These Are The Two Key Growth Drivers For Dr. Pepper Snapple

Dr Pepper Snapple (NYSE:DPS) is well poised for solid growth in 2016, as it continues to focus on smaller packages which command higher price per volume. The company reported strong performance in Q2 2016 and raised its EPS guidance for the rest of the year. (Read Dr. Pepper Raised EPS Guidance On Solid Q2 Results.) Despite its heavy dependence on carbonated soft drinks, Dr. Pepper Snapple has been able to maintain revenues from this segment. Over the longer term, the company’s growth will be driven by both a favorable package and price mix for its CSDs and by the strength of its allied brands, which are small but fast growing.

See Our Complete Analysis For Dr Pepper Snapple

Positive Package And Price Mix

The U.S. Carbonated Soft Drinks (CSD) market is experiencing a decline as consumers favor more healthy beverages. While the top two players in this market, Coca Cola and Pepsi Co., are focusing on alternative “healthier”  beverages, Dr. Pepper Snapple has been able to grow its revenue in this segment through changes in pricing and packaging. Its strategy is to attract the health conscious consumers by focusing on smaller sizes and slim cans to maintain a balance of health and taste.  And it is paying off. Downsizing portions is attracting consumers as they see them as a way to reduce their soda consumption and thus a healthier option. The company is able to charge more per ounce for these packages, impacting profitability positively. Dr. Pepper Snapple is heavily dependent on soda volumes for its revenues since it does not have a significant presence outside the U.S. where future growth in CSD is more more likely. According to our estimates, the North American carbonated soft drinks segment accounts for nearly 70% of the company’s valuation and we expect its market share to remain steady at around 20% over our forecast period.

However, as the North American CSD Market declines over our forecast period,  Dr. Pepper Snapple is likely to experience a decline in revenues from this segment,  despite its steady market share. In order to maintain its soda revenues and even grow, the company will need to develop innovative techniques such as promoting smaller, healthier soda options.

Allied Brands Supporting Growth In Non-Carbonated Beverages

Allied brands allow Dr Pepper to leverage its large scale distribution network and participate in growing emerging categories where it doesn’t have a considerable presence as of now. The company is deriving high volume growth from its allied brands and we expect this growth to continue in future. With more cash in hand, Dr. Pepper might look to invest in other smaller brands with growth potential. The company currently distributes small but fast growing brands such as Vita Coco and Bai 5. We believe a strong distribution network is a significant asset for the company.  Its ability to leverage this network can be a key growth driver over the long term. While margins from this segment are lower, since they are manufactured by other players, Dr. Pepper Snapple has been able to grow revenues in this segment.  We believe that, as growth in the CSD segment slows allied brands can provide the necessary boost to the company and drive revenues over the longer term.

Editor’s Note : We care deeply about your inputs, and want to ensure our content is increasingly more useful to you. Please let us know what/why you liked or disliked in this article, and importantly alternative analyses you want to see. Drop us a line at content@trefis.com

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research