Dr Pepper Snapple Group – 2011

Forest David

A. Case Abstract
Dr Pepper Snapple Group (DPS) is a comprehensive strategic management case that includes the
company’s year-end 2010 financial statements, organizational chart, competitor information and more. The
case time setting is the year 2011. Sufficient internal and external data are provided to enable students to
evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in
Plano, Texas, DPS’s common stock is publicly traded under the ticker symbol DPS.

Headquartered in Plano, Texas, Dr Pepper Snapple (DPS) produces, bottles, and distributes Dr Pepper,
Snapple, and other beverages in North America, including Canada, Mexico, and the US. DPS offers many
non-alcoholic beverages including flavored, carbonated soft drinks and non-carbonated soft drinks, along
with ready-to-drink non-carbonated teas, juices, juice drinks, and mixers. Among the company’s popular
brands are Dr Pepper, Snapple, A&W Root Beer, Hawaiian Punch, Mott's, Schweppes, Vernors, Squirt, and
Royal Crown Cola. DPS is the #3 soda business in North America, after #1 Coke and #2 Pepsi. With more
than 50 brands total, DPS is the leading producer of flavored beverages in North America and the
Caribbean. DPS owns 6 of the top 10 non-cola soft drinks. Nine of DPS’s 12 leading brands are No. 1 in
their flavor categories. Other DPS beverages include Sunkist soda, 7UP, Canada Dry, Crush, Peñafiel,
Clamato, Venom Energy, Rose's and Mr & Mrs T mixers.

DPS’s Q3 2011 diluted EPS were $0.71 compared to $0.60 in the prior year period. For Q3 2011, DPS
sales increased 5 percent and their income from operations was $261 million compared to $260 million in
the prior year period.

B. Vision Statement (proposed)

To become the number one choice for non cola flavored soft drinks in the world.

C. Mission Statement (proposed)

We at Dr. Pepper Snapple Group believe in being the leader in the food and beverage industry (6). Our
ability to provide our customers with great drink products (2) that fit into today’s society is unparalleled
(7). We are a global market competitor (3). Our responsibility to our employees is to give them the best
chance to be successful (9). Our customers (1) are number one and we will continue to use the latest
technology (4) to produce high quality products for their pleasure (5). At Dr. Pepper Snapple we believe
good ethics is good business and operate that way on a daily basis in our communities (8) and show respect
every employee (9).

1. Customers
2. Products or services
3. Markets
4. Technology

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 5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

D. External Audit
Opportunities

1. Customers currently prefer favored soft drinks over colas such as Sunkist, Dr. Pepper, and A&W.
2. Flavored teas, and bottled water are expected to grow 24 percent and 9 percent respectively.
3. Customers are becoming more health minded in their food and drink choices.
4. Brazil, India, and Eastern Europe should offer good long term opportunities.
5. China's food and beverage consumption is forecasted to increase by 54.1% by 2014.
6. 25% of Americans eat fast food each day.
7. Energy drinks hold 62% of the functional beverages market.
8. Coconut water is becoming a popular alternative to sports drinks such as Gatorade and Powerade.
9. Weaker US Dollar.

Threats

1. High commodity prices in sugar and tin.

2. Soft drinks are considered discretionary products and don’t perform well in poorer economic times.
3. Increased concern in health and wellness among consumers.
4. Sales are slower in the Winter months as the business is seasonal.
5. Retailers are consolidating reducing the number of companies and increasing their bargaining power.
6. Coke and Pepsi account for 63% of the sales in the industry.
7. Store brand and private label products still have great appeal among cost conscious customers.
8. Governments are looking to tax sugary drinks.

Competitive Profile Matrix

Dr. Pepper Pepsi Coke

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.12 3 0.36 2 0.24 4 0.48
Market Penetration 0.06 1 0.06 3 0.18 2 0.12
Customer Service 0.09 4 0.36 2 0.18 3 0.27
Vending Locations 0.10 2 0.20 4 0.40 3 0.30
R&D 0.06 4 0.24 3 0.18 2 0.12
Employee Dedication 0.07 2 0.14 3 0.21 4 0.28
Financial Profit 0.10 2 0.20 4 0.40 3 0.30
Customer Loyalty 0.09 1 0.09 3 0.27 4 0.36
Market Share 0.08 1 0.08 3 0.24 4 0.32
Product Quality 0.09 4 0.36 3 0.27 2 0.18
Top Management 0.04 2 0.08 3 0.12 4 0.16
Price Competitiveness 0.10 4 0.40 3 0.30 2 0.20
Totals 1.00 2.57 2.99 3.09

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 EFE Matrix

Opportunities Weight Rating Weighted Score

1. Customers currently prefer favored soft drinks over colas such 0.07 4 0.28
as Sunkist, Dr. Pepper, and A&W.
2. Flavored teas, and bottled water are expected to grow 24 percent 0.06 4 0.24
and 9 percent respectively.
3. Customers are becoming more health minded in their food and 0.05 2 0.10
drink choices.
4. Brazil, India, and Eastern Europe should offer good long term 0.06 2 0.12
opportunities.
5. China's food and beverage consumption is forecasted to 0.06 2 0.12
increase by 54.1% by 2014.
6. 25% of Americans eat fast food each day. 0.05 2 0.10
7. Energy drinks hold 62% of the functional beverages market. 0.03 1 0.03
8. Coconut water is becoming a popular alternative to sports drinks 0.03 1 0.03
such as Gatorade and Powerade.
9. Weaker US Dollar. 0.03 2 0.06

Threats Weight Rating Weighted Score

1. High commodity prices in sugar and tin. 0.12 3 0.36
2. Soft drinks are considered discretionary products and don’t
0.08 3 0.24
perform well in poorer economic times.
3. Increased concern in health and wellness among consumers. 0.05 4 0.20
4. Sales are slower in the Winter months as the business is
0.06 2 0.12
seasonal.
5. Retailers are consolidating reducing the number of companies
0.06 2 0.12
and increasing their bargaining power.
6. Coke and Pepsi account for 63% of the sales in the industry. 0.08 3 0.24
7. Store brand and private label products still have great appeal
0.06 2 0.12
among cost conscious customers.
8. Governments are looking to tax sugary drinks. 0.05 2 0.10
TOTALS 1.00 2.58

E. Internal Audit
Strengths

1. Dr. Pepper has 6 of the top 10 noncola soft drinks.

2. CEO Larry Young was named 2010 beverage executive of the year by Beverage Industry Magazine.
3. Sales in 2010 allowed DPS to: increase dividends 28%, pay down debt, and repurchase shares.
4. National launch of Sun Drop in 2011.
5. Snapple distributes their juices with labels indicating their health benefits.
6. $715 million agreement with Coke to distribute Dr. Pepper, and Canada Dry in the United States.
7. DPS markets many non carbonated drinks.

Weaknesses

1. DPS as of 2011 does not have a written vision or mission statement.

2. Profits were lower in 2010 than 2009 while Coke and Pepsi both had revenue growth over 13%.

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3. Brands like Mott’s, A&W, and Canada Dry have not received any serious advertisement since the
1990s.
4. Sunkist, 7UP, and A&W sales declined in 2010.
5. Substantial portion of net sales are generated through bottlers not owned by DPS.
6. 80% of revenues come from the sale of carbonated soft drinks.
7. 89% of revenues come from the US.

Financial Ratio Analysis

Growth Rate Percent DPS Industry S&P 500

Sales (Qtr vs year ago qtr) 4.90 30.50 14.50
Net Income (YTD vs YTD) NA NA NA
Net Income (Qtr vs year ago qtr) 6.90 7.90 47.50
Sales (5-Year Annual Avg.) 11.95 9.85 8.27
Net Income (5-Year Annual Avg.) 1.63 14.68 8.68
Dividends (5-Year Annual Avg.) NA 9.67 5.68

Profit Margin Percent

Gross Margin 58.4 56.1 39.9
Pre-Tax Margin 14.1 23.2 18.1
Net Profit Margin 9.4 19.3 13.2
5Yr Gross Margin (5-Year Avg.) 57.5 58.2 39.8

Liquidity Ratios
Debt/Equity Ratio 1.16 0.94 1.01
Current Ratio 1.0 1.2 1.4
Quick Ratio 0.8 1.1 0.9

Profitability Ratios
Return On Equity 22.8 34.6 26.0
Return On Assets 6.1 14.3 8.9
Return On Capital 7.2 20.3 11.8
Return On Equity (5-Year Avg.) 10.8 32.0 23.8
Return On Assets (5-Year Avg.) 3.9 15.2 8.0
Return On Capital (5-Year Avg.) 4.5 20.9 10.8

Efficiency Ratios
Income/Employee 29,000 67,398 126,213
Revenue/Employee 308,105 338,900 1 Mil
Receivable Turnover 11.0 9.7 15.7
Inventory Turnover 9.0 7.5 12.4

Net Worth Analysis (in millions)

Stockholders Equity $2,459

Net Income x 5 $2,640
(Share Price/EPS) x Net Income $7,993
Number of Shares Outstanding x Share Price $8,001
Method Average $5,273

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 IFE Matrix

Strengths Weight Rating Weighted Score

1. Dr. Pepper has 6 of the top 10 noncola soft drinks. 0.15 4 0.60
2. CEO Larry Young was named 2010 beverage executive of the
0.02 3 0.06
year by Beverage Industry Magazine.
3. Sales in 2010 allowed DPS to: increase dividends 28%, pay down
0.08 4 0.32
debt, and repurchase shares.
4. National launch of Sun Drop in 2011. 0.04 3 0.12
5. Snapple distributes their juices with labels indicating their health
0.05 4 0.20
benefits.
6. $715 million agreement with Coke to distribute Dr. Pepper, and
0.15 4 0.60
Canada Dry in the United States.
7. DPS markets many non carbonated drinks. 0.12 4 0.48

Weaknesses Weight Rating Weighted Score

1. DPS as of 2011 does not have a written vision or mission
0.03 1 0.03
statement.
2. Profits were lower in 2010 than 2009 while Coke and Pepsi both
0.08 1 0.08
had revenue growth over 13%.
3. Brands like Mott’s, A&W, and Canada Dry have not received
0.04 2 0.08
any serious advertisement since the 1990s.
4. Sunkist, 7UP, and A&W sales declined in 2010. 0.05 2 0.10
5. Substantial portion of net sales are generated through bottlers
0.05 2 0.10
not owned by DPS.
6. 80% of revenues come from the sale of carbonated soft drinks. 0.06 2 0.12
7. 89% of revenues come from the US. 0.08 1 0.08
TOTALS 1.00 2.97

F. SWOT
SO Strategies

1. Increase advertising by $200M marketing the health benefits of Snapple teas (S5, O3).
2. Increase R&D by $200M to develop an energy drink (S7, O7).

WO Strategies

1. Increase advertising by $300M for Canada Dry, A&W and other non cola flavored soft drinks (W3,
O1).
2. Build a new bottling plant in Croatia for $100M (W7, O4).

ST Strategies

1. Increase advertising by $100M for Snapple juice and tea products (S5, T3).

WT Strategies

1. Develop a line of flavored waters without sugar in plastic bottles only (W2, T1).
2. Develop a line of Christmas themed hot coco and ciders for $100M (T4, W6).

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G. SPACE Matrix

FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
Sales 5 Rate of Inflation -2
Debt/Equity 4 Technological Changes -2
Current Ratio 4 Healthy Options -4
ROE 4 Competitive Pressure -6
ROA 2 Barriers to Entry into Market -3
Financial Position (FP) Average 3.8 Stability Position (SP) Average -3.4

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -3 Growth Potential 4
Product Quality -2 Financial Stability 5
Customer Loyalty -1 Ease of Entry into Market 5
Product Variety -3 Resource Utilization 5
Control over Suppliers and Distributors -4 Profit Potential 5
Competitive Position (CP) Average -2.6 Industry Position (IP) Average 4.8

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H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Dr. Pepper

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

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I. The Internal-External (IE) Matrix

Segment Revenue 2010 (in millions) Operating Profit 2010 (in millions)
Beverage Concentrates $1,156 $745
Packaged Beverages $4,098 $536

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J. QSPM

Develop a
Build a new
new line of
bottling plant
flavors
Opportunities Weight AS TAS AS TAS
1. Customers currently prefer favored soft drinks over colas such
0.07 4 0.28 2 0.14
as Sunkist, Dr. Pepper, and A&W.
2. Flavored teas, and bottled water are expected to grow 24 percent
0.06 4 0.24 2 0.12
and 9 percent respectively.
3. Customers are becoming more health minded in their food and 0.05 4 0.20 2 0.10
4. Brazil, India, and Eastern Europe should offer good long term 0.06 2 0.12 4 0.24
opportunities.
5. China's food and beverage consumption is forecasted to 0.06 2 0.12 4 0.24
6. 25% of Americans eat fast food each day. 0.05 0 0.00 0 0.00
7. Energy drinks hold 62% of the functional beverages market. 0.03 4 0.12 3 0.09
8. Coconut water is becoming a popular alternative to sports drinks
0.03 3 0.09 2 0.06
such as Gatorade and Powerade.
9. Weaker US Dollar. 0.03 1 0.03 4 0.12

Threats Weight AS TAS AS TAS

1. High commodity prices in sugar and tin. 0.12 2 0.24 1 0.12
2. Soft drinks are considered discretionary products and don’t
0.08 0 0.00 0 0.00
perform well in poorer economic times.
3. Increased concern in health and wellness among consumers. 0.05 4 0.20 2 0.10
4. Sales are slower in the Winter months as the business is
0.06 4 0.24 2 0.12
seasonal.
5. Retailers are consolidating reducing the number of companies
0.06 0 0.00 0 0.00
and increasing their bargaining power.
6. Coke and Pepsi account for 63% of the sales in the industry. 0.08 2 0.16 4 0.32
7. Store brand and private label products still have great appeal
0.06 0 0.00 0 0.00
among cost conscious customers.
8. Governments are looking to tax sugary drinks. 0.05 4 0.20 2 0.10

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 Develop a
Build a new
new line of
bottling plant
flavors
Strengths Weight AS TAS AS TAS
1. Dr. Pepper has 6 of the top 10 noncola soft drinks. 0.15 4 0.60 3 0.45
2. CEO Larry Young was named 2010 beverage executive of the
0.02 0 0.00 0 0.00
year by Beverage Industry Magazine.
3. Sales in 2010 allowed DPS to: increase dividends 28%, pay down
0.08 0 0.00 0 0.00
debt, and repurchase shares.
4. National launch of Sun Drop in 2011. 0.04 0 0.00 0 0.00
5. Snapple distributes their juices with labels indicating their health
0.05 0 0.00 0 0.00
benefits.
6. $715 million agreement with Coke to distribute Dr. Pepper, and
0.15 1 0.15 4 0.60
Canada Dry in the United States.
7. DPS markets many non carbonated drinks. 0.12 3 0.36 2 0.24

Weaknesses Weight AS TAS AS TAS

1. DPS as of 2011 does not have a written vision or mission
0.03 0 0.00 0 0.00
statement.
2. Profits were lower in 2010 than 2009 while Coke and Pepsi both
0.08 0 0.00 0 0.00
had revenue growth over 13%.
3. Brands like Mott’s, A&W, and Canada Dry have not received
0.04 0 0.00 0 0.00
any serious advertisement since the 1990s.
4. Sunkist, 7UP, and A&W sales declined in 2010. 0.05 0 0.00 0 0.00
5. Substantial portion of net sales are generated through bottlers
0.05 1 0.05 4 0.20
not owned by DPS.
6. 80% of revenues come from the sale of carbonated soft drinks. 0.06 4 0.24 2 0.12
7. 89% of revenues come from the US. 0.08 1 0.08 4 0.32
TOTALS 3.72 3.80

K. Recommendations

1. Increase advertising by $200M marketing the health benefits of Snapple teas.

2. Increase R&D by $200M to develop an energy drink.
3. Increase advertising by $300M for Canada Dry, A&W and other non cola flavored soft drinks.
4. Build a new bottling plant in Croatia for $100M.
5. Increase advertising by $100M for Snapple juice and tea products.
6. Develop a line of flavored waters without sugar in plastic bottles only for $100M.
7. Develop a line of Christmas themed hot coco and ciders for $100M.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $1,100M
Stock Price: $36.69
Shares Outstanding: 214

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 Interest Rate: 5%
Tax Rate: 31%

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT $800 $1,200 $2,000 $800 $1,200 $2,000
Interest 0 0 0 55 55 55
EBT 800 1,200 2,000 745 1,145 1,945
Taxes 248 372 620 231 355 603
EAT 552 828 1,380 514 790 1,342
# Shares 244 244 244 214 214 214
EPS 2.26 3.39 5.66 2.40 3.69 6.27

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $800 $1,200 $2,000 $800 $1,200 $2,000
Interest 44 44 44 11 11 11
EBT 756 1,156 1,956 789 1,189 1,989
Taxes 234 358 606 245 369 617
EAT 522 798 1,350 544 820 1,372
# Shares 220 220 220 238 238 238
EPS 2.37 3.63 6.13 2.29 3.45 5.77

M. Epilogue
Year-to-date including Q3 2011, DPS’s sales increased 5 percent and their income from operations was
$753 million compared to $757 million in the prior year period. Net income was $440 million compared to
$416 million in the prior year period. DPS’s national launch of Dr Pepper TEN is benefiting the firm as it
continues to build per capita consumption with new fountain availabilities and cold drink placements.

For the Q3 of 2011, DPS’s volume declined 1 percent with carbonated soft drinks (CSDs) flat compared to
the prior year and non-carbonated beverages (NCBs) down 5 percent. In CSDs, Sun Drop added 2 million
cases, Canada Dry volume grew double digits and Squirt grew low-single digits. Dr Pepper volume was
flat. Crush and Sunkist soda declined double digits while 7UP and A&W grew low-single digits. Fountain
foodservice volume grew 4%. In NCBs, Clamato volume grew double-digits and Snapple grew 2 percent.
Both Hawaiian Punch and Mott’s volume declined as net pricing increased, driving sales dollar increases
for both brands. Aguafiel also declined double-digits.

In Q3 2011, DPS’s U.S. and Canada CSD volume was flat while NCB volume declined 5 percent. In
Mexico and the Caribbean, CSD volume grew 4 percent while NCB volume declined 6 percent. Year-to-
date through September 2011 and across all measured channels, as reported by The Nielsen Company, U.S.
CSD dollar share declined 0.2 percentage points.

Regarding DPS’s Latin America Beverages in Q3 of 2011, sales for the quarter increased 4 percent
reflecting low-single digit price increases, favorable product mix and 2 percent volume growth. A the end

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of Q3 2011, DPS said it expects full year 2011 reported sales to increase 3 percent to 5 percent and diluted
earnings per share to be in the $2.70 to $2.78 range.

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