Dr Pepper Snapple Group Inc. (NYSE:DPS) is weighing its options well and is balancing well grounded cost cutting efforts with strategic product launches. Amid declining soda sales in the US it has turned in a good quarter with earnings of $0.53 well ahead of $0.46 estimated by analysts at Thomson Reuters. Although volumes were down 2%, the company achieved 1% sales growth driven by pricing.
Presently the most exciting thing about Dr Pepper Snapple Group Inc. (NYSE:DPS) is its new TEN drinks. And I will tell you why.
Demand for lower calorie drinks is growing
By now it is quite an established fact that in the US, which is world’s largest soda market, demand for fizzy drinks is cooling as people become more health conscious.
While this is fueling demand for alternate beverages like energy drinks, sports drinks, juices, etc on one hand, this is also driving demand for soda options with lower calories. The lower calorie soda variants are becoming increasingly popular with people who would like to avoid the calories but do not like the taste of sugar-free diet soda.
The statistics that have emerged are quite exciting. According to Innova Market Insights, lower calorie drinks comprised 17.5% of all global soda launches in 2012. In the US the category outperformed the global trends and accounted for 25% of new product launches.
Dr Pepper has a full range of low calorie drinks
The third largest US soft drink maker has in the offering a new soda variant which contains only 10 calories per serving. Dr Pepper had been testing the concept since 2011 when it first launched its Dr Pepper Ten. It has recently expanded its portfolio by introducing five new flavors: 7Up Ten, A&W Ten, Sunkist Ten, Canada Dry Ten and RC Ten.
For its TEN drinks the company is promising the same full flavor as the original version of the sugar containing drink. One has to keep in mind that the success of any low calorie substitute ultimately depends on the taste. So if TEN can live up to the expectations the possibilities are mind blowing.
The company is spending $30 million on this initiative and has started aggressive television campaigning. The commercials will run all summer.
Aside from the TEN drinks, Dr Pepper Snapple Group Inc. (NYSE:DPS) also has low calorie versions for A&W root beer, 7Up lemon lime, RC Cola, etc, which are moderately successful.
An edge over soda kings
The best thing about the TEN drinks is that they can earn Dr Pepper Snapple Group Inc. (NYSE:DPS) a competitive edge over its heavyweight rivals The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP).
The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) have both tried their luck with mid calorie drinks decades back with no success. The former had introduced a mid calorie drink called C2 in 2001 and the latter had launched a similar concept called Pepsi Edge in 2004. Both flopped.
Now Pepsi has again come out with a new mid-calorie drink called PepsiCo, Inc. (NYSE:PEP) Next but this is yet to create a ripple. Recently Pepsi has reported 3% volume decline in the first quarter in its Americas Beverage group. Its soda volumes were down by mid single digits. The company also lost share to Coca-Cola. However Pepsi has its snack business to fall back on, but that is a story for another day.
Coming back to lower calorie drinks, The Coca-Cola Company (NYSE:KO) has recently launched mid calorie Sprite in UK which will permanently replace the sugar containing version. For the US market the company is still testing mid calorie versions for Sprite and Fanta but has not scheduled an official launch yet.
Coca-Cola’s launch of mid calorie drinks will be quite significant as the company is using natural sweeteners and not the high fructose corn syrup and artificial sweetners that Pepsi and Dr Pepper use in their lower calorie drinks.
So Coca-Cola can use this fact to differentiate its offerings and gain a competitive advantage. However stevia, the natural sweetener that it is using is believed to leave a bitter aftertaste so we have to see how these drinks fare on account of taste.
However, the point for Dr Pepper Snapple Group Inc. (NYSE:DPS) remains that now the market is clear in the lower calorie soda segment. So, TEN might just have the early mover advantage. The company has timed its launch well and all that needs to be seen is how well it scores on account of taste and how fast it grows its distribution channels.
Last word
Dr Pepper Snapple Group Inc. (NYSE:DPS) has fared well despite lower sales volumes. It is working hard to move towards a leaner cost structure and trying to improve its distribution channels. It has also stuck to its prices. Now if it can infuse life into its declining soda volumes through the new TEN drinks platform it should see significant long-term growth.
The article Dr. Pepper Is Trying to Make its Mark originally appeared on Fool.com and is written by Eshna De.
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