Strategy & Competition

Why Dr Pepper Is in the Pink of Health


In the soda wars, Dr Pepper Snapple Group (DPS) (DPSG) has long run a distant third to Coca-Cola (KO) and PepsiCo (PEP). But the beverage maker is experiencing a surprising renaissance. Its stock is up 154% since March, compared with a 33% climb for Coke and a 32% rise for Pepsi. Sales of its flagship brand, Dr Pepper, are bucking the industry trend, rising almost 3% in the first half of this year while overall soda consumption dropped by that much, according to Beverage Digest. Analysts expect the company to post a $498 million profit this year, up from a $312 million loss in 2008.

For CEO Larry D. Young, the turning point in DPSG's fortunes came with the Plano (Tex.) company's spin-off from Cadbury (CBY) in May 2008. That allowed Young to cut costs and invest the savings in building up long-neglected brands and distribution networks. His team no longer has to wait months for decisions to be vetted by the U.K. parent or kick up profits when London management came "dialing for dollars," as Young puts it. (Cadbury declined to comment.) Now he's focused on bringing more attention to his 58 brands, which include A&W Root Beer, 7Up, and Canada Dry, along with Dr Pepper and Snapple.

"THEY HAVE TO BE SCRAPPY"That means more money for quirkier and more plentiful advertising, a push for new products, and wider distribution. Much of the company's efforts are focused on the austere, all-white laboratory housed on the first floor of headquarters. Here a team of 75 food scientists, chemists, microbiologists, and engineers team up to create the next generation of DPSG products. Their $17 million budget comes nowhere near PepsiCo's $388 million for research and development, but it has had an impact, with seven new products launched last year. When research showed that parents were watering down their children's juice to cut back on calories, the team created a new version of its Mott's apple juice with 40% less sugar but the nutrition of full-force juice, called Mott's for Tots. That hit a note with moms worried about empty calories, prompting Young to add new flavors and product sizes.

DPSG is also working more closely with retail partners like 7-Eleven. Young moved the research team from Connecticut to Texas partly to integrate customer feedback better. "They're aggressive, and they understand that they have to be scrappy," says 7-Eleven CEO Joseph DePinto. Another hit: Canada Dry Green Tea Ginger Ale, which boosted volume 2.6% in the ho-hum category of soda. Though Snapple sales continue to sink despite resizing the bottles to fit into a car's cupholder, a switch to sugar from corn syrup, and new advertising, Young is determined to reverse that trend: "If it's going to be in my company's name, by God, we're going to do something with it."

He has upped his marketing budget while rivals have cut back. Eric Hirshberg, president and chief creative officer at Deutsch LA, DPSG's advertising firm, argues that "Coke and Pepsi, all they have to do is remind you why you like the brand. Dr Pepper has to tell you why you should drink this more."

But the biggest key to success is distribution. Recently Dr Pepper scored a coup: a fountain spigot in McDonald's (MCD) 14,000 U.S. restaurants. And staffers like Tony English, DPSG's director of supermarket sales in Dallas-Fort Worth, where people drink more Dr Pepper than Coke, spend their days hustling from one store to the next. His team's only day off: Christmas. Young would have it no other way. "Strategy is fantastic," he says. "But execution is what brings the results in."
Nanette_byrnes
Byrnes is a senior writer for BusinessWeek.

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