, January 2014, news.msn.com [↩]
3. “Health battle over soda flares in Mexico“, August 2013, wsj.com [↩]
4. “Dr. Pepper backed brand Bai 5 scores $20 m sales“, December 2013, beveragedaily.com [↩]
5. “Beverage wars move to coconuts“, February 11, 2012, wsj.com [↩]