Young said Q3 2013 sales of regular Dr Pepper were strong (finished beverage sales -1%) but blamed diets for most of the overall 2% CSD decline, which is especially critical for DPS since 80% of its portfolio is focused on carbonates, while it has suffered ten consecutive quarters of flat to negative growth in non-carbonates.
Despite weak volume sales and sluggish top-line growth (+ circa.1% to $1.543bn) pricing and cost savings enabled DPS – America’s No.3 soda maker – to grow quarterly net income 15% to $207m year-over year.
Young said that the early success of DPS’ TEN platform – led by flag product Dr Pepper TEN – could work to counter the decline and sooth aspartame fears, since the 10-calorie drinks also use the high-intensity sweetener, as well as Acesulfame Potassium, alongside High Fructose Corn Syrup.
That said, of DPS’ Core 4 TEN brands, only Canada Dry was up, while the other three were down on a volume sales basis, despite significant brand investment.
‘Artificiality and aspartame’
Analyst Ali Dibadj, Sanford Bernstein, warned on yesterday’s earnings call that health and wellness concerns were shifting from caloric intake, addressed by diet sodas and TEN, to “artificiality and aspartame”.
Young had earlier told analysts: “Aspartame is one of the most tested sweeteners on the market and there’s never been anything found on it. The FDA has proven that there’s nothing wrong, but you have people talking about it causing Alzheimers…makes you want to eat more, will increase obesity.”
“Social media has stepped it up even more…so I think that’s the headwind we have to fight there,” he added. “We’ve got to do a better job of educating people with the facts, with the science, instead of hearsay.”
Noting 76% ACV (All Commodity Volume) for the Core 4 TEN brands in grocery sales channels as of March, Young said DPS was keen to “reignite” demand for its ten-calorie platform.
“So again, going back to the sweeteners, we’ve got to let people know that these products are good, they’re safe and they’re also fun,” he said.
Analyst disquiet over TEN
However, Bonnie Herzog, senior analyst at Wells Fargo Securities, wrote in a note after the call that she was still concerned about TEN,given a tepid reaction from her firm’s C-store retail contacts, no sequential improvements from Q2 ACV penetration in grocery outlets and ongoing challenges in CSDs.
“We therefore can only hope that management remains prudent with its investments until there is more significant evidence that the platform has long-term viability,” she wrote.
But Martin Ellen, DPS CFO, said on the call: “More recently, it appears right that the aspartame which is in TEN is becoming an increased area of focus, but there’s still a big population of people that simply do not want all the calories in a regular product, but still want the taste of a regular product.”
Nielsen Homescan data was “way too positive” for DPS to pull back on TEN, Ellen said, citing 51% of TEN drinkers coming from outside CSDs and limited cannibalization of regular and diet Dr Pepper.
But he still struck a warning note: “[We] have to, now, be somewhat concerned about whether the aspartame issue is going to have a more negative impact on the TEN expectations for us, but we’ll talk about our investment spending on this next year.”