Dr Pepper Snapple Group Case
Dr. Pepper Snapple Group Case Study
Financial Management
Derks, V (3997979). Doyle, D (4137531) & Ichev, R (4111443).
Commissioned by the University of Utrecht.
Introduction
Originating to as early as 1880, Dr Pepper has become one of the most famous producers of carbonated drinks around the world. On May 7, 2008 the brand was spun-off from its parent company, Cadbury Schweppes Americas Beverages, or CSAB. The company was split into two with Dr. Pepper Snapple Group controlling its beverages operations and Cadbury Plc controlling the confectionary operations. To this day the company has undergone significant development with DPS now controlling over 50 brands of carbonated soft drinks, juices etc.
You are working as an analyst at a major …show more content…
investment company that held a portfolio of a million shares of the original parent company, Cadbury Schweppes American Beverages (CSAB), just before the spin-off occurred in 2008. The managing director of your department has asked you to come up with an assessment of whether or not holding the 1.000.000 shares of CSAB up until now, January 1, 2014 was the right thing to do. Based on your findings, prepare a report which:
Examines the performance of this portfolio over the last six years (since the spin off in May 2008), focusing in particular on how Dr Pepper Snapple Group has performed. It should also outline which companies the portfolio is now invested in as a result of spin offs, mergers and acquisitions.
Analyses the Dr Pepper Snapple Group company, focusing on the company’s products, competitors, industry and financials.
Provides a recommendation on whether the firm should continue to hold/sell or increase the number of Dr Pepper Snapple Group shares in its portfolio.
Also provide answers to the following sub questions:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
3. What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firm’s portfolio if the portfolio was left untouched? What is its annual return?
Background on the Company, Industry, and Competitors
In the very beginning Dr. Pepper has been recognized as an out of the ordinary, uncommon kind of taste, not known yet to the consumers. Nowadays, almost more than 130 years after the establishment, Dr Pepper’s CEO still emphasizes the uniqueness of the taste of the drink believing that it is not even comparable, not to cola, not to beer, or to any kind of fruit juice.
As stated in the introduction, originating since 1880s Dr Pepper Company started as manufacturer of soft drinks recognized by their unique flavor distinct from any other manufacturer across the globe. The formula for the drink was firstly created by the pharmacist Charles Alderton, in a drug store where he worked in Waco - Texas, who offered it to the storeowner Wade Morrison. Founding it to his liking, Morrison began offering the product, which as the American oldest soft drink became highly demanded by numerous fans. The drink was later renamed to “Dr. Pepper” after Dr Charles Pepper, Morrison’s friend. The full stop in the name was dropped later in the 1950s. One of the main events in the history of Dr Pepper is the merger with The 7 UP Company on May 19th 1986. Both companies were acquired by separate investment groups by an investment firm where all the participants would possess shares of the new company Dr Pepper/Seven Up Bottling Group. Dr Pepper/Seven Up was later purchased by Cadbury Schweppes (confectionary and soft drink company) on March 2nd 1995, after becoming insolvent. The debt of DPSU was paid, and Cadbury Schweppes become the largest soft drink company in the world not named after a cola beverage.
A new development came in 2000, when Cadbury Schweppes acquired the Snapple Beverage Group, or Snapple. Three years after this purchase, Schweppes combined its four North American beverage companies: Dr Pepper/Seven up, Snapple, Mott’s and Bebidas Mexico into the Cadbury Schweppes Americas Beverages, or CSAB. The company grew and by 2006, CSAB had a large bottling and distribution network, as well as a clear business strategy and management structure. In May 2008, under the direction of Larry Young, CSAB officially spun-off from Cadbury’s confectionary manufacturing division and became known as Dr Pepper/Snapple Group, Inc (NYSE=DPS).
The history of Dr Pepper is related to the portfolio of its parent company Dr Pepper Snapple Group. Dr Pepper Snapple Group, Inc. is a company that manufactures and distributes more than 50 brands of soft drinks, teas, waters and other beverages. Another drink name contained in the name of the group is Snapple, an apple soda developed 100 years later (1972). This company was demerged together with Dr. Pepper to create Dr. Pepper Snapple group. Despite the brands already mentioned, DPS represents 35 brands in the territory of the US, 23 brands in Canada and 11 in Mexico, including in the portfolio: 7UP, A&W, Orangina, Sun Drop, Canada Dry, Crush, Vernors, Clamato, Hawaiian Punch etc.
Figure . Dr. Pepper Snapple group.
Dr Pepper Snapple Group – The Company With more than 50 brands under its wings, the DPS Group is the leading producer of flavored beverages in the North America. DPS maintains a market share of over 40% in the non-cola carbonated soft drink category. Out of their products they have: 6 of the top 10 non-cola soft drinks, and 13 brands that are No. 1 or No. 2 in the world in their flavor categories. The vision of the company is to be the best beverage company in the Americas. To become synonym to refreshment, fun, and flavor within generations. The company focuses its strategies to reflect and build upon the position of leading beverage producer and constantly works on: ‘building and enhancing the leading brands, pursuing profitable channels, packages and categories, leveraging integrated business models, strengthening the route to the market and improving the operating efficiencies’ (DPS, 2014). DPS lays the results on the hard work of the employees and the actions taken by them to meet the needs of the customers. Luckily, the leaders and officers of the group are highly experienced professionals in the beverage industry.
As the spin-off is already mentioned, the success of the DPS is highly dependent on the operations and mergers of its parent company Cadbury Schweppes many decades ago. Since the establishment in 1969 and the following three decades, Cadbury Schweppes gained the third largest share of the market in North America in the respected area with the acquisitions that occurred. Some of them include highly recognized beverage companies that are now included in the DPS portfolio. To strengthen the management structure, to improve the business strategies and to increase the focus on the US market, Cadbury Schweppes combined its four North American beverage companies: Dr Pepper/Seven Up, Snapple, Mott’s and Bebidas Mexico into Cadbury Schweppes Americas Beverages (CSAB) in 2003. Three years later this formation was officially spun off from the Cadbury division and became the DPS Group as an independent company.
Operations
Throughout the territories where it is present, DPS employs roughly 20,000 people in 24 production plants and more than 200 distribution centers. It is headquartered in Plano, Texas and almost all the beverage concentrates are produced in premises in St. Louis, Missouri. The business model includes approximately 40% volume distribution within the company owned direct-store-delivery, 40% through third-party distributors in the Coca-Cola, PepsiCo, and other independent bottler systems, and the rest is split between warehouse service and food distributors. Of main importance to the business model is the extensively integrated information system and network with its independently developed IT support and staff. All the focuses are put on improvement on excelling at delivering customer value, improving productivity and enhancing growth opportunities.
The industry
Since the demerging from Cadbury Schweppes DPS was going through three difficult economic years. Credit markets were frozen resulting from the recession, and this led to bizarre commodities prices. However, DPS achieved some growth in sales in 2010. Upgrading the company’s portfolio consistently by acquiring new small producers of soft drinks, which were already known to the consumers, fed by providing new products, packages and distribution, increased the sales volume for 10% in 2010. Increased cash flows were highly welcomed in the group. These opportunities of which the group was simply taking advantage of opened the possibility that DPS could actually prosper in an industry governed by two of the strongest brands on the world: Coca-Cola and PepsiCo. With the recession and the poor economic situation in the States the sales in the industry stoned forcing many companies to cut on marketing costs. Oppositely, DPS focused on aggressive marketing and advertising with increasing the marketing budget for its core brands and invested on brand developing and availability.
The industry where DPS competes, US beverage manufacture and bottling, includes around 3,000 companies made up of manufacturers, bottlers and distributers. The major products in this industry are carbonated soft drinks (colas and other flavors), bottled waters, juices, and syrups and mixes. Even though this is a large number of companies, revenues are condensed and generated by the three largest companies: Coca-Cola, PepsiCo and the Dr Pepper Snapple Group itself (and their subsidiaries). This concentration involves over 90% of the $70 billion annual revenues. The industry is highly sensitive and greatly influenced by economic factors and market trends within the consumers, hence all the companies must have developed strategies to respond to these changes. For example, the recession mentioned before caused discretionary (carbonated soft drinks are considered as discretionary items) spending to drop below 16%. On the other hand, the industry is affected by state in demographic, health concerns, preferences, seasonality (higher sales during summer and holidays) and lifestyle. The demand is increased for no calorie soft drinks, teas and flavored and functional waters (growth in 2013: bottled water-9%, ready-to-drink teas-24%, flavored and functional waters-71%). One of the most important parts in succession in the industry is the relationship with bottlers, distributors and retailers as the direct consumers. As DPS distributes almost more than two thirds through third party bottlers (in 2013 75% through Coca-Cola and PepsiCo bottlers), productive and strong relationships are essential for the strength and position of the DPS brand.
Competition
Coca Cola and Pepsi are the main competitors of the firm. The top managers within the company believe that the consumers are growing tired of cola drinks. As producers of non-cola flavored soft drinks, DPS possesses a different position in the industry and hence has a potential to gain market share over its rivals. Despite that, DPS is the third largest beverage producer and distributor after Coca-Cola and PepsiCo, which together have 63% of the sales in the industry. This can be a result that DPS is actually a newly established company on the American market (since the demerger in 2008) and has less resources than its competition. Also, one of the main problems is the fact that the company is hardly present on international markets. 89% of the DPS sales are concentrated in N. America, while Coca-Cola has 74% and PepsiCo-over than 40% outside N. America. Nevertheless, considering the strong brand recognition and differentiated flavor of the brands the DPS represents, it is an overwhelming struggle to compete with the world’s leader and most valuable brand Coca-Cola – owning 4 of world’s top 5 soft drinks (Coca-Cola, diet Coke, Fanta and Sprite) and succeeding in over 200 countries in the world. The gap from becoming the world leader for DPS mainly lies in international sales, technology development, marketing, level of meeting the customer needs, and organizational and operational programs that Coca-Cola and Pepsi developed through the years within their existence. Figure 1 illustrates these differences between the three companies more clearly.
Figure 2. Comparison of the Pepsi, Coca-Cola and Dr Pepper Snapple groups financials.
Spin Offs, Mergers and Acquisitions
On 7th May 2008, Cadbury Schweppes is spun off into Dr Pepper Snapple Group & Cadbury Plc. For every 1 share owned of Cadbury Schweppes, you receive .64 shares of Cadbury Plc and .12 shares of Dr Pepper Snapple Group
19th January 2010, Cadbury Plc is taken over by Kraft foods. For every 1 share of Cadbury Plc owned, you receive 500 pence in cash and 0.1874 shares of Kraft Foods.
4th August 2011, Kraft Foods is split into Mondelez International and Kraft Food Groups. For every 1 share owned of Kraft Foods, you receive 1 share of Mondelez International and .33 shares of Kraft Foods Group.
The Future?
The major future goals of the DPS Group are focused on environmental sustainability with goals set on fuel conservation, energy consumption, recycling, water conservation, resolved with innovative technological solutions and major investments. Furthermore, Dr Pepper continues to build customer value with offering taste of kind in an environment where the “taste is king”, and heavily invests in the products with developing strong marketing behind them. Turn to appendix 4 for an in-depth prediction of Dr. Pepper and its industry (Cooper, 2013).
Conclusion
Now that we have a clear image of the company, the industry and its competition we turn back to the research questions at hand. The information above provides you (the analyst) with sufficient data to come up with an overview of what would have happened to the 1.000.000 shares of CSAB owned by your company before the spin-off in 2008. Based on your findings and your own interpretation, put together a report that outlines how the portfolio has performed since the spin off, and whether or not Dr Pepper Snapple group is a good investment for the firm in the future. Feel free to make use of appendix 4 or websites such as www.bloomberg.com and Yahoo Finance to support your conclusion. To show your boss you have a deeper understanding of Dr. Pepper Snapple group, also provide answers to the following sub-questions:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
3. What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firm’s portfolio if the portfolio was left untouched? What is its annual return?
Teachers note
Sub-answers:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
Cadbury came under pressure from many investors to try to add value by separating the businesses. The credit market felt the total value would be higher after a spin-off. Cadbury management thought a sale of its beverage department would be an unlikely event, thus it had no other choice than spinning off part of its company.
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
Cadbury of course had the option to list Dr.Pepper Snapple Group on the London stock exchange. Due to the high sales rates in North America compared to the rest of the world, the NYSE was a more obvious choice.
3.What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
The mechanisms that will help in reflecting the position of the company can be : the capital structure of the company (the debt ratio maintained by the company), shares owned by insiders, shares repurchasing tender offers, retained earnings, dividend payment frequency, share price movement ( long and short term) and etc.
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firms portfolio if the portfolio was left untouched? What is its annual return?
The excel spreadsheet attached explains that before the spin off, the portfolio value is $519,505. On January 1st 2014, the current value of the portfolio is equal to $3,338,659 which gives the portfolio an annual return of 38.2%. If the firm had sold no shares, it would currently hold 120,000 shares of Dr Pepper Snapple Group, 119936 shares of Mondelez International and 39578 shares of Kraft Foods Groups, for a total value of $138,659. The firm receives a cash payout from the acquisition of Cadburys Plc by Kraft foods for a value of $3,200,000 (640000 shares multiplied by 500 pence per share), hence the abnormally large high annual return on the portfolio. Since the acquisition of Caburys Plc by Kraft Foods was largely a cash acquisition, all shareholders and stockholders were paid a large sum of money with the total takeover bid equaling over $19.6bn
Future Investment in Dr Pepper Snapple Group?
The firm currently holds 120,000 shares in Dr Pepper Snapple Group at 47.72 pence per share for a value of $57,264. Directly after the spin off, these shares were worth 25.18 pence per share. The annualized return on this stock is 11.94%, when taking into consideration dividend payments this amount climbs to 13.98%. In comparison, the average annual return for the stock market index (iShares NYSE 100 Index (ETF) during this same period was only 2.85% whilst the S&P 500 index was slightly higher at 5.9%, highlighting the extremely strong returns of the banks portfolio. This alone should signal to the analyst that the firm should be increasing the number of Dr Pepper Snapple Group shares it currently has in its portfolio, by using the $3,200,000 cash it received from the cash payout of the Kraft Foods acquisition. In addition, the analyst may mention the sound financials of the company as a reason for further future investment. For example, since the spin off, the company’s earnings have grown by 6 % per year. Moreover, the analyst could investigate the strengths of the companies products, where ‘about 75% of the company’s volume is generated from brands that are either number one or number two in their category with six of the top 10 non-cola soft drinks under its corporate umbrella .
Works Cited
Carnavale, C. (2013, October). In the Beverage Industry, Don 't Overlook Dr. Pepper Snapple Group. (Forbes, Producer) Retrieved from http://www.forbes.com/sites/chuckcarnevale/2013/10/25/dr-pepper-snapple-dont-overlook-this-beverage-contender/
The Economic TImes. (2010, Jan). Kraft wins over Cadbury with $19.6 bn offer. (S. Sen, Editor) Retrieved from http://articles.economictimes.indiatimes.com/2010-01-20/news/28452665_1_cadbury-shareholders-cadbury-board-irene-rosenfeld
Cooper, T. (2013, December). 3 Reasons Dr Pepper Snapple Group Will Narrow the Gap with Coca-Cola and PepsiCo in 2014.(The Motley Fool) Retrieved from http://www.fool.com/investing/general/2013/12/25/3-reasons-dr-pepper-snapple-group-will-narrow-the.aspx
Appendices
Appendix 1
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2012 and 2011
(in millions, except share and per share data) December 31, December 31, 2012 2011
Assets
Current assets: Cash and cash equivalents $ 366 $ 701 Accounts receivable: Trade, net 552 585 Other 50 50 Inventories 197 212 Deferred tax assets 66 96 Prepaid expenses and other current assets 104 113 Total current assets 1,335 1,757
Property, plant and equipment, net 1,202 1,152 Investments in unconsolidated subsidiaries 14 13 Goodwill 2,983 2,980 Other intangible assets, net 2,684 2,677 Other non-current assets 580 573 Non-current deferred tax assets 130 131 Total assets $ 8,928 $ 9,283
Liabilities and Stockholders ' Equity
Current liabilities: Accounts payable $ 283 $ 265 Deferred revenue 65 65 Current portion of long-term obligations 250 452 Income taxes payable 45 530 Other current liabilities 589 603 Total current liabilities 1,232 1,915 Long-term obligations 2,554 2,256 Non-current deferred tax liabilities 630
586 Non-current deferred revenue 1,386 1,449 Other non-current liabilities 846 814 Total liabilities 6,648 7,020
Commitments and contingencies
Stockholders ' equity: Preferred stock, $.01 par value, 15,000,000 shares authorized, no shares issued Common stock, $.01 par value, 800,000,000 shares authorized, 205,292,657 and 212,130,239 shares issued and outstanding for 2012 and 2011, respectively 2 2
Additional paid-in capital 1,308 1,631
Retained earnings 1,080 740
Accumulated other comprehensive loss (110) (110) Total stockholders ' equity 2,280 2,263 Total liabilities and stockholders ' equity $ 8,928 $ 9,283
Appendix 2
Appendix 3
3.1. 3.2.
3.3. Differences in interest (search volume): competition(reference it)
Appendix 4
By Ted Cooper |
December 25, 2013 |
3 Reasons Dr Pepper Snapple Group Will Narrow the Gap with Coca-Cola and PepsiCo in 2014
Dr Pepper Snapple Group (NYSE: DPS ) often gets short shrift from observers of the beverage industry. It is a distant third in the cola wars, with Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) combining for a 70% share of the market compared to Dr Pepper Snapple 's 17% share. However, the latter 's recent initiatives may enable it to close the gap in 2014.
Dr Pepper Snapple is gaining on Coca-Cola and PepsiCo
Carbonated soft drinks, or CSDs, have been linked to obesity and other unhealthy conditions. At issue is the copious amount of sugar and artificial sweeteners found in the drinks. This has resulted in weak CSD sales volume in 2013 and an uncertain future for the industry in the United States.
Dr Pepper Snapple, however, is convinced that its line of low-calorie beverages -- namely, TEN -- is the answer to the company 's woes. The TEN platform consists of 10-calorie versions of its most popular brands, including Dr Pepper, 7UP, and Sunkist. The drinks have the full flavor of the regular drinks and fewer calories.
Although TEN includes artificial sweeteners like high-fructose corn syrup and aspartame, it appeals to consumers that fled diet drinks because of their poor aftertaste. A little over half of TEN sales are made to consumers who used to drink diet soda but stopped. This suggests that the TEN platform is a noticeable improvement over traditional diet sodas and a possible avenue for market share growth.
PepsiCo, on the other hand, has struggled to retain its market share amid a challenging environment; its share of the CSD market fell from 31.1% in 2007 to 28.1% in 2012. Coca-Cola also lost market share over this period, falling from 42.8% to 42% according to Beverage Digest. Meanwhile, Dr Pepper Snapple 's market share grew from 15% in 2007 to 16.8% in 2012, although the bulk of those gains came in 2009.
Source: Beverage Digest
If the TEN platform can draw drinkers of Diet Coke, Diet Pepsi, and Diet Mountain Dew, then Dr Pepper Snapple is in position to narrow the gap between the company and its larger rivals.
Dr Pepper Snapple institutes Rapid Continuous Improvement
There is only so much Dr Pepper Snapple can do about its revenue, but it has significant control over its cost structure. In February 2011, the company began implementing a program called Rapid Continuous Improvement, or RCI. The point of the program is to streamline Dr Pepper Snapple 's operations and eliminate waste.
In addition to optimizing distribution logistics, RCI enhances inventory management by syncing production and distribution with customer traffic patterns. Customer traffic fluctuates in more-or-less predictable patterns throughout the month based on when people receive their paychecks and other factors. Traditionally, merchandisers had not accounted for these fluctuations, but now Dr Pepper Snapple is accounting for them. As a result of these efforts, the company has tuned production to a level where it can meet demand without carrying excessive inventory.
Source: Morningstar, SEC Filings, author 's calculations
If RCI continues to increase efficiencies at Dr Pepper Snapple, the company will generate more free cash flow to support a more aggressive balance sheet.
Latin America and beyond present long-term growth opportunity
Coca-Cola and PepsiCo own global brands with worldwide distribution systems. Dr Pepper Snapple, on the other hand, has only dipped its toe into international waters. The company 's Latin America segment represented just 7.6% of its overall sales through the first three quarters of 2013, but that was up from 6.9% in 2012.
The Latin America segment includes Mexico and parts of the Caribbean. It is fully integrated, meaning Dr Pepper Snapple manufactures, bottles, and distributes most of its products in the region. An integrated model can be advantageous once the distribution network reaches scale, but it is a capital-intensive endeavor that takes time to develop.
It cost $157 million to build the company 's two wholly owned bottling facilities in Mexico -- that is more than one-third of the segment 's total sales. After you add the distribution centers and fleet of delivery vehicles, it comes out to a lot of capital required to operate the system.
Despite the low returns on capital, Dr Pepper Snapple 's determination to build its own bottling and distribution system will help wean the company off of third-party distribution systems, namely those of Coca-Cola and PepsiCo. The two soft drink giants account for half of Dr Pepper Snapple 's net sales in the beverage concentrates segment, or about 10% of its total sales. The company also partners with local entrepreneurs that build the system outside of the company, reducing Dr Pepper Snapple 's capital outlay.
Regardless of how Dr Pepper Snapple chooses to expand, its brands have global potential similar to those of Coca-Cola and PepsiCo, so it has a long runway for growth beyond its current markets.
Bottom line
Dr Pepper Snapple is doing well in a poor environment. It will always play third wheel to Coca-Cola and PepsiCo, but product innovation, cost reductions, and future growth put the company on a path to narrow the gap.
Financial Management
Derks, V (3997979). Doyle, D (4137531) & Ichev, R (4111443).
Commissioned by the University of Utrecht.
Introduction
Originating to as early as 1880, Dr Pepper has become one of the most famous producers of carbonated drinks around the world. On May 7, 2008 the brand was spun-off from its parent company, Cadbury Schweppes Americas Beverages, or CSAB. The company was split into two with Dr. Pepper Snapple Group controlling its beverages operations and Cadbury Plc controlling the confectionary operations. To this day the company has undergone significant development with DPS now controlling over 50 brands of carbonated soft drinks, juices etc.
You are working as an analyst at a major …show more content…
investment company that held a portfolio of a million shares of the original parent company, Cadbury Schweppes American Beverages (CSAB), just before the spin-off occurred in 2008. The managing director of your department has asked you to come up with an assessment of whether or not holding the 1.000.000 shares of CSAB up until now, January 1, 2014 was the right thing to do. Based on your findings, prepare a report which:
Examines the performance of this portfolio over the last six years (since the spin off in May 2008), focusing in particular on how Dr Pepper Snapple Group has performed. It should also outline which companies the portfolio is now invested in as a result of spin offs, mergers and acquisitions.
Analyses the Dr Pepper Snapple Group company, focusing on the company’s products, competitors, industry and financials.
Provides a recommendation on whether the firm should continue to hold/sell or increase the number of Dr Pepper Snapple Group shares in its portfolio.
Also provide answers to the following sub questions:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
3. What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firm’s portfolio if the portfolio was left untouched? What is its annual return?
Background on the Company, Industry, and Competitors
In the very beginning Dr. Pepper has been recognized as an out of the ordinary, uncommon kind of taste, not known yet to the consumers. Nowadays, almost more than 130 years after the establishment, Dr Pepper’s CEO still emphasizes the uniqueness of the taste of the drink believing that it is not even comparable, not to cola, not to beer, or to any kind of fruit juice.
As stated in the introduction, originating since 1880s Dr Pepper Company started as manufacturer of soft drinks recognized by their unique flavor distinct from any other manufacturer across the globe. The formula for the drink was firstly created by the pharmacist Charles Alderton, in a drug store where he worked in Waco - Texas, who offered it to the storeowner Wade Morrison. Founding it to his liking, Morrison began offering the product, which as the American oldest soft drink became highly demanded by numerous fans. The drink was later renamed to “Dr. Pepper” after Dr Charles Pepper, Morrison’s friend. The full stop in the name was dropped later in the 1950s. One of the main events in the history of Dr Pepper is the merger with The 7 UP Company on May 19th 1986. Both companies were acquired by separate investment groups by an investment firm where all the participants would possess shares of the new company Dr Pepper/Seven Up Bottling Group. Dr Pepper/Seven Up was later purchased by Cadbury Schweppes (confectionary and soft drink company) on March 2nd 1995, after becoming insolvent. The debt of DPSU was paid, and Cadbury Schweppes become the largest soft drink company in the world not named after a cola beverage.
A new development came in 2000, when Cadbury Schweppes acquired the Snapple Beverage Group, or Snapple. Three years after this purchase, Schweppes combined its four North American beverage companies: Dr Pepper/Seven up, Snapple, Mott’s and Bebidas Mexico into the Cadbury Schweppes Americas Beverages, or CSAB. The company grew and by 2006, CSAB had a large bottling and distribution network, as well as a clear business strategy and management structure. In May 2008, under the direction of Larry Young, CSAB officially spun-off from Cadbury’s confectionary manufacturing division and became known as Dr Pepper/Snapple Group, Inc (NYSE=DPS).
The history of Dr Pepper is related to the portfolio of its parent company Dr Pepper Snapple Group. Dr Pepper Snapple Group, Inc. is a company that manufactures and distributes more than 50 brands of soft drinks, teas, waters and other beverages. Another drink name contained in the name of the group is Snapple, an apple soda developed 100 years later (1972). This company was demerged together with Dr. Pepper to create Dr. Pepper Snapple group. Despite the brands already mentioned, DPS represents 35 brands in the territory of the US, 23 brands in Canada and 11 in Mexico, including in the portfolio: 7UP, A&W, Orangina, Sun Drop, Canada Dry, Crush, Vernors, Clamato, Hawaiian Punch etc.
Figure . Dr. Pepper Snapple group.
Dr Pepper Snapple Group – The Company With more than 50 brands under its wings, the DPS Group is the leading producer of flavored beverages in the North America. DPS maintains a market share of over 40% in the non-cola carbonated soft drink category. Out of their products they have: 6 of the top 10 non-cola soft drinks, and 13 brands that are No. 1 or No. 2 in the world in their flavor categories. The vision of the company is to be the best beverage company in the Americas. To become synonym to refreshment, fun, and flavor within generations. The company focuses its strategies to reflect and build upon the position of leading beverage producer and constantly works on: ‘building and enhancing the leading brands, pursuing profitable channels, packages and categories, leveraging integrated business models, strengthening the route to the market and improving the operating efficiencies’ (DPS, 2014). DPS lays the results on the hard work of the employees and the actions taken by them to meet the needs of the customers. Luckily, the leaders and officers of the group are highly experienced professionals in the beverage industry.
As the spin-off is already mentioned, the success of the DPS is highly dependent on the operations and mergers of its parent company Cadbury Schweppes many decades ago. Since the establishment in 1969 and the following three decades, Cadbury Schweppes gained the third largest share of the market in North America in the respected area with the acquisitions that occurred. Some of them include highly recognized beverage companies that are now included in the DPS portfolio. To strengthen the management structure, to improve the business strategies and to increase the focus on the US market, Cadbury Schweppes combined its four North American beverage companies: Dr Pepper/Seven Up, Snapple, Mott’s and Bebidas Mexico into Cadbury Schweppes Americas Beverages (CSAB) in 2003. Three years later this formation was officially spun off from the Cadbury division and became the DPS Group as an independent company.
Operations
Throughout the territories where it is present, DPS employs roughly 20,000 people in 24 production plants and more than 200 distribution centers. It is headquartered in Plano, Texas and almost all the beverage concentrates are produced in premises in St. Louis, Missouri. The business model includes approximately 40% volume distribution within the company owned direct-store-delivery, 40% through third-party distributors in the Coca-Cola, PepsiCo, and other independent bottler systems, and the rest is split between warehouse service and food distributors. Of main importance to the business model is the extensively integrated information system and network with its independently developed IT support and staff. All the focuses are put on improvement on excelling at delivering customer value, improving productivity and enhancing growth opportunities.
The industry
Since the demerging from Cadbury Schweppes DPS was going through three difficult economic years. Credit markets were frozen resulting from the recession, and this led to bizarre commodities prices. However, DPS achieved some growth in sales in 2010. Upgrading the company’s portfolio consistently by acquiring new small producers of soft drinks, which were already known to the consumers, fed by providing new products, packages and distribution, increased the sales volume for 10% in 2010. Increased cash flows were highly welcomed in the group. These opportunities of which the group was simply taking advantage of opened the possibility that DPS could actually prosper in an industry governed by two of the strongest brands on the world: Coca-Cola and PepsiCo. With the recession and the poor economic situation in the States the sales in the industry stoned forcing many companies to cut on marketing costs. Oppositely, DPS focused on aggressive marketing and advertising with increasing the marketing budget for its core brands and invested on brand developing and availability.
The industry where DPS competes, US beverage manufacture and bottling, includes around 3,000 companies made up of manufacturers, bottlers and distributers. The major products in this industry are carbonated soft drinks (colas and other flavors), bottled waters, juices, and syrups and mixes. Even though this is a large number of companies, revenues are condensed and generated by the three largest companies: Coca-Cola, PepsiCo and the Dr Pepper Snapple Group itself (and their subsidiaries). This concentration involves over 90% of the $70 billion annual revenues. The industry is highly sensitive and greatly influenced by economic factors and market trends within the consumers, hence all the companies must have developed strategies to respond to these changes. For example, the recession mentioned before caused discretionary (carbonated soft drinks are considered as discretionary items) spending to drop below 16%. On the other hand, the industry is affected by state in demographic, health concerns, preferences, seasonality (higher sales during summer and holidays) and lifestyle. The demand is increased for no calorie soft drinks, teas and flavored and functional waters (growth in 2013: bottled water-9%, ready-to-drink teas-24%, flavored and functional waters-71%). One of the most important parts in succession in the industry is the relationship with bottlers, distributors and retailers as the direct consumers. As DPS distributes almost more than two thirds through third party bottlers (in 2013 75% through Coca-Cola and PepsiCo bottlers), productive and strong relationships are essential for the strength and position of the DPS brand.
Competition
Coca Cola and Pepsi are the main competitors of the firm. The top managers within the company believe that the consumers are growing tired of cola drinks. As producers of non-cola flavored soft drinks, DPS possesses a different position in the industry and hence has a potential to gain market share over its rivals. Despite that, DPS is the third largest beverage producer and distributor after Coca-Cola and PepsiCo, which together have 63% of the sales in the industry. This can be a result that DPS is actually a newly established company on the American market (since the demerger in 2008) and has less resources than its competition. Also, one of the main problems is the fact that the company is hardly present on international markets. 89% of the DPS sales are concentrated in N. America, while Coca-Cola has 74% and PepsiCo-over than 40% outside N. America. Nevertheless, considering the strong brand recognition and differentiated flavor of the brands the DPS represents, it is an overwhelming struggle to compete with the world’s leader and most valuable brand Coca-Cola – owning 4 of world’s top 5 soft drinks (Coca-Cola, diet Coke, Fanta and Sprite) and succeeding in over 200 countries in the world. The gap from becoming the world leader for DPS mainly lies in international sales, technology development, marketing, level of meeting the customer needs, and organizational and operational programs that Coca-Cola and Pepsi developed through the years within their existence. Figure 1 illustrates these differences between the three companies more clearly.
Figure 2. Comparison of the Pepsi, Coca-Cola and Dr Pepper Snapple groups financials.
Spin Offs, Mergers and Acquisitions
On 7th May 2008, Cadbury Schweppes is spun off into Dr Pepper Snapple Group & Cadbury Plc. For every 1 share owned of Cadbury Schweppes, you receive .64 shares of Cadbury Plc and .12 shares of Dr Pepper Snapple Group
19th January 2010, Cadbury Plc is taken over by Kraft foods. For every 1 share of Cadbury Plc owned, you receive 500 pence in cash and 0.1874 shares of Kraft Foods.
4th August 2011, Kraft Foods is split into Mondelez International and Kraft Food Groups. For every 1 share owned of Kraft Foods, you receive 1 share of Mondelez International and .33 shares of Kraft Foods Group.
The Future?
The major future goals of the DPS Group are focused on environmental sustainability with goals set on fuel conservation, energy consumption, recycling, water conservation, resolved with innovative technological solutions and major investments. Furthermore, Dr Pepper continues to build customer value with offering taste of kind in an environment where the “taste is king”, and heavily invests in the products with developing strong marketing behind them. Turn to appendix 4 for an in-depth prediction of Dr. Pepper and its industry (Cooper, 2013).
Conclusion
Now that we have a clear image of the company, the industry and its competition we turn back to the research questions at hand. The information above provides you (the analyst) with sufficient data to come up with an overview of what would have happened to the 1.000.000 shares of CSAB owned by your company before the spin-off in 2008. Based on your findings and your own interpretation, put together a report that outlines how the portfolio has performed since the spin off, and whether or not Dr Pepper Snapple group is a good investment for the firm in the future. Feel free to make use of appendix 4 or websites such as www.bloomberg.com and Yahoo Finance to support your conclusion. To show your boss you have a deeper understanding of Dr. Pepper Snapple group, also provide answers to the following sub-questions:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
3. What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firm’s portfolio if the portfolio was left untouched? What is its annual return?
Teachers note
Sub-answers:
1. Why did CSAB want to list Dr. Pepper Snapple Group as a separate company? So what were the motivations for the spin-off?
Cadbury came under pressure from many investors to try to add value by separating the businesses. The credit market felt the total value would be higher after a spin-off. Cadbury management thought a sale of its beverage department would be an unlikely event, thus it had no other choice than spinning off part of its company.
2. Which other listing options did CSAB have at that time, and why do you think they chose for this particular option?
Cadbury of course had the option to list Dr.Pepper Snapple Group on the London stock exchange. Due to the high sales rates in North America compared to the rest of the world, the NYSE was a more obvious choice.
3.What are the signaling mechanisms that will reflect the general performance before the spin-off and after the spin-off and will help for attracting and retaining investors?
The mechanisms that will help in reflecting the position of the company can be : the capital structure of the company (the debt ratio maintained by the company), shares owned by insiders, shares repurchasing tender offers, retained earnings, dividend payment frequency, share price movement ( long and short term) and etc.
4. Assuming your investment firm owned 1 million shares in Cadbury Schweppes just before the spinoff in May 2008, what is the current value of the firms portfolio if the portfolio was left untouched? What is its annual return?
The excel spreadsheet attached explains that before the spin off, the portfolio value is $519,505. On January 1st 2014, the current value of the portfolio is equal to $3,338,659 which gives the portfolio an annual return of 38.2%. If the firm had sold no shares, it would currently hold 120,000 shares of Dr Pepper Snapple Group, 119936 shares of Mondelez International and 39578 shares of Kraft Foods Groups, for a total value of $138,659. The firm receives a cash payout from the acquisition of Cadburys Plc by Kraft foods for a value of $3,200,000 (640000 shares multiplied by 500 pence per share), hence the abnormally large high annual return on the portfolio. Since the acquisition of Caburys Plc by Kraft Foods was largely a cash acquisition, all shareholders and stockholders were paid a large sum of money with the total takeover bid equaling over $19.6bn
Future Investment in Dr Pepper Snapple Group?
The firm currently holds 120,000 shares in Dr Pepper Snapple Group at 47.72 pence per share for a value of $57,264. Directly after the spin off, these shares were worth 25.18 pence per share. The annualized return on this stock is 11.94%, when taking into consideration dividend payments this amount climbs to 13.98%. In comparison, the average annual return for the stock market index (iShares NYSE 100 Index (ETF) during this same period was only 2.85% whilst the S&P 500 index was slightly higher at 5.9%, highlighting the extremely strong returns of the banks portfolio. This alone should signal to the analyst that the firm should be increasing the number of Dr Pepper Snapple Group shares it currently has in its portfolio, by using the $3,200,000 cash it received from the cash payout of the Kraft Foods acquisition. In addition, the analyst may mention the sound financials of the company as a reason for further future investment. For example, since the spin off, the company’s earnings have grown by 6 % per year. Moreover, the analyst could investigate the strengths of the companies products, where ‘about 75% of the company’s volume is generated from brands that are either number one or number two in their category with six of the top 10 non-cola soft drinks under its corporate umbrella .
Works Cited
Carnavale, C. (2013, October). In the Beverage Industry, Don 't Overlook Dr. Pepper Snapple Group. (Forbes, Producer) Retrieved from http://www.forbes.com/sites/chuckcarnevale/2013/10/25/dr-pepper-snapple-dont-overlook-this-beverage-contender/
The Economic TImes. (2010, Jan). Kraft wins over Cadbury with $19.6 bn offer. (S. Sen, Editor) Retrieved from http://articles.economictimes.indiatimes.com/2010-01-20/news/28452665_1_cadbury-shareholders-cadbury-board-irene-rosenfeld
Cooper, T. (2013, December). 3 Reasons Dr Pepper Snapple Group Will Narrow the Gap with Coca-Cola and PepsiCo in 2014.(The Motley Fool) Retrieved from http://www.fool.com/investing/general/2013/12/25/3-reasons-dr-pepper-snapple-group-will-narrow-the.aspx
Appendices
Appendix 1
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2012 and 2011
(in millions, except share and per share data) December 31, December 31, 2012 2011
Assets
Current assets: Cash and cash equivalents $ 366 $ 701 Accounts receivable: Trade, net 552 585 Other 50 50 Inventories 197 212 Deferred tax assets 66 96 Prepaid expenses and other current assets 104 113 Total current assets 1,335 1,757
Property, plant and equipment, net 1,202 1,152 Investments in unconsolidated subsidiaries 14 13 Goodwill 2,983 2,980 Other intangible assets, net 2,684 2,677 Other non-current assets 580 573 Non-current deferred tax assets 130 131 Total assets $ 8,928 $ 9,283
Liabilities and Stockholders ' Equity
Current liabilities: Accounts payable $ 283 $ 265 Deferred revenue 65 65 Current portion of long-term obligations 250 452 Income taxes payable 45 530 Other current liabilities 589 603 Total current liabilities 1,232 1,915 Long-term obligations 2,554 2,256 Non-current deferred tax liabilities 630
586 Non-current deferred revenue 1,386 1,449 Other non-current liabilities 846 814 Total liabilities 6,648 7,020
Commitments and contingencies
Stockholders ' equity: Preferred stock, $.01 par value, 15,000,000 shares authorized, no shares issued Common stock, $.01 par value, 800,000,000 shares authorized, 205,292,657 and 212,130,239 shares issued and outstanding for 2012 and 2011, respectively 2 2
Additional paid-in capital 1,308 1,631
Retained earnings 1,080 740
Accumulated other comprehensive loss (110) (110) Total stockholders ' equity 2,280 2,263 Total liabilities and stockholders ' equity $ 8,928 $ 9,283
Appendix 2
Appendix 3
3.1. 3.2.
3.3. Differences in interest (search volume): competition(reference it)
Appendix 4
By Ted Cooper |
December 25, 2013 |
3 Reasons Dr Pepper Snapple Group Will Narrow the Gap with Coca-Cola and PepsiCo in 2014
Dr Pepper Snapple Group (NYSE: DPS ) often gets short shrift from observers of the beverage industry. It is a distant third in the cola wars, with Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) combining for a 70% share of the market compared to Dr Pepper Snapple 's 17% share. However, the latter 's recent initiatives may enable it to close the gap in 2014.
Dr Pepper Snapple is gaining on Coca-Cola and PepsiCo
Carbonated soft drinks, or CSDs, have been linked to obesity and other unhealthy conditions. At issue is the copious amount of sugar and artificial sweeteners found in the drinks. This has resulted in weak CSD sales volume in 2013 and an uncertain future for the industry in the United States.
Dr Pepper Snapple, however, is convinced that its line of low-calorie beverages -- namely, TEN -- is the answer to the company 's woes. The TEN platform consists of 10-calorie versions of its most popular brands, including Dr Pepper, 7UP, and Sunkist. The drinks have the full flavor of the regular drinks and fewer calories.
Although TEN includes artificial sweeteners like high-fructose corn syrup and aspartame, it appeals to consumers that fled diet drinks because of their poor aftertaste. A little over half of TEN sales are made to consumers who used to drink diet soda but stopped. This suggests that the TEN platform is a noticeable improvement over traditional diet sodas and a possible avenue for market share growth.
PepsiCo, on the other hand, has struggled to retain its market share amid a challenging environment; its share of the CSD market fell from 31.1% in 2007 to 28.1% in 2012. Coca-Cola also lost market share over this period, falling from 42.8% to 42% according to Beverage Digest. Meanwhile, Dr Pepper Snapple 's market share grew from 15% in 2007 to 16.8% in 2012, although the bulk of those gains came in 2009.
Source: Beverage Digest
If the TEN platform can draw drinkers of Diet Coke, Diet Pepsi, and Diet Mountain Dew, then Dr Pepper Snapple is in position to narrow the gap between the company and its larger rivals.
Dr Pepper Snapple institutes Rapid Continuous Improvement
There is only so much Dr Pepper Snapple can do about its revenue, but it has significant control over its cost structure. In February 2011, the company began implementing a program called Rapid Continuous Improvement, or RCI. The point of the program is to streamline Dr Pepper Snapple 's operations and eliminate waste.
In addition to optimizing distribution logistics, RCI enhances inventory management by syncing production and distribution with customer traffic patterns. Customer traffic fluctuates in more-or-less predictable patterns throughout the month based on when people receive their paychecks and other factors. Traditionally, merchandisers had not accounted for these fluctuations, but now Dr Pepper Snapple is accounting for them. As a result of these efforts, the company has tuned production to a level where it can meet demand without carrying excessive inventory.
Source: Morningstar, SEC Filings, author 's calculations
If RCI continues to increase efficiencies at Dr Pepper Snapple, the company will generate more free cash flow to support a more aggressive balance sheet.
Latin America and beyond present long-term growth opportunity
Coca-Cola and PepsiCo own global brands with worldwide distribution systems. Dr Pepper Snapple, on the other hand, has only dipped its toe into international waters. The company 's Latin America segment represented just 7.6% of its overall sales through the first three quarters of 2013, but that was up from 6.9% in 2012.
The Latin America segment includes Mexico and parts of the Caribbean. It is fully integrated, meaning Dr Pepper Snapple manufactures, bottles, and distributes most of its products in the region. An integrated model can be advantageous once the distribution network reaches scale, but it is a capital-intensive endeavor that takes time to develop.
It cost $157 million to build the company 's two wholly owned bottling facilities in Mexico -- that is more than one-third of the segment 's total sales. After you add the distribution centers and fleet of delivery vehicles, it comes out to a lot of capital required to operate the system.
Despite the low returns on capital, Dr Pepper Snapple 's determination to build its own bottling and distribution system will help wean the company off of third-party distribution systems, namely those of Coca-Cola and PepsiCo. The two soft drink giants account for half of Dr Pepper Snapple 's net sales in the beverage concentrates segment, or about 10% of its total sales. The company also partners with local entrepreneurs that build the system outside of the company, reducing Dr Pepper Snapple 's capital outlay.
Regardless of how Dr Pepper Snapple chooses to expand, its brands have global potential similar to those of Coca-Cola and PepsiCo, so it has a long runway for growth beyond its current markets.
Bottom line
Dr Pepper Snapple is doing well in a poor environment. It will always play third wheel to Coca-Cola and PepsiCo, but product innovation, cost reductions, and future growth put the company on a path to narrow the gap.