PLANO, TEXAS — Executives at Dr Pepper Snapple Group were inundated with questions about the Bai beverage business during the company’s third-quarter conference call, reflecting concerns about long-term prospects for potential problems for the long-term brand building of Bai. Concern about how the brand fits into Dr Pepper’s portfolio contributed to the company’s share price dipping to a near 52-week low of $81.70 in trading on Oct. 25.
Net income at Dr Pepper Snapple Group in the third quarter ended Sept. 30 totaled $203 million, equal to $1.12 per share on the common stock, down 15.5% from $240 million, or $1.30 per share, in the same period a year ago. Net sales, meanwhile, increased 3.5% to $1,740 million from $1,680 million. The company said results were adversely affected by the default by a long-standing resin supplier to its business in Mexico and the hurricanes in the United States and earthquake in Mexico.
But it is the performance of the Bai brand that drew the most interest during the Oct. 25 conference call.
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| Larry Young, president and c.e.o. of Dr Pepper Snapple Group |
“We now expect the (Bai) volume to be at 40%,” Larry D. Young, president and chief executive officer of Dr Pepper Snapple Group, said during an Oct. 25 conference call with analysts. “We were previously just talking 40% or 50%. And I hope everybody appreciates … we’re trying to predict volume growth at those levels of percentages on a relatively smaller base than many of our other brands that tend to be between 0% and 1%. I hope you realize that … there’s a little more variability in the prediction.
“So yes, you can say, we’ve tempered the volume a little bit, but … there’s no business reason other than sort of clarifying a foggy crystal ball just because of the law of numbers here.”
Martin M. Ellen, chief financial officer, noted earlier in the call that Dr Pepper has been upfront about wanting to drive trial for Bai. He said the company spent $10 million doing just that in the third quarter, and it has spent about $22 million year-to-date.
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| Martin Ellen, c.f.o. of Dr Pepper Snapple Group |
“You’ve probably seen in the market large format, lot of three-for-$5s, convenience two-for-$4s,” Mr. Ellen said. “The result of all that has been from — when we measure from March to the end of September, we’ve more than doubled household penetration on trial. It is still single digits, but we doubled it, and repeat purchases are still strong. So we think the results of that activity, which is mostly completed now, gave us the desired result in building the brand.”
Mr. Ellen said Dr Pepper also has worked to deemphasize the club channel, saying that is not the way that the company wants to build Bai profitably for the long term.
“A year ago through Q3, club channel mix was 31%,” he explained. “We have decreased it to 26% year-to-date. It was 33% last year, (but) it’s now down to 27%. And if you look at the non-club channels in Q3, the brand grew 45%, nearly grew 11% in club. That’s a conscious decision. It probably has cost us some volume in net sales because you saw 15 packs for the most part in club. But again, highly promoted, it’s not the way we want to build the brand.”
Despite some of the current and future challenges with Bai, the company’s executives remained optimistic about Dr Pepper Snapple Group’s ability to build the brand. Asked point blank by an analyst whether the company would still have bought the brand knowing what it does today, Mr. Young responded with a one-word answer: “Yes.”
