Volume Growth And Favorable Mix Aid In Revenue Growth For Dr Pepper Snapple

by Trefis Team
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Dr Pepper Snapple (NYSE:DPS) and Keurig Green Moutain (which was private earlier) both posted an increase in sales in their final quarter as separate entities. The merger of the two companies was completed early in the third quarter, and consequently, Keurig Dr Pepper (NYSE: KDP), will post combined earnings from Q3 onward. DPS posted a 5% growth in sales, driven by a favorable mix, higher volumes, and a modest increase in pricing. Although the operating income fell 3.5% in the quarter, as a result of commodity inflation, higher marketing costs, and increased logistics expenses, the adjusted diluted EPS was up 4%, benefiting from the reduction in the corporate tax rate, as expected.

We are in the process of updating our model to reflect the financials of the merged entity.

Factors That May Impact Future Performance

1. Popularity of Ginger Ale: Canada Dry had a 9% gain in volumes in the second quarter due to steady growth in the ginger ale category and product innovation. The increasing popularity of ginger ale has been driven by millennials, as they look for more authentic, quality beverages having natural flavors. Ginger beverages have been gaining traction in many markets around the world, with demand growing strongly at a 32% year over year growth rate across the U.S., U.K., Spain, and Mexico.  Ginger, a sought-after flavor, was also ranked in the top 10 in Google’s 2017 Beverage Report. This segment is expected to continue its strong growth in the remainder of the financial year.

2. Potential of Bai Brands: Bai Brands has tremendous potential to grow and drive KDP’s revenues going forward. As millennials move away from carbonated soft drinks, demand for healthier options is increasing, and Bai is likely to be the front-runner for KDP 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. In the quarter, Bai volumes increased 22% driven by distribution gains, product innovation, and promotional activity, as well as higher sales to third party bottlers in the Latin America Beverages segment.

3. Reduction in Effective Tax Rate: The lowering of the corporate tax rate from 35% to 21% in the U.S., effective January 1, 2018, positively impacted the company. Consequently, the effective tax rate for the second quarter of this year was 26.1%, as compared to 33.3% in Q2 2017. This trend is expected to benefit the results of the full financial year.

4. Merger Synergies: KDP expects merger-related synergies totaling $600 million over the 2019-2021 period, with $200 million in savings expected per year. This will help in the combined company meeting its adjusted diluted EPS target of $1.02 to $1.07 for the full year.

5. Growth Potential: JAB Holdings, Keurig’s owner, has acquired a number of coffee brands, such as Jacobs, Peets, Caribou, and Keurig. It has also scooped up Krispy Kreme Doughnuts, Panera Bread, Au Bon Pain, among other food and beverage companies. However, being able to deliver these products to places where the consumers shop requires a massive distribution network, and this is where Dr Pepper Snapple will come in. Furthermore, this deal, the biggest in the soft drinks space, would also result in a hot and cold drinks combination, with immense scale for both. DPS, meanwhile, will benefit from Keurig’s e-commerce capabilities. JAB also has experience in the past of acquiring small brands, and ensuring their fast growth rates continue, an aspect DPS has clearly been struggling with for Bai.

6. Fiji Exit: Premium bottled water brand, Fiji Water, discontinued its distribution agreement with DPS, effective October 2018, in order to provide a better in-store experience for its customers, and to be more responsive to their demands, given the growth in e-commerce and omnichannel retail. As per BevNET, Fiji VP of Marketing Clarence Chia said this is a “direct result” of the DPS-Keurig merger. This move gives rise to speculation that more exits could follow, particularly with rumors going around that Body Armor, another DPS allied brand, could be on the market, with Coca-Cola a possible suitor.

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