Dr Pepper Snapple CEO Larry Young has urged patience on the firm’s new mid-calorie TEN portfolio, as analysts quizzed him on whether the brand was cannibalizing regular Dr Pepper sales, down 2% in Q3 2012.
Young kicked off a conference call with investors and analysts to discuss the Texas-based firm’s quarterly results yesterday by pointing to an “unpredictable and uncertain” macro environment.
“Consumers’ wallets continue to be strained, making them more cautious as we move closer to the upcoming presidential election,” he said.
DPS Group turnover fell slightly year over year in Q3 2012 to $1.528bn ($1.529bn: Q3 2012), although net income rose to $179m ($154m: Q3 2011).
‘Core 5’ brands slump
But the tale of macro woe fed into DPS figures for Q3: bottler case sales down 3% and CSD (carbonated soft drinks) volumes down 2% in the quarter (versus Q3 2011); the overall Dr Pepper brand fell 1%, with declines only partly offset by growth in Dr Pepper TEN and the firm’s fountain business.
In sum, volumes for DPS’s ‘core five’ brands (Sunkist, 7UP, Dr Pepper, Sun Drop and Canada Dry) fell 6% in Q3, but Young said management had chosen not to repeat the aggressive pricing it implemented last year.
After acknowledging that CSD sales as a whole were a little soft as price increases fed through to consumers, Judy Hong from Goldman Sachs asked Young to ‘characterize’ the 2% drop.
“Do you think there’s some cannibalization from the Dr Pepper TEN brands. And as you think about going forward…what sort of volume expectation do you think we can see from the base Dr Pepper brand?”
Insisting that the base fall was in line with industry performance, Young said it did not concern DPS unduly, and that the firm was “still very positive on Dr Pepper TEN. It’s a new brand. Launches take a long time. People have to have patience”.
Nonetheless, later in the call Mark Swartzberg from Stifel, Nicolaus & Co. tentatively suggested that, upon the basis of his data, Dr Pepper TEN “helped [the overall Dr Pepper brand] late last year [it was launched in October 2011], helped early this year. It’s not proving quite as beneficial as the year wears on”.
‘Our TEN is a new platform…’
Insisting again that Dr Pepper’s performance for Q3 was in line with industry, “perhaps a little better”, Young stressed the brand’s association with the pending US football season.
He added: “I think people sometimes look at it and think TEN is like an extension to Dr Pepper. It’s not. Our TEN is a new platform, it’s a new launch, it’s a new brand.
“And so, those brands take time and they take patience. We’re not seeing a lot of cannibalism on Dr Pepper from the TEN, and that’s very encouraging for us, but it takes time to educate people and get them to understand what TEN is.”
Young also stressed growing repeat rates for TEN, as well as an increasing number of consumers coming back into the CSD category who had previously left it. “As Marty [Martin Ellen, DPS CFO] mentioned, 80% of our business is CSDs. That’s where we live and die.”