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Will Bai Brands take Dr Pepper Snapple Group to the next level? - Analysis

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On the conference call following the company's full-year results announcement this week, Dr Pepper Snapple Group CEO Larry Young said newly-acquired Bai would become one of the company's priority brands.

The Bai Black range of sodas launched in November

The Bai Black range of sodas launched in November

‌In the client notes that followed the call, analysts appear encouraged by the idea. Bai, it seems, is widely-expected to help breathe some new life into DPSG.

While the group's performance has been consistent - with steady sales and profits growth since 2013 - SIG analyst Pablo Zuanic says both its CSD and non-carbonated segments are under pressure, which, he claims, partly rationalises the acquisition of Bai.

"CSD unit case volumes grew 1% both in 2016 and 2015 (Dr Pepper family +1% in 2016 and -1% in 2015), according to the company's disclosure," Zuanic says. "However, the IRI data had CSD volumes at -1.9% for 2016 and -2.5% in 2015. So, we assume DPSG has made gains in non-measured channels like fountain.

"At some point, we would assume these figures would converge."

NCB unit case volumes fell 1% in the fourth quarter of 2016, and were up only 1% for the year after +4% in 2015. But, as Zuanic notes, NCB volumes "are supposed to be a driver of growth".

In part, he adds, this "explains the company's more assertive M&A strategy".

At CLSA, Caroline Levy says the acquisition of Bai could provide an upside to longer-term growth, with "greater distribution/velocity aided by increased marketing". That increase in marketing, she says, will total US$80m.

Levy is also in favour of DPSG's decision to maintain Bai's head office, as well as its own management and sales team. "We continue to see significant distribution opportunity both in flagship Bai-5 and new products such as Bai Bubbles (flavoured CSDs), Bai Black (colas) and Bai Supertea (RTD teas)," she adds.

Moreover, Bai is not new to DPSG - the firm has been distributing the brand since 2013 and in 2015, paid $15m for an unspecified minority stake. Stifel analyst Mark Swartzberg says this, along with the increase in marketing spend, means Bai is likely to outperform management's year-one objectives.

"In our opinion, DPS managers are highly qualified to undertake this spend." he says. "DPS knows what it is buying, ... Bai has a deep innovation pipeline and Dr Pepper Snapple has posted superior share trends to Coca-Cola Co and Pepsi in legacy CSDs while keeping brand spend constant relative to sales, in contrast to increases for Coke & Pepsi."

If these forecasts come true, we can expect 2017 to buck the group's 2.1%, 2.6% and 2.5% annual sales growth trend.

D?r Pepper Snapple Group Full-Year 2016 results - Click here for the full round-up of just-drinks coverage


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