Dr Pepper Snapple Group Remains Bullish on TEN-calorie Strategy

By Josh Long

PLANO, TEXASDr Pepper Snapple Group, Inc. (NYSE: DPS), whose flagship soft drink dates back to an era of Old West gunslingers, posted anemic growth in the first quarter of 2013. Although its $106 million profit beat estimates, net sales rose just 1%.

Wall Street doesn't view the beverage behemoth as a catalyst for skyrocketing growth. However, the third-largest U.S. soft drink company isn't deterred. It has devised a strategy to reinvigorate interest in carbonated soft drinks: maintain the delicious taste of a soda absent the calories.

Seventeen months ago, after scientists labored for three years to develop the flavors, Dr Pepper TEN was introduced at retailers nationwide.

It exclusively targeted men who aren't thrilled with the taste of diet soda. (Consider DPS' "It's Not for Women" advertising campaign and a Facebook application that let ladies know, "No women allowed, but don't forget to tell the man in your life about Dr Pepper TEN").

The innovative Dr Pepper must have shown ample promise because the company has expanded the strategy to other drinks, including 7 Up, Canada Dry, A&W, Sunkist and RC Cola. Except this time women are not excluded from the TEN club.

Its new products target both men and women between the ages of 25 and 39 years. Where they are distributed, the 10-calorie beverages represent 10% of the collective brands' total sales, Larry Young, president and CEO of Dr Pepper Snapple Group, told analysts during a first-quarter conference call.

During its first-quarter earnings call, the company reported plans to spend $30 million incrementally to support the launch of the 10-calorie drinks. In the first quarter, the company spent $10 million of the incremental investment on the drinks, and it is expected to invest the rest in the second quarter, according to J.P. Morgan in an equity research note April 25.

"It's not just something we go out there and turn the lights on overnight, getting these consumption habits to change," Young said, "but so far, we are very bullish on what we have seen being able to happen and how excited the retailer is about it."

Dr Pepper Snapple Group could use some help in the growth department. In the first quarter, net sales increased a negligible 1% to $1.38 billion as volumes decreased 2%. The company still anticipates sales will rise 3% for the year, although J.P. Morgan noted that figure is at the low end of a long-term target of 3-5%.

"This is not surprising," J.P. Morgan analyst John Faucher wrote, "given the difficult operating environment for North American beverages."

TEN may be resurrecting interest in carbonated drinks. According to a CNBC article, Young said research and feedback from retailers indicated that more than half of the individuals who purchased the TEN sodas had entirely left the carbonated drinks category.

"That's a home run for us," he told CNBC.

Although the beverage maker hasn't given any specific projections on what percentage of its total carbonated soft drink portfolio TEN products will comprise in five years, Chief Financial Officer Martin Ellen told an analyst, "We think it could be big."

Still, the bears on Wall Street might not think it's big enough.

"With 0.5% volume and 3% sales growth this year we dont see any magic growth bullets on the horizon," wrote Deutsche Bank Securities analysts (who rate DPS' stock a "hold") in a research note April 24, "and low probability of broader corporate actions or opportunities to broaden the portfolio outside the US."