Dr. Pepper Might Also Look To Enter The At-Home Carbonation Market

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) is the third largest carbonated soft drinks (CSD) manufacturer in the U.S., behind The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), both of which account for over 70% sales in this category. However, unlike its competitors, the highs and lows of the beverage industry in the domestic market are more significant for Dr. Pepper’s business. The company generated over two-third of its revenues from sodas in the U.S. in 2013. In addition, Dr. Pepper operates only in North America, Mexico and the Caribbean, without having any immediate international expansion plans. In contrast, only one-fifth of Coca-Cola’s revenues were contributed by domestic fizzy drinks last year by our estimates. Coca-Cola is also a strong global brand, and its international sales could possibly offset slow domestic CSD demand. On the other hand, PepsiCo has its booming snacks division, which contributes more than half to its top line. The company also expects two-thirds of its revenue growth to come from the snacks market (division wise) and emerging economies (geography wise) in 2014.

With both the beverage giants, Coca-Cola and PepsiCo, welcoming at-home carbonation systems as an additional platform for soft drink consumption, Dr. Pepper will also aim to join forces with soda system manufacturers and distribute its CSDs. We have a price estimate of $49.88 for Dr Pepper Snapple, which is around 7% lower than the current market price.

See Our Complete Analysis For Dr Pepper Snapple

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According to Dr. Pepper, the company is deciphering ways to gain from the at-home carbonation market, while protecting the interests of its bottling partners. [1] Around 63% of its flagship Dr. Pepper volumes are distributed by bottlers affiliated with Coca-Cola and PepsiCo. Both these companies constituted nearly half of Dr. Pepper’s beverage concentrate sales in 2013. [2] While sales for Dr. Pepper’s packaged beverage segment decreased last year, the concentrates segment witnessed a small rise in sales. The beverage maker might look to substitute ailing soda sales by increasing consumption rates of avid customers with in-home soft drink preparation machines.

Dr. Pepper Already Sells Snapple With Keurig Systems

Perceived health benefits of tea and health concerns regarding sugary sodas have caused a rise in ready-to-drink (RTD) tea sales. The RTD tea market is expected to generate $5.3 billion this year, up 3.3% year-on-year, and is further estimated to grow at a healthy CAGR of 6.1% till 2018. [3] Dr. Pepper is one of four major manufacturers of RTD tea in the domestic market, along with Arizona Beverage Company (Arizona RTD), Unilever (Lipton), and Nestle (Nestea). In order to further sales of its flagship Snapple RTD brand, Dr. Pepper partnered with Keurig Green Mountain (NASDAQ:GMCR) last year to sell Snapple premium iced teas in K-Cups and Vue packs compatible with Keurig single cup brewing systems. Green Mountain is now coming out with the Keurig Cold single-serve beverage system in its fiscal 2015, which starts later this year. Coca-Cola bought 10% stake in Keurig Green Mountain this year, and will introduce its soft drink portfolio with the Keurig Cold System. Seeing how Dr. Pepper already has a partnership deal with Keurig brewers with respect to Snapple, the former might look to collaborate with the Keurig Cold System to distribute its CSD offerings as well. The company could also look to partner other soda system makers such as SodaStream and Bevyz, which already has PepsiCo as a partner brand.

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Notes:
  1. Dr. Pepper earnings transcript“ []
  2. Dr. Pepper 10-K“ []
  3. RTD tea production in the US industry“, January 2014, prweb.com []