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Can Bai still deliver for Dr Pepper Snapple Group? - Analysis

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In the notes that followed Dr Pepper Snapple Group's Q3 & YTD 2017 conference call, analysts expressed disappointment, calling Bai's performance "weaker than expected". 

Dr Pepper Snapple Group paid US$1.7bn for Bai

Dr Pepper Snapple Group paid US$1.7bn for Bai

Although the brand contributed just over 1% to the company's 4% net sales growth in Q3, the financial world had hoped for more - estimates from Bernstein analyst Ali Dibadj came in at 2.5%. DPSG also changed its volumes growth predictions for the Bai brand in FY2017, from 40-50% to 40%. 

Dibadj said Bernstein will "remain cautious on Bai, despite the company's reassurance that it remains on track to almost double the brand's sales by the end of next year."

There was, however, some optimism elsewhere. 

"While we share investors' frustration on another deterioration of Bai's volume outlook, we also note that this is still within the previous range," said Wells Fargo analyst Bonnie Herzog.

Meanwhile, Stifel analyst Mark Swartzberg asserted that "concerns about Bai are overdone". 

"We think the consensus view, that DPS is throwing good money after bad lifting anticipated Bai-related dilution through 2017 while cutting anticipated growth, has a degree of merit: the cost of revenue has indeed increased," Swartzberg noted. "But, we also think this view obscures Bai's capacity to grow at similar rates next year, while slowing spending growth."

He said spending against Bai is taking two forms - promotional spending, which results in additional shelf space, and brand spending, which impacts shopper demand. 

The Stifel analyst said promotional spending thus far "has resulted in significant shelf space expansion". 

He also believes that although Bai-related marketing spend is likely to grow "much faster" than overall DPSG marketing spend next year, "we expect it do so while leveraging 2017's significant expansion of real estate - household penetration doubled since March".

Herzog is also looking on the bright side. "Can DPSG sustain Bai's 40% growth next year to reach its goal to double sales from 2018 vs. 2016? Yes." 

She underscored several points including repeat purchases and DPSG's plans to relaunch Bai antioxidant water and repackage Bubbles. 

"Ultimately, irrespective of the brand's FY17 sales outlook, we believe DPS's strategy for the brand is the right one, and are encouraged that management has stayed the course," she concluded. 

Bai was one of DPSG's 'allied brands' and in 2015 DPSG paid US$15m for an unspecified minority stake. A year later, DPSG paid $1.7bn for the company and its complete portfolio. In June this year, the company confirmed the departure of Bai Brands CEO & founder Ben Weiss.

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