Dr Pepper Snapple Looks Beyond North America For Growth

Dr Pepper Snapple’s (NYSE:DPS) geographical reach has been very limited with more than 90% of its total revenues coming from North America. Moreover, the company’s beverage portfolio is highly geared towards sodas, with more than 70% of its revenues coming from carbonated drinks. This has been a major cause for distress among investors given that consumers in the North American region have been steadily moving away from fizzy drinks towards healthier options such as juices and sports drinks.

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Per capita consumption of soda in the US, for example, has declined from around 54 gallons per year in 1998 to 44 gallons today. ((“Water becomes America’s favorite drink again“, March 2013, USAToday.com)) The company’s volume sales for fizzy drinks fell by nearly 2% in 2012.

In this situation, there are only two clear growth avenues for DPS:

1. Expand its portfolio in non-carbonated beverages (NCB) to leverage the increasing consumer spend in this segment.

2. Head towards emerging markets where per capita consumption is still very low but increasing at a fairly steady pace.

The problem for DPS with the first option is the intense competition in NCBs in North America. With major players such as PepsiCo and Coca-Cola already boasting their impressive portfolios in the segment, it would be very difficult for DPS – a company best known for a handful of soda brands – to make inroads into this saturated market.

The second option is also lucrative, but intense competition exists here as well. Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) have been trying to work their way around declining consumption in developed markets by making huge investments in regions such as India, China and Brazil over the past few years. But more than competition, Dr Pepper’s plans for international expansion have been thwarted by its international licensing agreements that put distribution and sale of its most popular brands in the hands of other companies outside the US.

But Dr Pepper Snapple finally seems to be taking matters into its own hands. The company recently announced the repurchase of distribution rights for its beverages in the South Asia and Pacific regions from Mondelez International. ^[1] With this deal, DPS will now have the rights to distribute beverages such as  Mott’s, Yoo-hoo, Clamato and some other drinks in Australia as well as Snapple in Australia, China, Japan, South Korea and Malaysia.

Investors should definitely be cheering this deal as it sends a strong signal about the company’s intentions of stepping up its international game. The company will now go head-to-head with giants PepsiCo and Coca-Cola in these high-potential regions, something which will require a lot of marketing muscle. We expect the company’s ad spend to increase significantly because of this.

Meanwhile, we will also watch out for any developments around the company’s second possible growth strategy –  expansion of its NCB portfolio in North America.

We currently have a price estimate of $46 for Dr Pepper Snapple, which is around 5% above the current market price.

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1. “Dr Pepper Snapple buys back distribution rights in Asia-Pacific“, March 2013, Wall Street Journal [↩]