13 May 2008 - The Dr Pepper Snapple Group (DPS), the former beverage business of Cadbury Schweppes that formally separated from it on May 7, enjoys many strengths but it faces an exceptionally tricky competitive environment.
DPS has some definite advantages. It is a sizeable company with $5.7 billion in sales and strong cash flow. It has established brands in both the carbonated soft drink (CSD) and non-carbonated beverage categories. This puts it in the unique position of participating in markets for both concentrates and finished products. Moreover, it distinguishes itself from Coca-Cola and PepsiCo by possessing a network of bottlers that effectively gives it control of 75% of its route to market. This integration allows it to offer big-box retailers like Wal-Mart direct shipping, which can translate into more shelf-space in a critical distribution channel. With 15% of U.S. CSD market, the company has a brand roster consisting of diverse popular flavored brands, and such non-colas have generally outperformed colas in recent years. Moreover, the Snapple brand has revived with the successful introduction of new high-end teas.
However, DPS confronts several challenges. On the concentrate side, CSDs represent a declining category, and contractions do not appear to be abating. While non-colas and diets had previously been performing more strongly than regular CSDs and colas, this was not the case in the first quarter of 2008. Consequently, the flavored CSD lineup that gave it a leg up preceding the spin-off cannot be counted on for growth in the future. With regard to the bottling business, the company is losing in-demand brands such as Glaceau and Monster when companies like Coca-Cola and Anheuser-Busch acquire them or strike distribution deals with their owners. Unprecedented input costs relating to all aspects of manufacturing operations, including HFCS, PET, aluminum and fuel, as well as slowdowns in CSD volume growth give cause for concern. Further, it remains to be seen if the revitalization of Snapple will prove to be sustainable. Moreover, some of its other non-carbs, such as Motts, participate in intensely competitive categories, or, like Clamato, are strong but relatively small.
Moving against these headwinds, DPS remains poised for growth, albeit possibly not as strong as in the period prior to the demerger. Growth in todays marketplace requires both successful innovation and strong marketing. The company has done well with marketing in the past, but has not been especially innovative in an arena where newer beverage styles like sports beverages, energy drinks and enhanced waters have given rivals competitive edges.