Bai beverages
Dr Pepper Snapple's Bai business fell short of initial forecasts in the recent quarter.

PLANO, TEXAS — Executives of the Dr Pepper Snapple Group, Inc. are resetting their expectations for the newly acquired Bai business, which in the recent quarter fell short of initial forecasts following the $1.7 billion transaction in January.

Overall, Dr Pepper Snapple net income in the first quarter ended March 31 was $177 million, equal to 97c per share on the common stock, down 3% from $182 million, or 97c per share, in the year-ago period. Contributing to the decline in profit were transaction and marketing expenses related to the Bai business.

Net sales, meanwhile, rose 2% to $1,510 million from $1,487 million.

Dr Pepper
Dr Pepper Snapple's carbonated soft drinks segment grew 1%.

Sales volumes in the quarter increased 1%, including the addition of Bai. Carbonated soft drinks grew 1%, while non-carbonated beverages declined 2%, driven in part by weaker-than-expected performance of Snapple.

The company now expects full-year net sales growth of about 4%, with 2% of net sales growth coming from Bai. Previously, the company forecast net sales growth of 4.5%, with 3% from Bai.

Marty Ellen, Dr Pepper Snapple Group
Marty Ellen, c.f.o. of Dr Pepper Snapple

“Our expectation for Bai has come down slightly from our February call, and we now see volume growth in the 40% to 50% range,” said Marty Ellen, chief financial officer, during an April 26 call with financial analysts. Previously, the company expected about 80% year-over-year volume growth.

Accounting for 4% of the company’s portfolio, Bai delivered $21 million in net sales in the quarter, including $11 million from third-party distributors and $10 million through Dr Pepper Snapple’s direct-store delivery system. 

Dr Pepper Snapple's non-carbonated beverages declined 2%, driven in part by weaker-than-expected performance of Snapple.

“At an operating level, there was a loss of $5 million,” Mr. Ellen said. “Included in this loss was the $11 million of marketing investment, including the cost of the Super Bowl commercial. We then had to defer the $9 million of profit Bai realized on sales of product to us that was not sold through to retailers and were in our inventory at quarter end. But the profit on the product we did sell-through was previously earned by Bai before we acquired them. We also recorded $1 million of purchase price amortization. And finally, and not included in core results, were $19 million of transaction and integration-related expenses.”

In the coming quarters, Dr Pepper Snapple is planning “heavy marketing investment” to increase awareness and drive trial of Bai, which has a strong repeat purchase rate, said Larry Young, president and chief executive officer.

Larry Young, Dr Pepper Snapple Group
Larry Young, president and c.e.o. of Dr Pepper Snapple

“We’ve recently done some research on Bai and learned that while trial is low on the brand, repeat rates are higher than we’ve historically experienced, giving us confidence in our strategy in driving trial and awareness with consumers,” Mr. Young said.

Dr Pepper Snapple also is repositioning some of Bai’s product lines, including Bai Bubbles, a sparkling beverage that was previously merchandised in the enhanced waters section of the grocery store.

“This product can really go after the sparkling water category,” Mr. Ellen said. “There are some incumbents in that category that we think have weakened and we think are deserving of a pretty much frontal attack by us, and that’s where we’re going.”

Bai Bubbles
Dr Pepper Snapple is repositioning Bai Bubbles.

Additionally, the company is adjusting the brand’s channel strategy, which also affected quarterly results. About a third of Bai’s business prior to the acquisition was in the club channel, where consumers who have never tasted Bai might not invest in a multi-pack of the product, Mr. Ellen said.

“So, part of our reduction, if you will … is this view that we’ve got to go back and think about how we build the brand, sort of more one bottle at a time and get the trial going so we can get the repeat purchases,” he said. “So embedded in that is really what we think is a thoughtful change in channel strategy.”

Following the earnings release, shares of Dr Pepper Snapple Group slid 5.5% to close at $92.98 on April 26.