Case Analysis - Dr. Pepper Snapple Group, Inc.

Ruth Wawin, Paida Kangai, Thomas Ulrich

Case Analysis Dr. Pepper Snapple Group, Inc.

Ruth Wawin Paida Kangai Thomas Ulrich Submitted Oct 7, 2012

Ruth Wawin, Paida Kangai, Thomas Ulrich

Case Analysis - Dr. Pepper Snapple Group, Inc.

Executive Summary: This case report will provide a current analysis of Dr. Pepper Snapple Group Inc., and whether entrance in the maturing energy drink market with the release of a new beverage would be a profitable opportunity. The alternatives that will be considered are to (1) introduce an energy beverage, targeting heavy consumers, (2) introduce an energy beverage, targeting the adult niche market or (3) not introducing an energy beverage. In this case, we are recommending to Snapple brand manager, Andrew Barker, to introduce an energy beverage targeting heavy consumers. This, in addition to the marketing strategies we intend to employ, will provide the best chance at gaining entrance into the energy drink market and taking ownership of sufficient market share needed to ensure future success. We have based this decision on potential profit margins, the ability to differentiate our product, and the ability to target the most profitable market.

Problem Statement: Dr. Pepper Snapple Group has no energy beverages in their product line; as well they are a late adopter into the market. Mr. Barker would like to consider the opportunity to gain market share in this high growth, high margin, energy-beverage market.

Ruth Wawin, Paida Kangai, Thomas Ulrich SWOT Analysis Resource strengths: · Strong diverse portfolio of leading consumer-preferred brands in the CSD and Non CSD brands. · Strong brand name · Excellent company reputation. · Owned 18.5 percent market share in 2006 of non-alcoholic beverages · Follow an integrated business model · Strong Customer relationships with competitors and distributors · Strong financial position, net sales of $5.78 billion · Extensive geographic manufacturing and distribution capability · Experienced executive management team (over 20 years of experience) Problematic weaknesses: ·

The only major domestic non-alcoholic beverage company in the USA without an energy drink

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Not global like competitors

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Will be a late adopter should they choose to introduce a new line of energy drink

Market Opportunities: · Great opportunities to expand 6.2 billion dollar Energy industry and a gain in an additional customer group · Increase presence in high-margin channels and packages · Less barriers to attractive foreign markets · Acquisition, through vertical integration strategy · Copy Red bull strategy of aggressive media promotion · Offering a sugar-free alternative · Offer increased functionality in the physical design of drink External Threats: ·

Increased rival intensity Slowed growth market Growing bargain powers of customers and suppliers

Ruth Wawin, Paida Kangai, Thomas Ulrich

Industry With annual sales growth rate reaching 42.5% from 2001 to 2006, the energy beverage market has become the fastest growing non-alcoholic beverage category. However, analysts expect this growth rate to decline to 10.5% in the next three years. This is attributed to the market maturing, the increase in product price and the emergence of the “hybrid” energy beverages, such as energy colas, fruit drinks and energy water. The energy drink segment is the „new wake up drug‟ during the morning, „boost‟ during the day and „alertness‟ and „push‟ during an evening of studying or partying. For North America, sales are generally steady during the year unlike CSD and non CSD sales which are affected during the cooler seasons of the year. The energy drink market does not seem to follow a seasonal pattern. The industry characterized by a high budget in media promotion and major sports league sponsorships.

Company: Being a large and highly successful brand owner, internal funding for expenditures such as product development, market research and promotional expenses should not be an immediate concern. DRS is a publicly traded company and this can provide alternative avenues for any necessary fundraising through the issuance of shares. This will all prove helpful in DRS‟s ability to establish themselves as a serious competitor in the energy beverage market. DRS have built strong relationships with many major distributors, convenience and supermarket chains that currently carry their CSD and NCSD products. The

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distribution networks are largely already in place. This, along with the reputation of DRS, will make the obstacle of attaining shelf/fridge space to place their new products, less of an issue.

Consumer: The average consumer of energy drinks is males between the ages of 12-34. They are what are known as the “heavy users” of the drink. They drink energy drinks to increase their mental alertness and to give them energy through the day and night. They consume primarily in the afternoon hours, while at work, when they driving or even just at home. This information is vital when considering marketing strategies for introduction of a new energy drink as you are able to focus your attention on providing convenient ways for consumers to find and purchase your product. Also, the promotions and advertising can be honed in to appeal to the atypical energy drinker as well as appealing to people new to energy drinks altogether. The consumers in the energy beverage market have proven that they limit their choice to, on average, only 1.4 brands. This suggests high brand loyalty in the energy drink market. This may hinder DRS‟s ability to get the current consumers of other brands to give their new product a try.

Competition: The energy drink market is full of major players as far as competition is concerned. Not only that, but these competitors have had years of experience selling these products. Red bull, for example, is an Austrian company who entered the market

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in 1997 with aggressive marketing strategies and is the clear frontrunner in the industry. DRS has had proven success and while they are no stranger to a bit of competition, as they deal with many competitors in the CSD/N-CSD markets, they are “late to the party” in this case. Lines have been drawn and market share has been acquired. DRS is set to attempt to hurdle itself into the mix in an attempt to gain a share of the market for itself, but is it too late?

Alternatives: Alternative (1) Introduce energy beverage, targeting heavy users Our first alternative is to target heavy energy drink users which are men ages 1234. Since this group of men is the target of many of the competitors in the energy drink market, this alternative offers a way to differentiate ourselves. To effectively target this group of men, while differentiating ourselves from the many competitors whom target this group also, we will be offering a16.9 ounce aluminum can with a re-sealable screw top priced at $3.50. The brand loyal market could see this as enough of a change to give the new product a chance. Although the flavoring of the drink will be custom fit to our market, the ingredients will be much the same as competitors, with only a slight increase in caffeine and taurine content. To successfully integrate ourselves into the mind of our targeted group of consumers, we will be spending $12,500,000 on advertising and promotion. This is similar to what TAB energy spent in their initial year. Given the media expenditure of the competitors in the market, we have placed ourselves around the middle to higher end of the competition. It is vital that Dr. Pepper Snapple Group, Inc.‟s energy beverage makes

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a big splash in its initial year in the market and media expenditure can be re-evaluated for its second year in the market. In order to have a brand name that resonates with our target market we selected a word that was synonymous with strength, something that all men can yearn for. Not just physical strength but also mental strength and alertness, which is why we decided on “Thunder.” Distributing “Thunder” to convenience stores was the best option to successfully provide the target market with the most convenience and frequent exposure to the product. Men visit convenience stores solely for the reason of convenience, they are there to pick up a product and continue on their way. Heavy users of energy drinks, such as our target market of men 12-34, are the type of consumers who seek out energy beverages in order to consume them. The sole purpose of visiting the convenience store could be to pick up an energy drink. We are also targeting those who visit the convenience store for others purposes and grab “Thunder” to gain that energy boost they are looking for to get through their day. Convenience stores also have the largest gross margin at 50% in comparison to the supermarket and wholesalers gross margins. The size and physical construction of our of our can is what truly sets us apart from the competition, being the only available resealable screw top in the energy beverage market. Having a re-sealable top enables consumers to take the beverage on the road successfully without the fear of spillage or the loss of carbonation. Men can take their energy drink to work, to school, to the gym, anywhere knowing that it will travel without spilling a drop. 16.9 ounces is a single serving size that will be desired by our target market because they are heavy users and subsequently 16 ounce cans accounted for 50% of case sales. We felt since 16.9 ounce was similar to 16 ounces it would still be a desired option for our target market. The

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price point of $3.50 is established to position “Thunder” just below Red Bull in price per ounce in the convenience store distribution. Red Bulls price per ounce in the convenience store distribution is $0.24 per ounce and “Thunder‟s” would be $0.21 per ounce. In order to not directly compete with Red Bull, we wanted to be slightly cheaper and have the convenience of our re-sealable screw top being an added benefit to get consumers to choose “Thunder” over Red Bull. In regards to the rest of the competition, we have placed ourselves on the higher end of price per ounce for the convenience store distribution channel. The next highest price per ounce is Tab at $0.19. Our target market will value the benefit of the having the re-sealable aluminum can which will justify having our price point at the second highest price per ounce for convenience stores in the energy drink market.

Alternative (2) Introduce energy beverage, targeting adult niche Our target market for this alternative is adults, both men and women 35-54. This product is an energy beverage called “Zen”; a 16 ounce can, priced at $1.60 a can. At a much lower price, the “Zen” beverage will contain less sugar and less of the expensive ingredient “taurine”, in comparison to other energy drinks. This will fit with the interests target market we aim to reach by reducing the potential crash-effect of a drink that is high in sugar. In order to best target this market, it is optimal to have the product distributed to supermarkets because this where our target market will visit frequently. The gross margin in supermarkets is 40%, which is slightly less than convenience stores at 50%. However, convenience stores are leveling off in their sales of energy drinks and we think our target market will be found in supermarkets more regularly then

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convenience stores. Since Dr. Pepper Snapple Group Inc. is a well-established brand in itself, it will be easier for the company to obtain optimal shelf space in supermarkets compared to brands that have no established companies behind them. The targeted group is comprised of busy adults; users within this group represent 34% of all energy drink users. “Zen” was determined to be the most appropriate brand name for a beverage to be targeted at adults from 35-54. We felt that promoting this brand as a calming and stimulating drink would better appeal to this market of adults. Current energy drinks targeted at heavy user have bolder brand names to appeal to younger consumers, while “Zen” will promote mental clarity and alertness that will appeal to the busy adult who is trying to stay alert while getting through their day, stress free. Our target group is picking up an energy drink while grocery shopping, going to the store to grab lunch on the go, or walk by and see our product and realize it is something that will benefit them. Adults are busy spending time with their families, working, and trying to live fulfilling lifestyles. “Zen” will enable them to go about their busy day with mental clarity and a boost of energy. The media expenditure budget for promoting “Zen” to our niche adult market is $7,000,000. This number is larger than what the majority of the competition is currently spending on media expenditure in 2007; with the exception of Red Bull who is spending 60.9 million. Since “Zen” is targeting a niche market of adults, we determined $7,000,000 to be an appropriate number to make our product known in the market. Since “Zen” is targeted to a smaller group of the market and since the profit on each can sold is lower, we felt it was necessary to spend enough money to make an impact but not so much that it would take a long time and a lot of units sold to break even. When

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marketing a product to a niche group, less advertising expenditure is needed to be spent in comparison to the money needed to make an impact when advertising to a larger group of consumers. Since the manufacturing and bottling aspect of Dr. Pepper Snapple Group Inc. is well established and functioning, there is less of a need to spend an excessive amount of money to make a splash in the energy beverage market. Some consumers will recognize the company behind the brand and try it because they recognize the name and are familiar with Dr. Pepper Snapple Group Inc. When determining the size for this niche group of adults we took many criteria into consideration. We figured that if we choose the 8 ounce size can, which is a unique size specific to Red Bull, it would subsequently place is in direct competition with that brand. We wanted to avoid direct competition with Red Bull due to their current market, loyal customer base, and large media expenditure. Looking at the 24 ounce size can, it was determined that for the adult niche market that we were trying to target the can size may be too large for everyday convenience and would not be consumed as frequently as a smaller size. Therefore, by the process of elimination we decided 16 ounces would be the size that would best suit our target market. 16 ounces accounts for 50% of case sales and has the ability to travel well and be consumed more frequently than a larger size. We want our consumers to be encouraged to consume their beverage as a singleserving beverage which will encourage repeat purchase. In some cases repeat purchase will occur in the span of a day. Since our energy drink is targeting a narrower niche market, we opted for a relatively conservative price. When trying to attract a niche market you need to have specialized offerings, which in this case, will be a niche product at a lower price per

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ounce. This places “Zen” among the competition as having the lowest price per ounce in comparison to the other brands in supermarkets. “Zen” will have a pricing advantage over Monster, Amp, Sobe, Rockstar, Full Throttle and especially Red Bull. Although the gross margin per unit will be somewhat low, it is our goal to sell more units by pricing “Zen” as a cheaper niche energy drink at retail price of $0.10 per ounce which equates to $1.60 in a 16 ounce can. This is the lowest price per ounce for an energy beverage available in supermarkets. The next highest price per ounce is Monster, Rockstar and Full Throttle at $0.11 per ounce. On average, an older consumer base is more likely to be on the conservative side when it comes to the money they spend on functional beverages.

Alternative (3) Status Quo This alternative is for Dr. Pepper Snapple Group Inc. to remain at status quo and not enter the energy beverage market. The threat of the existing competition and the domination by its five main competitors makes the market difficult for any company to penetrate. With 94% of the energy beverage market being monopolized by five main competitors and the remaining 6% belonging to private labels, there is not much room left for a non-established energy drink to enter the market. 43% of the market currently belongs to Red Bull; the first energy beverage to introduce itself into the market. Despite emerging competition, Red Bull has still managed to maintain almost half of the market share. Regular consumers of energy beverages are considered to be extremely brand loyal, as the average users varies between 1.4 brands. With consumers being as loyal as they are to their favorite energy beverage, it is harder to absorb the competition‟s

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portions of the market share. In order for an energy drink to successfully be introduced into the market, it would have to do a variety of things: develop a new brand, target a niche market with specialized offerings, and/or differentiate a product clearly from that of the competitors. The introduction of a new brand in an established, mature market that has exhibited signs of slowed growth would need a well devised and well executed marketing plan. An appropriate advertising budget would need to be quite large in the initial years in order successfully position the product in the consumer‟s minds. The energy beverage market has begun to see many different energy beverages enter the market resulting in price erosion. Larger package prices, multi-packs, and the increase of availability of energy beverages in mass merchandisers are causing lower prices and resulting in lower profit margins. It is predicted that convenience stores will continue to have problems with price erosion for energy beverages in the future. In order for a company such as Dr. Pepper Snapple Group Inc. to break into the energy drink market, there are a lot of criteria to consider. With this industry already saturated with strong competition, an energy beverage may not be as profitable as they may have hoped and therefore not entering the market may prevent Dr. Pepper Snapple Group Inc. from losing revenue.

Key decision criteria Our key decision criteria include: - Profit Margins - The market is a high growth, high profit market. This is something that was considered when choosing whether or not to enter the market. - Differentiation - We needed to choose an alternative that made our product

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stand out from the competition in order to attain a decent market share. - Market Choice - We are choosing what we believe is the market that will provide us with the best potential to be profitable and successful.

Choice and Rationale We have chosen to implement alternative (1); introduce energy beverage, targeting heavy users. The “Thunder” brand will focus on males, 12-34. We have chosen a single serve can at a size of 16.9oz that will include a revolutionary resealable screw cap to differentiate the product from other competitors, especially the other similar sized cans. This way we follow the general guidelines of entering a maturing market as a late adopter by (1) Attracting customers with a specialized offering and (2) Differentiating our product clearly from those of competitors. Our can design will be of the 16.9oz size to avoid mimicking Red Bull‟s renowned 8oz can. It is not our immediate concern to compete with Red Bull‟s share of the market, therefore the 16.9oz can will compete with the others in that size range. Also, we have chosen to use this size because it has shown the largest growth, at over 150% since 2004. We provide newfound functionality by incorporating the first re-sealable screw-top to an energy beverage. Consumer Trends: Agriculture and Agri-Food Canada (AAFC) are quoted as reporting:

“For energy drinks and shots, consumers are looking for greater functionality...” Consumer Trends: Agriculture and Agri-Food Canada (AAFC), 2011

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With this choice, we will be using convenience stores as our main source of distribution. The margins using this channel, although slightly declining, have proven to be the highest in the industry at about 50%. We feel that this is right where we need to be to match with our target market of heavy users, which it would be expected our competition has also come to realize, as reported by AAFC:

“Certain manufacturers have targeted non-specialist retailers, such as convenience stores to drive product sales. These are appealing due to their potential to capture casual athletes who currently use these products infrequently or not at all.” Consumer Trends: Agriculture and Agri-Food Canada (AAFC), 2011

We will be introducing the “Thunder” beverage with an initial media expenditure cost of $12,500,000. This, we feel, will provide enough of a presence in our first year of sales to get our product off to a good start and is similar to what TAB energy spent in their initial year. The physical benefits of energy drinks have already been widely taught by the pioneers of the industry, such as Red Bull. This means, that we will not have to spend as much time and money educating the public on what energy drinks do and we can focus on promoting the brand name, “Thunder” through various media avenues. A sugar-free alternative was decided against as the regular energy drinks account for 80% of the market and we do not feel that our target market makes up a large portion the 20% that would be left untapped. With this choice, our breakeven is relatively low at only $25,000,000. To reach this number, we would only have to attain 0.4% of the current total market sales of $6.2B. This would appear to be easily attainable based on how the competition currently

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fares and how Tab Energy fared in their first year. We hope to attain at least 2.5% of the current market by having sales numbers at $155,000,000 in the first year. These sales figures are similar to the initial introduction of TAB energy drink.

Implementation Our goal is to attract our target market, men ages 12-34 by positioning our brand at the forefront of their minds as the man‟s “go-to” energy beverage. An extensive promotional strategy will aid in placing “Thunder” in the evoked set of our target market and consumers will recognize our drink as the one that gives you a strong energy boost that will get you through the day. “Thunder” is a 16.9 ounce can, priced at $3.50. Its promotion will focus on the convenience of having a re-sealable top so that you can take it with you throughout the day. The promotional budget of $12,500,000 will be used on a well devised marketing plan targeted towards men. Advertisements for “Thunder” will be placed in all of the major men‟s magazines, car magazines such as Car and Driver, fitness magazines such as Men‟s Health, and a variety of sports magazines such as Sports Illustrated. Point of purchase displays in convenience stores will be a large portion of our promotional advertising. Since energy beverages are a low involvement purchase and differences between brands are small, it is necessary to have advertising present at the point of purchase. With low involvement purchases consumers tend to select brands because they are familiar with, therefore it is necessary for the promotional efforts of “Thunder” to have a big impact on the target market especially within its initial year in the market. Having a point of purchase display will show consumers our product is out there and when they go into the store for an energy

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beverage they will be inclined to try the newest energy beverage by Dr. Pepper Snapple Group Inc. The display will be a large energy drink can cut out, vibrant in color, with shelving to hold the cans. Consumers will see the display when entering any convenience store that “Thunder” is available, and will hopefully spark our consumers‟ interest. Not only will this grab our target markets attention, but we will also reach out to the consumers outside of our target market using this method. Another great way to advertise to our target market is to use social media advertising on sites such as Facebook, Twitter, and Tumblr. Appealing banner ads with a click-through to the “Thunder” website is an optimal way to get attention from consumers who spend a lot of time on social media sites. Similar banner ads for internet sites that are popular among our target market will also be a prominent part of our advertising. Sports websites, car websites, fitness websites, as well as miscellaneous sites that are popular among men are where the majority our internet advertising will take place. Sponsoring an athlete in an extreme sport such as motocross will allow us to have our presence known among our target audience that watches extreme sports. Our competition is known for sponsoring extreme sports such as motocross. Monster, Red Bull and Rockstar are all well-known sponsors in the motocross industry. Having “Thunder” seen among our competitors in the market will give our brand notoriety by the consumers. Sponsoring an athlete strengthens the “Thunder” brand not only because of television and promotional exposure but also because it places our brand in the forefront of consumers mind as a man‟s energy beverage. With the advertising

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expenditure that Dr. Pepper Snapple Group Inc. is spending on its promotions, our goal for “Thunder” is to obtain 2.5% of the current market share.

Control-evaluating criteria The criteria that Dr. Pepper Snapple Group Inc. will use to determine whether or not the energy beverage “Thunder” is performing successfully in the market will be based largely on profits and unit sales. Our goal is to obtain 2.5% of the current market by the end of year one. The current market share that “Thunder” has obtained will be evaluated quarterly and re-evaluated at year end to see if we have obtained our goal. Important performance criteria such as how many units we are selling in convenience stores will be evaluated against the current competition to see how we are performing in our chosen channel. Since TAB energy has been a newer entrance into the energy beverage market, we will compare our results in unit sales against theirs in their initial year. Our media expenditure is also similar to their first year, so this makes the two performances easier to compare. If “Thunder” does not reach its goal of obtaining 2.5% market share it will be below the $80,500,000 million in net income that we expect the beverage to make. At this point we will need to re-evaluate and consider changes to the marketing mix and to promotional expenditure. If changes need to be made, we will evaluate the response of our various sections of advertising is having on our target market. Marketing research will be completed on our target market to see if we are making the expected impact the consumers mind. Re-evaluating our promotional themes will be considered as an option to recover if we do receive lower than expected sales performance.

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At the end of year one, necessary evaluations will take place. If they are less than half the percentage of what we expected we will change course. Changing the course of where “Thunder” is distributed is also a reasonable option if performance in convenience stores levels off, as predicted. Changing the various aspects of the marketing mix will be seriously considered including the changes to the product, price, place and promotion.