Sports Drink Wars In The U.S. To Get Exciting?

In the last five years, while the U.S. carbonated soft drinks (CSD) segment has been contracting, the overall liquid refreshment beverage (LRB) market has been growing. Consumers aren’t drinking less fluids, they are just not drinking sugary sodas as much anymore. So where is the growth coming from?

Segments such as bottled water, sports drinks, energy drinks, and ready-to-drink teas and coffees, have grown their share of the U.S. LRB market over the last few years. While CSDs still account for a hefty 41% of the overall market, this percentage share is down from 47% five years ago. Bottled water is the second largest segment, accounting for approximately 35% of the net beverage volumes sold in the country. But there are other segments too, such as sports drinks, that although constitute a small percentage of the overall volumes at present, are witnessing solid growth — growth that is lucrative enough to attract large beverage manufacturers. And now, Dr Pepper Snapple (NYSE:DPS) is upping its sports drinks game.

We have a price estimate of $80 for Dr Pepper Snapple, which is roughly in line with the current market price.

See Our Complete Analysis For Dr Pepper Snapple

Dr Pepper has bought an 11.7% stake in BodyArmor, a sports drink startup, for $20 million. BodyArmor is headed by Mike Repole, the co-founder of Energy Brands Inc., maker of Vitaminwater and Smartwater, which was later sold for $4.1 billion to Coca-Cola in 2007. Vitaminwater and Smartwater have been successful premium water brands for Coca-Cola, with combined retail sales of over $1.2 billion in the 52 weeks ended May 17. ^[1] BodyArmor too has done well, with $30 million in retail sales in 2014, and a growth of 180% in sales this year through August. Perhaps Mr.Repole has a knack of building brands that could be potential winners?

Dr Pepper has already been distributing BodyArmor since 2013, but the drink could grow further now, leveraging Dr Pepper’s distribution channels. What are its selling points? Firstly, it is a sports drink. Sports drinks are marketed as thirst quenchers which are substitutes for water. The difference is that these drinks have additional minerals and electrolytes, which argue how consumers need more than just water to meet their hydration needs. This market worth $6.81 billion has grown at a CAGR of 3.8% in the last five years. In comparison, the U.S. LRB market has grown at an average of only approximately 1%.

Secondly, the drink has the potential to take away share from its much larger rivals, Gatorade and Powerade, owned by PepsiCo and Coca-Cola respectively. Gatorade has a mammoth 77% share, whereas Powerade has 20% of this market. BodyArmor is made with potassium-packed electrolytes, vitamins, and coconut water, but doesn’t use artificial colors like Gatorade or high-fructose corn syrup as a sweetener like Powerade, which is why it is marketed as more natural. ^[2] With renowned personalities such as NBA Star Kobe Bryant backing BodyArmor, and increased reach and availability, the drink might be able to take some of the share away from Gatorade and Powerade, and grow not only by virtue of growth in sports drinks as a segment, but also due to a rising market share.

Sports drinks account for around 4.6% of the U.S. LRB market volumes, according to our estimates, and with more and more consumers looking for alternatives to their sugary calorie-filled sodas, this segment is expected to continue expanding. 80% of Dr Pepper’s net volumes are CSDs, and with sodas continuing to lose favor with customers, the company has looked to diversify its non-carbonated portfolio to keep growing.

While both Coca-Cola and PepsiCo have looked to derive growth from their non-carbonated drinks portfolio in the absence of strong CSD growth, Dr Pepper had somewhat struggled to do so in the past, because of the absence of strong Dr Pepper brands in some of the fastest growing segments of the non-sparkling beverage category, such as energy drinks, sports drinks, and bottled water. Non-carbonated beverage volume declined 1% for the company in 2014, mainly as the letdowns in this segment in the first half offset the stronger performance in the latter half. However, the non-carbonated segment is poised to grow this year, after growing by an impressive 5% in Q1, and 3% in Q2, on the back of strong sales for the ready-to-drink tea brand Snapple, and Hawaiian Punch, which has returned to growth this year following consecutive quarters of large declines.

Growth in the sports drinks segment cannot be ignored, and although Dr Pepper might not acquire BodyArmor, considering its history with only tying up with brands such as Bai5 and Vita Coco for distribution, the potential growth of BodyArmor is expected to increase sales of packaged beverages for Dr Pepper going forward. BodyArmor might be a small brand compared to the likes of Gatorade, which, in fact, is the sixth largest beverage trademark in the U.S., but it could be a worthy competitor. Gatorade and Powerade together form 97% of the segment sales, as aforementioned, so the brands obviously have more to lose.

BodyArmor might not contribute significant revenues to Dr Pepper’s top line just yet, but it could cut into the shares of its larger rivals in time, and shake-up the U.S. sports drinks market.

See the links below for more information and analysis:

• Rising on domestic growth, Dr Pepper’s first half has been solid
• PepsiCo earnings review: snacks and beverages make a good marriage?
• Bottled water is a potential growth category that can’t be ignored
• Soda makers wonder: where could growth in U.S. come from?
• The strong dollar is weighing down these large beverage companies
• Trefis analysis: Dr Pepper North America CSD Revenues
• Trefis analysis: PepsiCo Soft Drink Revenues
• Trefis analysis: Coca-Cola Revenues

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1. Sales of leading still bottled water brands in the U.S., statista.com [↩]
2. Dr Pepper buys stake in Gatorade rival BodyArmor, wsj.com [↩]