Why You Should Stick With These Beverage Companies

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Increasing health concerns around carbonated soft drinks, or CSDs, in the U.S., Europe, and other developed nations slowed down the growth of beverage companies. These companies are being held responsible for the growing obesity epidemic, which causes diseases like diabetes, heart problems, and hypertension. Consumers, especially in developed nations, are shifting to healthier food and drinks.

In order to maintain their growth, these companies are adopting various strategies like refranchising the bottling business, cost cutting initiatives, and M&A. 

I have analyzed three such beverage companies. Let’s find out how these companies are employing various strategies for their growth.

Refranchising and cost cutting plan

Coca-Cola (NYSE: KO) is looking to refranchise its U.S. bottling business, with which the company expects positive structural changes that will boost its earning margins. To enhance its distribution network and to improve operating margins it announced the signing of a refranchising contract with five bottling companies in North America in April 2013. This contract includes outright territory sale, a territory swap, and sub-bottling agreements, and it is expected to close in 2014. These five bottling companies are contributing to around 5%-10% of its U.S. sales.

Coca-Cola expects to generate an operating profit of more than $500 million by optimizing its manufacturing base in North America in 2014. This will have a long-term, positive impact on the company's brand, as these local sellers have adequate awareness about their territory. The company, with its U.S. plants, expects it can operate well with only two-thirds of its current facilities within 3-4 years.

Coca-Cola announced a new, four-year “productivity and reinvestment” program in 2012, which will enable the company to strengthen the brand and reinvest the resources to drive long-term profitability growth. In the productivity program, it will focus on streamlining its technology system, making its global supply chain more efficient, and standardizing business processes, which is expected to generate annualized savings of around $450 million in four years.

Acquisition and cost cutting plan

In 2012, Mondelez International (NASDAQ: MDLZ), a $56 billion cookies maker, split off from Kraft Foods Group. Now PepsiCo (NYSE: PEP) is planning to acquire Mondelez. Both Pepsico and Mondelez have a leading position in the snack food market.

Globally, the snack food market has $400 billion in annual sales currently, which is growing at 5% per annum. Nearly 40% of snack food sales are contributed by emerging markets. Both these companies are aiming to expand their snacks' footprints in emerging markets. It is expected that PepsiCo revenue will be boosted by this acquisition. The merger of these two companies is likely to generate substantial synergies in terms of cost reduction and advancing distribution channels, which will accelerate revenue. Potential cost synergies of more than $2 billion in revenue and $450 million in earnings before tax is expected from this deal.

Additionally, PepsiCo planned a multi-year productivity program for cost savings of $1.5 billion in 2012, which will result in savings of $500 million in 2013 and $500 million in 2014. Under this, the company is planning to reduce its global workforce by 3%, amounting to 8,700 employees in 30 countries, by 2014. This cost savings will improve its return on invested capital by half a percent annually, starting from 2013.

The magic of TEN

Dr Pepper Snapple (NYSE: DPS) drives 89% of its revenue from the U.S. market. With the rise in consumers' health concerns, the demand for CSDs has declined in the U.S. The company, to revive the CSD category, has launched a new product range with 10 calories called "TEN," a low-calorie diet drink. This new product is able to fulfill the customers' need for a low-calorie drink and will continue to generate revenue from the U.S. market.

In the test market, 7% of the volume was generated by TEN, and it contributed 40% of revenue to the CSD category. TEN is expected to roll out nationwide by the end of the second quarter of 2013. The company plans to invest around $30 million on its TEN platform in 2013 and is expecting a long-term 3%-5% revenue growth per year from TEN.

Dr Pepper, with the aim of increasing its revenue and customer base, signed an agreement with Spirit Airlines (NASDAQ: SAVE) on June 4, 2013. In this agreement, Dr Pepper and diet Dr Pepper will be added to the airline's in-flight beverages service through 2016. The company is expecting to generate higher volumes from this deal, as its Dr Pepper will be served to more than 12 million Spirit Airlines' customers. With this deal the company will increase its relationship with Spirit customers and boost its brand-building. Additionally, the agreement includes advertisement and marketing consideration and will increase the company's brand, resulting in high-volume growth in the upcoming quarters. It is expected to generate revenue of $1.6 billion for the quarter ending June and $6.15 billion for fiscal year 2013.

Conclusion

Coca-Cola, with its refranchise model and four-year Productivity and Reinvestment program, is creating a strong base for future growth. On the other hand, PepsiCo's multiyear cost savings and the expected deal with Mondelez can generate a good long-term growth opportunity for the company.

Dr Pepper Snapple, with its 10-calorie TEN and tie-up with Spirit Airlines, will probably boost its revenue in coming quarters.

I recommend a buy on all these stocks.

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Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and SPIRIT AIRLINES INC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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