PLANO, Texas -- More than a year into its separation from Cadbury PLC, soft-drink maker Dr Pepper Snapple Group Inc. is coming into its own, according to a Wall Street Journal report. The maker of the eponymous soda has gained market share in the carbonated-soft-drink (CSD) industry even as overall soft-drink sales have fallen.
The company also issued its first dividend recently and entered into a long-awaited distribution agreement with PepsiCo Inc. this month.
A May 2008 spinoff from Cadbury, the company turned independent as the U.S. slid into a recession. [image-nocss] But that independence also helped it reinvest more of its profits into its own brands, the company said, launching such products as Dr Pepper Cherry and boosting marketing.
"Previously, much of our profits were shipped across the pond to help a candy outlet that was based there," CEO Larry Young said at the recent Beverage Digest conference, according to the newspaper report.
As a subsidiary, Dr Pepper Snapple saw its marketing budget drop for several years, but since gaining its independence, it has been boosting its ad spending, marketing chief Jim Trebilcock told the newspaper. The company, for instance, relaunched advertising for Canada Dry for the first time after nearly a decade this year, he said, a move that helped drive higher volumes for the brand this year.
With a market capitalization of roughly $7 billion, Dr Pepper Snapple is much smaller than competitor Coca-Cola's $135 billion and PepsiCo's $94 billion. In 2008, the most recent full year of data from trade publication Beverage Digest, Dr Pepper Snapple's market share of the U.S. carbonated-soft-drink market rose 0.3 percentage point to 15.3%, even as Coca-Cola and PepsiCo saw slight share declines to about 42.7% and 30.8%, respectively.
Dr Pepper Snapple, Plano, Texas, trades at about 14 times expected 2009 earnings, still relatively cheaper than Coca-Cola's 19 times and PepsiCo's 16 times.
At the heart of Dr Pepper Snapple's market-share gains has been the popularity of its flavored carbonated drinks like Dr Pepper, which have held up better than the overall soft drink market.
"Their volumes look very good compared to the rest of the industry," said Esther Kwon, an analyst at Standard & Poor's. "The flavored drinks haven't been declining as much."
The beverage company has its share of challenges. Sales of its premium, and key, Snapple brand have been under pressure as consumers have slashed spending, the Journal said. In an effort to boost that brand, the company is trying new Snapple offerings, such as a cheaper version that sells in a can for 79 cents.
Now, a new deal with PepsiCo for distribution of such brands as Crush, will play a key role in the company's sales, the newspaper stated. Under the deal, PepsiCo will pay Dr Pepper $900 million to license some soft drinks like Crush in the United States. To be sure, even the $900 million payment fell short of what some analysts had been expecting PepsiCo to shell out. But the agreement helped remove uncertainty about the distribution of those brands.
ConsumerEdge Research analyst Bill Pecoriello said the deal will help the company reduce its debt and ultimately its interest expense. Pecoriello has a $34 price target on the stock, which was recently trading at about $28.
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