Soda companies see a world full of potential customers, just waiting to discover their love of pop. They have to — the United States has become so saturated with soda that market growth has slowed, leading soft-drink makers to rush abroad. Roughly half of PepsiCo’s (PEP) overall revenue comes from overseas, as does more than 60% of Coke’s (KO).
What, then, would a company do if it were stuck at home? “The other guys, they can run. We’ve got nowhere else to go,” Dr Pepper Snapple Group CEO Larry Young tells Fortune.
Unlike Pepsi and Coke, 89% of Dr Pepper Snapple’s (DPS) sales are in North America. It’s in its genes — Dr Pepper Snapple took the North American drink business when it spun off from former parent company Cadbury Schweppes in 2008. Now, carbonated beverages account for 80% of sales, Young says, and 89% of the company’s sales were generated in the U.S., while the rest came from sales in Canada, Mexico, and the Caribbean.
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Those stats aren’t exactly music to investors’ ears. According to an April 24 Morningstar analyst report, “Volumes in the U.S. carbonated soft drink market have been declining for almost a decade, with the weakness especially pronounced in the cola category.”
So how do you fight the soda wars on the home front? There are several ways, one of which is to get away from “cola.” Most of the soft-drink fatigue you hear about, Young insists, is actually “cola fatigue.” He says Dr Pepper differs from Coke and Pepsi because it emphasizes flavored soft drinks. According to the company, many of its brands lead their flavor category. The company’s brand A&W is the top-selling root beer, for example, and Squirt is the top-selling grapefruit soda.
But to get its namesake soda, Dr Pepper, in customers’ hands, the company has partnered with the enemy. Dr Pepper Snapple signed 20-year agreements in 2010 with Pepsi and Coke, both of which distribute Dr Pepper in the U.S.
Another tactic is to squeeze as much profit as possible by making sure operations are efficient. At Dr Pepper, Young has built a “hub and spoke” distribution model. Cadbury used to distribute exclusively from plants in the Northeast U.S. But after the spinoff, Young identified five places around the U.S. to build centers and distribute from there. That saves on fuel costs, he says, and has the added benefit of getting the product into customers’ hands more quickly.
Those kinds of savings can keep nervous investors happy. “In our view, the company understands its lot in life,” says an April analyst report out of Deutsche Bank, “maximizing cash flow and margins in a slow or no growth environment and returning excess to investors via share repurchase and dividend boosts.” Shareholders looking for exciting progress are leaving the category, the report continues: “As investors selectively flee bonds for [higher] yielding stocks, the company has clearly gotten love from risk-averse investors.”
No one likes to see investors go, but love from risk-averse investors might be less of a pain in a CEO’s side than other flavors of shareholders.
It will never beat Coke and Pepsi, but Dr Pepper will likely plug along profitably, though slowly, over time. “We’ll never tell you it’s easy out there,” Young says, and he would know. He has 25 years of experience with the Pepsi bottling system. He even sold Dr Pepper for Pepsi in a past life.
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“We hold CEO Larry Young in high regard,” the Morningstar report says. “He has an extremely deep understanding of the soft drink business and provides honest and frank insights into the state of the company, the industry, and the consumer.”
For a soda guy working in today’s American market, that ain’t bad.