Decline In Soda Demand In The U.S. And Mexico To Weigh On Dr. Pepper’s First Quarter Results

Dr Pepper Snapple (NYSE:DPS) is scheduled to announce its Q1 results on April 23. The beverage maker primarily operates in North America, with the U.S. contributing 88% to the top line last year. ^[1] Unlike PepsiCo (NYSE:PEP) and The Coca-Cola Company (NYSE:KO), which can draw growth from untapped potential of the emerging markets, Dr. Pepper’s business depends majorly on the trends in the domestic market. The North America carbonated soft drinks (CSD) division constitutes almost three-fourths of the company’s valuation by our estimates. We expect volumes in the first quarter to be affected by headwinds in the domestic CSD market, particularly in the diet segment. Volumes of Dr. Pepper’s low calorie TEN lineup remained flat last year and continue to suffer low consumer demand due to safety concerns regarding artificial sweeteners. In addition to the U.S. and Canada, the company also operates in Mexico and the Caribbean, both of which constituted 8% of the net sales in 2013. Mexico is the world’s largest consumer of both CSDs and bottled water. However, the country has enacted laws and imposed certain taxes recently, which act against the interests of beverage companies in the region. We expect Dr. Pepper’s CSD volumes to decline in Mexico, following the soda tax law. Lack of strong brands in budding segments, such as sports drinks, energy drinks, and ready-to-drink (RTD) coffee, is also expected to hinder growth in still beverages for the company. However, Dr. Pepper might slightly gain from its distribution agreements with companies such as Vita Coco, Sunny Delight and Bai 5 this quarter.

We have a price estimate of $49.88 for Dr Pepper Snapple, which is around 5% lower than the current market price.

See Our Complete Analysis For Dr Pepper Snapple

Low Calorie Sodas Underperform For Dr. Pepper

Dr. Pepper improved its market share by a small 0.1% to 17.5% in the U.S. CSD market last year by our estimates, while volumes in the overall market declined 3.2% year-over-year. ((“The U.S. liquid refreshment beverage market remained flat in 2013“, March 2014, beveragemarketing.com)) However, despite an increase in value share, domestic volumes fell 2.5% for the company. This came as consumers continue to ditch sugary sodas for healthier beverage options. Diet versions of regular sodas meant to solve the high-sugar problem have in turn fared even worse. While a 12 ounce bottle of regular Dr. Pepper carries 150 calories, the Dr. Pepper TEN version provides only 10 calories, to cater to health conscious consumers. But the artificial sweetener aspartame, also used in the Dr. Pepper TEN lineup, is considered harmful and a possible trigger for sugar cravings, dehydration, weight gain and even heart diseases. Dollar sales of low calorie Dr. Pepper sodas have fallen by 9.6% in convenience stores and measured take-at-home channels in the four-week period ending March 15. ^[2] On the other hand, retail sales for regular sodas during the same period increased by only 0.3%, mainly due to higher pricing.

In a bid to bring consumers back to the diet soda category, Dr. Pepper had announced its plans earlier this year to introduce naturally-sweetened 60 calorie sodas in the domestic market this year. Although having six times as many calories as the TEN lineup, the company hopes that consumers might prefer naturally-sweetened sugary drinks, which still have less than half the calorie count of regular CSDs. However, Dr. Pepper is still to launch such a product in the U.S., and is expected to witness declining soda volumes till then.

New Laws In Mexico To Lower Dr. Pepper’s Sales

Mexico volumes for Dr. Pepper are expected to decline this quarter, hurt by the soda tax and new water laws. The country had imposed a one-peso-per-liter (around 7.7 cents) tax on sugary soft drinks, effective as of January this year. This imposed tax resulted in raising prices of CSDs. With more than half of the country’s population living below the national poverty line, a price rise dissuaded some price-sensitive customers from soft drink consumption. ^[3] Dr. Pepper expects a 7-8% volume decline in the country this year. ^[4]

On the other hand, Mexico city also imposed a water law earlier in January. According to this law, restaurants will have to install filters in order to serve potable water to consumers, relegating use of bottled water. Around 65,000 restaurants will have to install filters by mid-year so as to evade fines on non-compliance. As the country looks to fight widespread water-borne diseases and work on its safe drinking water problem, this move will decrease bottled water consumption in restaurants and could potentially hurt sales of big corporate companies that sell bottled water. Dr. Pepper’s Mexico volumes rose 3% year-over-year in 2013, bolstered by its booming bottled water portfolio. While the still mineral water brand Aguafiel grew by 6% in volumes in the country last year, the carbonated water brand Penafiel saw a double-digit percent rise in unit sales. However, the newly imposed water law is expected to negatively impact sales of Aguafiel and Penafiel in Mexico this quarter.

Non-Carbonated Volumes Could Continue To Decline

Dr. Pepper’s still beverages in North America form over one-fifths of the company’s valuation by our estimates. Volumes for this division declined by 2% last year on the back of disappointing performances by the core juice portfolio. Sales of the juice brand Hawaiian Punch fell by 9% year-over-year in 2013 due to lower promotional activities and ongoing criticism of high sugar juices. Juice volumes might decline again this quarter for Dr. Pepper, seeing how consumers are shifting to healthier and less-sugary beverages. In addition, Dr. Pepper has a small presence in growing segments such as energy drinks, sports drinks and RTD coffee. The only bright spot for Dr. Pepper is its national distribution agreements with some strong brands in budding non-carbonated beverage categories, which could drive growth for the company this quarter.

Dr. Pepper distributes Vita Coco, the leader by far in the coconut water category, exceeding annual sales of $200 million. 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. In addition, Dr. Pepper partnered Sunny Delight on the national launch of the carbonated flavored water brand Sparkling Fruit₂O late last year. The sparkling bottled water category witnessed over 30% year-over-year growth in retail sales to over $1 billion last year. These brands could continue to grow by leveraging Dr. Pepper’s scale and efficiency in direct store distribution, also adding incremental volumes for Dr. Pepper.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

1. “Dr. Pepper 10-k“ [↩]
2. “Energy drinks on fire, but diet soda still in a funk“, March 2014, foodnavigator-usa.com [↩]
3. “Poverty headcount ratio at national poverty line“, worldbank.com [↩]
4. “An ominous Dr. Pepper TEN“, April 2014, bevnet.com [↩]