Dive Brief:
- During a third-quarter earnings call with a dozen analysts, much of the discussion focused on Dr Pepper Snapple Group's $1.7 billion acquisition of Bai Brands and how the purchase fits into the company's portfolio, according to a Seeking Alpha transcript of the call.
- When asked whether the beverage maker would have purchased Bai knowing what it knows now, Martin Ellen, Dr Pepper Snapple's chief financial officer, responded: "Yes, exactly I mean whenever you want to buy these things and look at it I mean I'm thrilled a bit of what's going on."
- Larry Young, president and chief executive officer, said during the call that Dr Pepper Snapple now expects Bai's volume to be at 40% — earlier projections were 40% to 50% — and he acknowledged some variability in the prediction process. "So yes, you can say, we’ve tempered the volume a little bit, but … there’s no business reason other than sort of clarifying a foggy crystal ball just because of the law of numbers here," he said.
Dive Insight:
Soda giants Dr Pepper Snapple, Coca-Cola and PepsiCo are all facing the same challenge — consumers are moving away from their sugary namesake sodas in favor of better-for-you waters, teas and fruit drinks. While soda remains an intricate part of their operations, the companies have extensively cut back on sugar in their own beverages and gone outside their firms to purchase brands that better align with changing consumer tastes.
Coca-Cola announced in early October that it acquired the Topo Chico premium sparkling mineral water brand for $220 million. And last fall, PepsiCo announced it would acquire probiotics beverage manufacturer KeVita, a company the beverage and snack giant was already intimately familiar with through a minority stake and distribution deal.
But, unlike these smaller deals, there have been concerns that the $1.7 billion acquisition of Bai Brands by Dr Pepper Snapple completed Jan. 31 has been more difficult to integrate. The purchase would probably not have received the share of attention it has were it not for the lofty price tag — analysts questioned whether Dr Pepper Snapple overpaid to begin with — or the challenges the beverage giant has faced integrating the smaller company since it closed.
The ongoing difficulties were underscored in late June when Dr Pepper Snapple announced it replaced Bai founder Ben Weiss with a 10-year veteran from within, suggesting executives were looking for a change in direction and didn't believe Weiss or other officials at Bai were the answer. Bai currently represents about 4.5% of Dr Pepper Snapple's revenue.
It's still early since the acquisition, though, and there is plenty of time to turn things around.
"As I said the day we announced the acquisition of Bai, the organization and I couldn't be more excited about the prospects for this brand," Young said. " We're executing against the strategy we communicated and ensuring that we continue to drive sustainable growth across the brand."
But Dr Pepper Snapple is facing many of the same difficulties big companies face when they try to integrate a smaller brand used to operating with pure autonomy and without the bureaucracy that can sometimes slow down decision making and product development. Campbell Soup, for example, has faced challenges since acquiring the Bolthouse Farms and Garden Fresh Gourmet brands in 2012 and 2015, respectively. Dr Pepper Snapple executives seemed to acknowledge during the earnings call this week that the integration hasn't gone quite as planned and noting that Bai's volume growth will be at the lower end of their forecast.
The company has been busy promoting Bai products through multi-pack formats and sales offers, and Martin Ellen, the chief financial officer, noted on the call that household penetration numbers were very encouraging from March through September. However, creative strategies will need to increase if Bai is to be adequately integrated into the larger Dr Pepper Snapple family of brands and perform as envisioned.
Executives smartly responded during the call that the company would still have acquired Bai Brands knowing what it knows now — a reaction top officials had to give considering the cost of the deal and their reputation should the company decide to acquire another business. Dr Pepper Snapple will be under pressure to show that these early hiccups are temporary and that the Bai Brands buy was just what the doctor ordered.