Cadbury Schweppes PLC SWOT Company Analysis Report -Soft Drinks Industry Analysis Report

Cadbury Schweppes Plc

· Key US soft drinks player – the Dr Pepper Snapple Group has inherited a position as a leading soft drinks player in the US, boasting high-profile brands such as those which comprise its name and the likes of 7-Up and Schweppes.

· Independent drinks business – following the demerger from Cadbury Schweppes, the sole focus of the new Dr Pepper Snapple Group is soft drinks, a status that should allow it to better target growth in the sector.

· Strong distribution system – the Dr Pepper Snapple Group has inherited the largest independent distribution network in the US and a reduced reliance on Coca-Cola Enterprises and Pepsi Bottling Group for securing access to the market for its brands.

· Leading Australian soft drinks company – Cadbury Plc, with its portfolio of strong brands, including carbonates and bottled water labels largely under the Schweppes umbrella, is a leading player in Australian soft drinks.

Weaknesses

· Overexposed to US carbonates – despite its emphasis on expanding its non-carbonates presence, the Dr Pepper Snapple Group remains over-reliant on the floundering US carbonates market. As such, it is exposed to fluctuations in this marketplace.

· Weaker financial position – following the demerger, the Dr Pepper Snapple Group finds itself operating without financial backing of what was the much larger Cadbury Schweppes group, which could also rely on confectionery revenues.

· Limited product portfolio – the Dr Pepper Snapple Group has a smaller product portfolio than its competitors, in particular The Coca-Cola Company and PepsiCo, which provides a smaller base from which to rapidly expand and diversify its product offer.

· Geographic constraints – owing to the multiple franchisee ownership of core brands such as Schweppes, Dr Pepper and 7-Up, the Dr Pepper Snapple Group is restricted in terms of international expansion, which given its reliance on the US, is a definite weakness.

· Cadbury role shrinks – in its new guise, Cadbury Plc became a smaller-scale, regional soft drinks player and hence, cannot rely on the same level of financial backing and brand exposure to generate revenues as was available before.

Opportunities

· RTD tea potential – the Dr Pepper Snapple Group is in a good position to exploit growth in RTD tea in the US in the short term as consumers continue to abandon carbonates in search of better for you non-carbonated beverages.

· Functional fillip – functional bottled water and other functional drinks in the US are growth opportunities for the Dr Pepper Snapple Group, with the shift away from unhealthily perceived carbonates benefiting better for you beverages.

· Bolder market segmentation – the Dr Pepper Snapple Group has the ability to benefit from a bolder approach to its functional drinks portfolio. Beverages which claim to lower blood pressure levels, make the skin beautiful and increase fat burning are among the latest to emerge on the market.

· Mexican soft drinks – the soft drinks market in Mexico, in particular bottled water, functional drinks and RTD tea, is a strong growth opportunity for the Dr Pepper Snapple Group, with these core categories expected to perform well in the short term.

· Non-carbonates in Australia – Cadbury Plc is in a position to benefit from marked growth in a number of non-carbonates categories in Australia, in particular bottled water, functional drinks and RTD tea, with all three set to outperform overall soft drinks.

Threats

· Key market maturity – the Dr Pepper Snapple Group’s key US carbonates market is set to contract in the short term, as consumers continue to switch to healthier soft drinks. This malaise will put pressure on margins at the company.

· High level of industry consolidation – the global soft drinks market is characterised by a high level of consolidation, with the top rankings held by the major companies The Coca-Cola Company, PepsiCo and Danone. As these companies are stretching their operations globally, this will pose challenges for the Dr Pepper Snapple Group in terms of entering new markets and building out its core sector presence.

· Rising raw material costs – the price of raw materials such as packaging, fruit and fuels are expected to continue to rise in the short term, a development which is certain to place greater downward pressure on the company’s profit margins and threaten development plans.

· Attractive target – despite the fact that Cadbury Schweppes failed to find a suitable buyer, the Dr Pepper Snapple Group remains a particularly attractive target to rivals, in particular those looking to build out their RTD beverage portfolios, such as The Coca-Cola Company, Danone and Tata Tea.

Prospects for Cadbury Schweppes Plc in Soft Drinks

Core Businesses

· Following the demerger, the global beverages player Cadbury Schweppes has been divided into two key regional companies: the Dr Pepper Snapple Group in North America, as well as Mexico, and Cadbury Plc in Australia. The main focus of both producers is undoubtedly carbonates, although Cadbury Schweppes was investing significantly in non-carbonates such as bottled water, functional drinks and juices before the split.

· The Dr Pepper Snapple Group has inherited Cadbury Schweppes’s weakening position in soft drinks in North America. Although the latter maintained a notable third place behind the giants of PepsiCo and The Coca-Cola Company, its share fell continuously between 2000 and 2007, from 10% to under 8% in off-trade volume terms. Its overexposure to the US market, exacerbated by the 2006 divestment of its European beverages business, has been the key factor behind this slump and in 2007, the company slipped to fourth in US soft drinks, overtaken by Nestlé, which has benefited from a more timely focus on non-carbonates, in particular bottled water.

· Cadbury Plc has inherited a third place position in Australian soft drinks, behind The Coca-Cola Company and San Miguel; while it also takes over a business in decline, the descent is not as steep as in North America, although Pure & Natural Beverages is starting to appear close over its shoulder, with PepsiCo not too far behind.

· Underlining the weakened position that both the Dr Pepper Snapple Group and Cadbury Plc has inherited is Cadbury Schweppes’s poor performance in global soft drinks over the 2003-2007 period. Cadbury Schweppes was by far the weakest of the top five global soft drinks manufacturers, with its sales declining at a compound annual growth rate (CAGR) of 3% by off-trade volume, comparing very unfavourably with both the overall market (CAGR of 6%) and rivals The Coca-Cola Company and PepsiCo (each 4%), Danone (10%) and Nestlé (9%). However, much of the decline can be attributed to the sale of a number of beverages operations, in Europe and Africa and the Middle East, in early 2006. Fierce competition in carbonates has also contributed and underpinned the company's decision to demerge its Americas Beverages division in 2008.

Growth Opportunities

RTD beverages in the US offers potential for Dr Pepper Snapple

· The consumption of RTD beverages may be relatively weak in the US, but armed with its established Snapple brand, the potential return for the Dr Pepper Snapple Group over the medium to long term is considerable, although it will first have to reinvigorate a brand that despite annual single-digit growth is losing market share to the labels of larger rivals. The potential growth, albeit from a small base, is significant. In the US, RTD tea is expected to do well (volume 2007-2012 CAGR of 4%), performing above overall soft drinks (CAGR of 1%) and contracting carbonates. In addition, RTD coffee is set to post healthy growth (CAGR of 8%). The next 12 months will be crucial for the company in this market and it is imperative that it does not allow its Snapple brand to be overwhelmed by increasingly powerful rivals. Snapple has a premium positioning and this must be exploited, with a heavyweight advertising budget and greater coverage at higher margin retail points seemingly essential.

Functional bottled water fillip for Dr Pepper Snapple in the US

· Functional bottled water in the US holds considerable potential for the Dr Pepper Snapple Group (volume 2007-2012 CAGR of 13%). The company has recently extended its Snapple portfolio into this area and it would do well to continue to invest in this expansion in the short term, in particular as the saturation of still waters, as well as the recent negative press, is triggering bottled water manufacturers to diversify their product portfolios with more flavoured and functional waters. At present, the functional bottled water competitive environment is relatively narrow, which suggests there is room for smaller brands to grow despite the dominance of The Coca-Cola Company and PepsiCo through their Glaceau VitaminWater and Propel Fitness Water labels respectively.

Dr Pepper Snapple eyes Mexican soft drinks growth

· The Dr Pepper Snapple Group has identified Latin America has a key growth area as it looks to lessen its reliance on the bumpy US market and expand its emerging market profile. A major focus will undoubtedly be Mexico as it is able to target this soft drinks market from an existing platform. Non-carbonates hold considerable potential for the company, with fruit/vegetable juice (volume 2007-2012 CAGR of 5%), bottled water (CAGR of 9%) and functional drinks (CAGR of 11%) all set to post healthy growth in the short term as increasingly wellbeing-conscious consumers ditch carbonates in greater numbers. The company is developing its Snapple brand in all these categories and it would do well to focus its growth strategy in Mexico on what arguably is its most dynamic label, in particular as the likes of The Coca-Cola Company, PepsiCo and Nestlé are all targeting new growth in this market.

Limited Potential

Grim carbonates forecast puts pressure on Dr Pepper Snapple and Cadbury Plc

· Arguably the greatest challenge facing the Dr Pepper Snapple Group’s, and to an extent also Cadbury Plc’s Australian beverages business, is the management of its carbonates portfolio. Despite investment in innovation, Cadbury Schweppes generated little growth in carbonates sales in key markets in the run-up to the demerger. Focusing on the Dr Pepper Snapple Group, the forecast for the sector in the US (volume 2007-2012 CAGR of -2%) and other core developed sales areas, such as Canada (CAGR of -1%), gives little reason for optimism. In the US, volume sales are expected to drop consistently over the next few years as consumers become increasingly focused on their health and turn away from what they consider to be unhealthy carbonates. Of additional concern for the Dr Pepper Snapple Group will be an expected contraction in non-cola carbonates (CAGR of -1%) in the US, in particular in lime/lemonade carbonates (CAGR of -2%), a forecast which will could negatively impact the company’s growth plans for its key category brands. Hence, some rationalisation of its carbonates portfolio may lay ahead for the company.

Dire outlook for US juice to put the squeeze on Dr Pepper Snapple

· Staying in the US, the outlook for fruit/vegetable juice, a key non-carbonates market for the Dr Pepper Snapple Group, is dire (volume 2007-2012 CAGR of -1%), a forecast made worse by the prognosis for its core juice drinks category (CAGR of -2%). Conditions in 100% juice offer no more reason for optimism (CAGR of -1%). Overall fruit/vegetable juice sales are forecast to fall by 7% in volume terms or 760 million litres. Compounding concern at the Dr Pepper Snapple Group will be the investment of The Coca-Cola Company and PepsiCo in fruit/vegetable juice, with Minute Maid and Tropicana, respectively, becoming increasingly powerful brands. The company faces an uphill struggle taking on these established labels with its relatively new Snapple product. Furthermore, it must compete with secondary labels such as PepsiCo’s Naked Juice brand, which will receive nationwide exposure thanks to a distribution deal with Starbucks.

Late to the non-carbonates game, Dr Pepper Snapple has to face off against industry giants

· Expanding on the growing competitive pressure facing the Dr Pepper Snapple Group in the US, it is not only in juices where the company will increasingly have to face larger rivals. In the US, in recent months The Coca-Cola Company has bolstered its RTD beverage and bottled water portfolios, including the acquisition of Energy Brands and in particular the Glaceau label, which Cadbury Schweppes previously distributed. PepsiCo has also been increasing its investment in non-carbonates, notably launching a functional drink in collaboration with Tiger Woods and expanding its Aquafina bottled water range. Switching to Latin America, which the Dr Pepper Snapple Group has identified as a key growth area, it must face a resurgent Nestlé in bottled water (not to mention emerging market growth hungry The Coca-Cola Company and PepsiCo), with the company benefiting from a distribution deal with Grupo Modelo, which gave it invaluable geographical coverage in the region.

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Thursday 1 May 2014