Dr. Pepper Pre-Earnings: Snapple to Boost Non-Sparkling Volumes, Mexico Sales Could Grow

DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) is scheduled to announce its Q2 results on July 24. Continued headwinds in the carbonated soft drinks (CSD) category are expected to drag down North American volumes for the beverage manufacturer again this quarter. The Texas based company depends on domestic sales more than its chief competitors The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), which together accounted for over 71% of the net volumes in the U.S. CSD market in 2013. This is because Dr. Pepper primarily operates in North America, with the U.S. contributing 88% to the top line last year, whereas both Coca-Cola and PepsiCo sell beverages in almost every part of the world. The North America CSD division constitutes almost 70% of Dr. Pepper’s valuation by our estimates. While both Coca-Cola and PepsiCo’s CSD volumes in North America fell 1% in Q1, Dr. Pepper’s CSD volumes in the region also fell 1% during this period, reaffirming the trend of contracting soda sales in the domestic market. Dr. Pepper’s North America soda volumes are expected to decline again this quarter.

On the other hand, while overall non-CSD volumes continue to rise in North America, Dr. Pepper has been losing share in this market due to the absence of strong brands in some of the fastest growing non-sparkling categories such as sports drinks, energy drinks and bottled water. However, strong sales for the popular ready-to-drink (RTD) tea brand Snapple might slightly offset the expected volume decline in the rest of Dr. Pepper’s still beverage lineup this quarter. The company could also gain from its distribution agreements with companies such as Vita Coco, Sunny Delight and Bai 5.

We have a price estimate of $54.23 for Dr Pepper Snapple, which is around 8% lower than the current market price.

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See Our Complete Analysis For Dr Pepper Snapple

Snapple Growth Might Offset Decline in Other Non-Sparkling Beverages

  • Dr. Pepper’s Still Beverage Volumes Could Fall

As consumers look to avoid the sugar and calorie-fueled carbonated drinks, volumes for healthier non-carbonated beverage segments such as sports drinks, bottled water, natural juices and RTD tea have been rising. Growth in still beverages has bolstered overall volume growth for companies, amid decline in carbonates. However, while still beverage volumes for both Coca-Cola and PepsiCo rose 3% and 2% respectively in the first quarter in North America, Dr. Pepper’s non-carbonated beverage (NCB) bottler case sales in the region fell 2% year-over-year. [1] [2] Following three consecutive years of contracting unit sales, the company’s juice brand Hawaiian Punch reported another 8% decline in volumes in Q1. Hawaiian Punch could continue to record low sales this quarter as consumers shift from high-calorie juices to organic all-natural and healthier beverages, and also due to lower promotional activities centered on the juice brand.

  • Snapple to Continue to Record Volumes Gains

Growth in Dr. Pepper’s North America NCB division is expected to come from the flagship RTD tea brand Snapple. While the company’s NCB segment declined 2% in 2013, Snapple’s volumes rose 2%. [3] This trend continued through the first quarter this year, with Snapple volumes rising 3%, despite the overall category suffering 2% volume-contraction. [4] Snapple was one of the first few established RTD tea brands in the U.S., along with the Arizona and Lipton tea brands. These three brands own the top eight highest selling RTD tea brands among them, with Lipton and Arizona accounting for 19% and 16% of the value share in this segment respectively. [5] Snapple and Diet Snapple together hold a market share of 8% with sales of over $400 million last year. While Lipton and Arizona together have been able to grab a significant chunk of the RTD tea segment owing to a wide variety of products and lower prices, Snapple has positioned itself as a premium tea brand.

RTD tea is one of the fastest growing segments of the U.S. beverage industry. Apart from acting as an alternative to sodas, tea is a convenient and healthier hydrant containing antioxidants that boost metabolism. Due to the growing demand for iced tea as a healthier refreshment drink, coupled with low current penetration levels, the U.S. RTD tea segment is expected to generate sales of $5.3 billion in 2014, up from $5.1 billion last year, and grow at a CAGR of over 6% till 2018. [6] Rising demand for RTD tea could also translate into higher Snapple volumes and consequently higher still beverage sales for Dr. Pepper this quarter.

  • Dr. Pepper’s Distribution Deals Could Uplift Volumes

Dr. Pepper distributes Vita Coco, the leader by far in the coconut water category, with annual sales of around $250 million in 2013. 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 this quarter.

Mexico Sales to Rise Due to Increase in Average Prices

Mexico is the world’s largest CSD consumer, and also the world’s fattest country. In fact, around 32.8% of the country’s population is obese. [7] In a bid to address growing health and wellness concerns, the country had imposed a soda tax of one peso (~8 cents) on one liter of sugary drinks, effective as of January 1. As over half of Mexico’s population lives below the national poverty line, price-sensitive customers could have been dissuaded from soft drink consumption. However, Dr. Pepper managed to carry its Mexican growth momentum seen in previous years into the first quarter, with volumes in the country rising 2%, beating analyst estimates. In contrast, both Coca-Cola and PepsiCo had reported lower year-over-year beverage volumes in Mexico, hurt by lowered demand for sodas.

Why Mexico is particularly important to Dr. Pepper is because around 8% of the company’s volumes come from the country. Around three-fourths of the company’s beverage portfolio in Mexico is subject to the soda tax. The tax has on an average made soda more expensive by around 8%. Dr. Pepper witnessed an 8-10% fall in demand for sugary sodas in the first three months since the soda tax was imposed, but a 9% rise in net pricing offset this decline. In addition, the still beverage lineup continued to record growth in Mexico, with the mineral water brand Penafiel undergoing a double-digit percent rise in volumes, and the newly launched naturally sweetened Mott’s juices with 40% less sugar also growing by 5% through March. Dr. Pepper managed to improve its organic revenues in Latin America by 17% in Q1, and could continue to post strong sales growth in the region this quarter, on the back of increased net pricing of sugary sodas and high sales of Penafiel, Mott’s and other still beverages. However, sales might also be somewhat hurt by the fall in demand for CSDs, as seen for both Coca-Cola and PepsiCo in Q1.

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Notes:
  1. Coca-Cola 10-q []
  2. PepsiCo 10-q []
  3. Dr. Pepper 10-k []
  4. Dr. Pepper 10-q []
  5. Sales of RTD tea brands in the U.S., statista.com []
  6. RTD tea production in the US“, January 2014, prweb.com []
  7. You really surpassed Mexico to U.S. obese adults?“, bbc.co.uk []