Nielsen data suggests that Bai is growing strongly in the c-store channel, although much of the growth appears to be from distribution gains, wrote Well Fargo analysts Bonnie Herzog, Adam Scott and Patty Kanada.
“According to Nielsen, Bai’s sales in the c-store channel were up 53.8% [year-on-year] in the four-week period ending 7/15, or up 72.4% from 3/26 to 7/15 (approximately DPS’s Q2) vs. 43.4% for all channels combined. Overall, we are encouraged by this strong growth given the importance that mgmt. has placed on the brand in the c-store channel.
“However, we believe much of Bai’s growth in sales is being driven by distribution gains, with DPS’s ACV [All Commodity Volume, a measure of distribution] at 67% in c-stores, up from 50% at the beginning of the year."
When considering growth in sales per point of distribution, however, Bai's results “look less rosy,” said the analysts. “In fact slightly negative for the past six months. Further, given recent negative trends in average retail price per case, we also have concerns about the long-term health of the brand’s equity, and in turn, DPS’s investment in Bai. While we fully expect distribution to continue to grow, ultimately Bai needs to grow in stores where it is in for DPS to earn a sufficient return on its $1.7bn investment in Bai.
“While we acknowledge our cautious view on Bai may prove to be early, we encourage investors to remain prudent in monitoring the brand’s performance as early signs suggest DPS’s acquisition of Bai may not generate sufficient returns to justify its rich price tag.”
A little bit less aggressive on expectations
Launched in 2009, Bai Brands has grown at a meteoric pace, generating revenues of $5.2m in 2012; $17m in 2013, $120m in 2015, and $231m in 2016.
However, it has not grown as fast in 2017, with Dr Pepper CEO Larry Young anticipating full year growth of 40-50% during the Q1 earnings call in April and CFO Martin Ellen noting that the company was now a "little bit less aggressive on expectations for rolling out innovation."
While the 2017 Bai SuperBowl ad (featuring Justin Timberlake and Christopher Walken) had given Bai a "lot of exposure," added Ellen, it was "planned, I will say, a little hurriedly and probably did not allow for the best retail execution planning and in store activity that maybe we would have done differently if we had had our hands on this thing completely from inception of planning on through retail execution."