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Dr. Pepper's Growth In Latin America Could Come From Penafiel

May 5 2014, 12:52pm CDT | by

Dr Pepper Snapple‘s revenue and margin growth in the first quarter prompted an almost 5% jump in its stock following the quarterly results announcement. Especially in Latin America, volumes for Dr....

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12 weeks ago

Dr. Pepper's Growth In Latin America Could Come From Penafiel

May 5 2014, 12:52pm CDT | by

Dr Pepper Snapple‘s revenue and margin growth in the first quarter prompted an almost 5% jump in its stock following the quarterly results announcement. Especially in Latin America, volumes for Dr. Pepper grew 2% despite the anticipated decline, following the sugar tax. Mexico forms around 90% of the Latin America volumes for the beverage maker. Mexico is the world’s largest consumer of carbonated soft drinks, and also the world’s fattest country. In fact, over 71% of the country’s population is overweight. In a bid to address growing health and wellness concerns, the country had imposed a soda tax of one peso (~8 cents) on one liter of sugary drinks, effective as of January 1. Why Mexico is particularly important to Dr. Pepper is because around 8% of the company’s volumes come from the country. With CSDs facing a continual decline in demand in North America, beverage companies have looked to extract growth from emerging economies with large soft drink appetites and increasing disposable incomes. Moreover, Dr. Pepper does business only in North America, Mexico and the Caribbean, with no immediate international expansion plans. This makes Mexico growth for the company imperative. Although the first quarter results indicate growth for Dr. Pepper in the country, we expect the impact of the soda tax to catch up in the course of the year and hamper Latin America volumes for the company.

We have a price estimate of $49.44 for Dr Pepper Snapple, which is around 11% lower than the current market price.

See Our Complete Analysis For Dr Pepper Snapple

Volumes Grew On The Back Of Rise In Net Pricing

Around three-fourths of Dr. Pepper’s beverage portfolio in Mexico is subject to the soda tax. The tax has on an average made soda more expensive by around 8%. The company witnessed an 8-10% fall in demand for sugary sodas in the first three months since the soda tax was imposed. However, this decline had been offset by a 9% rise in net pricing. The company managed to improve its organic revenues in Latin America by 17% in Q1 largely due to the performance of the rest of its beverage lineup. Dr. Pepper has a strong presence in the bottled water category in Mexico, with its mineral water brand Penafiel undergoing a double-digit percent rise in volumes through March. Dr. Pepper also launched its naturally sweetened Mott’s juices with 40% less sugar, which grew 5% in Mexico. This reflects how low-sugar initiatives and bottled water could be the growth drivers for the company this year in Mexico. However, as part of its efforts to improve health, Mexico has also taken steps that could deter bottled water sales going forward.

Bottled Water Sales Might Decline In The Next Few Months

According to a law introduced by Mexico city this year, restaurants will have to install filters in order to serve potable water to consumers, relegating usage of bottled water. Around 65,000 restaurants will have to install filters by mid-year in order to evade fines on non-compliance. As the country looks to fight water borne diseases and work on its safe drinking water problem, this move is expected to significantly impact bottled water consumption in restaurants in the latter part of the year, hurting sales for big corporate companies which sell bottled water. Volumes of Dr. Pepper’s still water brand Aguafiel decreased 3% in the first quarter, after witnessing three consecutive quarters of growth. Moreover, as the government is expected to collect close to $1 billion from this tax, the money could be utilized to support health efforts in the country, which include the induction of clean-water facilities and the repairment of old rusty underground pipes that contaminate water. With the improvement of tap water, sales of bottled water could decline in Mexico.

However, Sparkling Water Could Continue To Grow

We expect Dr. Pepper to draw only 2% top line-growth from Latin America this year, following revenue growth of 11% in 2013. On the other hand, margins are also expected to remain somewhat flat this year. The company expects price rise in Mexico, primarily due to the soda tax, to have a 1% impact on net sales. However, the tax is also anticipated to increase costs of sales by 1.6%, thereby causing a fall in profitability. There could be a small upside to our forecast for Dr. Pepper’s Latin America volumes if Penafiel continues to perform well. Carbonated water could eat into the CSD consumer base, seeing how sugary sodas face negative customer perception. In addition, rather than cannibalizing sales of Dr. Pepper’s CSDs, Penafiel might even attract previous Coca-Cola or Pepsi drinkers. Penafiel holds the second spot behind Topo Chico in the Mexican sparkling bottled water category, which presently forms the smallest portion of the bottled water market behind bulk and still water.

The U.S. sparkling bottled water category has grown by around 48% annually in the last couple of years to nearly $1 billion in retail sales in measured channels. Although the CSD category generates more than eight times the sales for sparkling water, growth in this category has declined in each of the last nine years. Taking the domestic market as a benchmark, sparkling water and consequently Penafiel could also grow in Mexico and boost Dr. Pepper’s volumes this year.

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