The perpetual third behind Coca-Cola and PepsiCo in the U.S. carbonated soft drinks market, Dr Pepper Snapple had a solid 2016. Steady organic growth even in the declining segment of U.S. CSDs, coupled with a strong non-carbonated portfolio, has resulted in the company beating consensus estimates for five consecutive quarters now. Solid operating performance, leading to an increase in margins despite a decline in the top line, pushed up estimates for the full-year earnings for Dr Pepper. This occurred both after the announcement of Q2 results, and then again after the announcement of Q3 results. The company now expects full-year core EPS to be in the $4.32-$4.40 range, up from the updated estimate of $4.27-$4.35 after the second quarter results.
Dr Pepper Has Been Able To Grow Its CSD Volume
The U.S. CSD market is expected to have declined for the twelfth consecutive year in 2016. The per capita consumption was already down to 154 liters last year— the lowest since 1985. Now, Dr Pepper’s growth is heavily dependent on the U.S. CSD market, with around 82% of the company’s net volume in this category and ~90% of the company’s net revenue coming from the U.S. itself. Despite a portfolio heavily skewed towards a low-growth category, Dr Pepper has managed to grow its CSD volume in North America.
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Dr Pepper has managed to extract growth in this segment despite both the mature nature of the U.S. CSD market and strong market position of both Coca-Cola and PepsiCo, which together hold close to 70% of the market. Why Dr Pepper has managed to grow is also because of its relatively small market share. Dr Pepper is taking away share from other companies, especially PepsiCo, which has lost share continuously in the last few years. But mostly, Dr Pepper has been able to grow its revenue per case due to positive package and price mix, which has boosted its CSD revenue in North America, which formed 92% of the company’s net sales in 2015. Favorable package and price mix helped increase CSD sales by 2% in Q3, 2.5% in Q2 and 3% in Q1. Companies are moving to single-serves, which have higher price per unit, thus boosting the revenue per case. Although Coca-Cola and PepsiCo emphasized smaller packs before Dr Pepper did, the latter is catching up, and could continue to see growth in CSDs due to the expected rise in its revenue per unit volume. The company has closed approximately 98% voids on its regular smaller CSD packages.
Allied Brands Contribute Big To Dr Pepper’s Growth
Dr Pepper is deriving high volume growth from its allied brands, which although together form roughly 5% of the company’s net volume, form ~50% of the top-line growth. The allied brands growth is included in the packaged beverage volumes for Dr Pepper, which is the distribution wing for these small but fast growing brands, such as Bai 5, Vita Coco, etc. Certain allied brands are experiencing both double- and triple-digit growth rates partially as a result of Dr Pepper’s specific focus on allied brand distribution and availability. At the gross margin line, the allied brands tend to carry lower gross margin because they have somebody else’s manufacturing profit in there, but are good contributors to Dr Pepper’s operating profitability. Allied brands are an important factor of growth, and Dr Pepper has continued to strengthen this segment.
In 2016, Dr Pepper bought Bai Brands, maker of antioxidant and other health-oriented beverages, for $1.7 billion, strengthening its portfolio of fast-growing beverage segments and moving slightly away from the slower-growth CSD category. Dr Pepper has remained formidable during tough times in the core CSD category and is also growing strongly in the faster-growing beverage categories in the non-carbonated drinks segment, which seemingly puts the company in good stead for another solid year in 2017.