Bai To Drive Growth For Dr Pepper Snapple In The Future

by Trefis Team
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Dr Pepper Snapple
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While in the past Dr Pepper Snapple (NYSE:DPS) was considered to be a growth stock, this doesn’t seem to be the case anymore. Even though the share price has been up and down in 2017, the year-to-date performance has been relatively flat. This is despite the solid growth reported by the company in the second quarter, which was released towards the end of July. Reported net sales grew 6% on strong volume growth of 4%, helping to beat consensus estimates. However, the flat core earnings reported by the company missed expectations by 3 cents. The fall in the earnings was largely a result of the increase in marketing expenditure related to Bai Brands, but this factor was also the cause of an impressive performance of the brand in terms of sales. In this article, we’ll focus on this brand alone, and what impact it will have on the company in the future.

Tremendous Potential Of Bai

The acquisition of Bai Brands has boosted the company’s revenues, and in Q2 2017 the brand accounted for just over two percentage points of the net sales growth. Through the acquisition of this brand, the company aims to be the leader in the healthy beverages segment. As millennials move away from carbonated soft drinks, demand for healthier options is increasing, and Bai is likely to be the front-runner for DPS in terms of healthy beverage options. Moreover, from an ACV (all-commodities volume) standpoint, while there are still distribution opportunities for its enhanced water product, greater opportunities lie in other platforms, such as Bubbles, Super Tea, and Black. ACV is considered an insightful measure for soft drink companies, and can be generally thought of as “% of stores selling,” but with stores weighted based on their size, and hence, reflects the item’s exposure to consumer spending.

Bai is known for its disruption in the beverage industry and its entrepreneurial structure has allowed the company to innovate in the healthy beverage segment. Over the past two years, the brand introduced fruit based carbonated beverages and a better-for-you soda called Bai Black. These efforts are aimed towards introducing beverages which are healthier and appeal to customer tastes. The company is also re-launching antioxidant water, which is slated for the latter part of this year, which may drive further upside to the brand. With the founder of Bai recently leaving the business, it will be crucial for Dr Pepper Snapple to ensure that the innovations in this brand continue.

Another factor that may boost the sales of this brand is the imposition of soda taxes in a number of cities in the US. With the presence of antioxidant-infused fruit beverages in Bai’s portfolio, DPS will be in a better position than other beverage companies to tide over this storm.

Higher Than Anticipated Costs Associated With Bai

One factor that may be hampering the stock price performance of DPS could be the expected costs associated with Bai Brands. While disclosing the second quarter earnings, the company provided its updated full year guidance, which included net sales growth of 4.5%, higher than the 4% predicted earlier, 2 percentage points of which are anticipated to come from the acquisition of Bai Brands. Moreover, even currency headwinds are expected to negatively impact the earnings by 4 cents per share, instead of 7 cents. Despite these factors, the company decided not to revise its EPS guidance upwards from the $4.56 to $4.66 range. This is because the impact of Bai is expected to be $0.07 dilutive, instead of an estimation of $0.02 earlier, due to the increased marketing efforts for the brand.

The total marketing spend on Bai alone was $20 million in Q2, with another $16 million spent on other priority brands. Such heavy levels of investment into the brand can be expected in the remainder of the year as well, with the highest expenditure coming in the third quarter. The company has a huge opportunity to scale up this niche brand; however, this would involve significant investment in terms of marketing and getting consumers to try these products. These investments made now may sting the company in the short-term, but will bode well for the brand in the future.

See Our Complete Analysis For Dr Pepper Snapple

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dr Pepper Snapple

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