Joseph S, Harrison University of Richmond Larry Young, President and CEO of Dr Pepper Snapple Group, Inc. (NYSE: DPS) seemed to be on a roll, Named 2010 Beverage Executive of the Year by Beverage Industry magazine, he led the company through three very difficult economic years since it separated from the London-based food and beverage giant Cadbury Schweppes. Reflecting on that time, he chuckled, “There couldn't have been a worse year to g0 public.” Triggered by the collapse of mortgage- backed securities, the recession froze credit markets and led to unprecedented commodities prices. In spite of adverse economic conditions and fierce competi- tion, the company managed to obtain modest geowth in sales in 2010, Perhaps most satisfying of all was the recent turnaround of the Snapple brand, which had been struggling for many years? Sales volume for the brand grew 10 percent in 2010, fueled by new produets, packages, and distribution. In addition, Dr Pepper, Canada Dry, Crush, Mott's, and Hawaiian Punch all experienced increases in demand. A healthy cash flow allowed the company to reduce its debt, ‘increase dividends, and repurchase shares. A question remained as to whether the company was simply taking advantage of some fairly obvious opportunities that it could not pursue when it was owned by Cadbury Schweppes, or whether this number three firma could actually begin to prosper in an industry dominated by two of the strongest brands in the world, After all, although DPS sales were up almost 2 percent in 2010, profits were lower than in 2008. In comparison, Coca Cola Company experienced revenue growth in 2010 of 133 percent, with operating income increasing by 27 percent. During the same time period, PepsiCo had revenue growth of 33.8 percent and growth in ‘operating profit of 3.6 percent. of No) Dye) cual da Kc ek Fighting to Prosper in a Highly ere et eg The Dr Pepper Snapple Story ‘The original Dr Pepper soft drink was invented in 1885 by a young pharmacist named Charles Alderton. At the time, Alderton was working at Morrison’s Olé Comer Drug Store in Waco, Texas, which served carbonated soft drinks from asode fountain. Using thatresource,Alderton began to experiment with his own recipes and soon discovered that one particular drink, referred to as “the “Waco,” was gaining popularity among his customers. As demand grew, Alderion and Morsison brought in a third partner to help with the manufacturing and bottling of the soft drink. The partner was Robert S. Lazenby, owner of the Circle “A” Ginger Ale Company. Aldeston lft the business shortly thereafter, but Morrison and Lazenby continued, eventually forming what would come to be known as the Dr Pepper Company, named afer a friend (of Morrison. The company was introduced tothe general publicin 1904 atthe World's Fair Exposition in St. Louis* From itshumble beginningsin Morrison's Old Corner Drug Store, the company Morrison and Lazenby started has become one of the largest beverage manufacturers in North America, DPS’ current product portfolio is closely tied to the history of mergers and acquisitions ofits one- time parent company, Cadbury Schweppes pic (Cadbury Schweppes). Cadbury Schweppes emerged in 1969 from the merger of Cadbury ple, a British confectionary and a soft drink company, and Schweppes, an international beverage brand, In the three decades that followed, Cadbury Schweppes gained the third largest share of the beverage market in North America through strategic acquisitions. Some notable acquisitions included the Duffy-Mott Company (later known as Mott), Canada Dry, Sunkist, Crush, and Sun Drop in the 1980s. In 1993, the company bought the A&W brands Squirt and Vernors as well ats signature root beer and cream soda ‘Ti es rand er decocr sean ier mace state gos a bad matagart paces | ld he eines he help ents De iy 5 Harn i paparma thecass am lo ol te Raine Sonal of aha oth Uses) of Retnonstor proving i wth he reco ‘ed ecu he cpa ard a compeive errart &casee flavors. Cadbury finally purchased Dr Pepper/Seven UF, Inc, in 1998, an acquisition that brought Dr Pepper, UR, IBC Root Beer, and the Welchis soft drink line into the company portfolio Tn 2000, Cadbury Schweppes acquired the Snepple Beverage Group (Snapple). Snapple had previously been part of a failed acquisition by Quaker in 1994. The acquisition was intended to help Quaker strengthen its beverage division, which atthe time included Gatorade, However, after failing to successfully integrate the contrasting corporate cultures, in 1997 Snapple was acquired by Triarc Companies, an investment company ‘with a history of purchasing struggling assets? It was from Triare that Cadbury Schiveppes ultimately acquired Snapple ‘Three years after acquiring Snapple, Cadbury Schwseppes combined its four North American beverage companies—Dr Pepper/Seven UP, Snapple, Mott's, and ‘Bebidas Mexico—into Cadbury Schweppes Americas Beverages (CSAB). By 2006, CSAB had developed a common vision, business strategy, and management structure and established its own bottling and distribution network. In May 2008, under the direction of Larry Young, CSAB officially spun off from Cadbury's confectionary manufacturing division and became known as Dr Pepper/Snapple Group, Inc ‘Today, DPS manufactures, markets, and distributes cover 50 brands of carbonated soft drinks, juices, mixers, ‘eas, and other beverages. In addition to Dr Pepper and Snapple brand drinks, DPS products include Mott’ juices, 7UP, A&W, RC Cola, Squirt, Sunkist soda, Canada Dry; Schweppes, Hawatian Punch, Yoo-Hoo, and other well-known beverages’ It has a market share of over 40 percent in the non-cola carbonated soft drink category. The Company Dr Pepper Snapple Group, Ine. is a major beverage company with an integrated business model including brand ownership, bottling, and distribution of nonalcoholic beverages in the United States, Canada, and Mexico. The company’s portfolio includes dozens ‘of brands of flavored (non-cola) carbonated soft drinks and noncarbonated beverages like mixers, juice drinks, and ready-to-drink teas and juices. Since the spin-off of| Cadbury in May 2008, the company has established itself as the top non-cola carbonated soft drink company in the United States, and has maintained the number three spot in the broader beverage industry in North America ‘The Management Team Current DPS management includes seasoned professionals with decades of experience in the food and. beverage industry. Most notable in the organization are ‘lobe: 6 sen RysniSockphet com president and CEO Larry Young, chief financial officer Martin Ellen, and President of Packaged Beverages Rodger L. Collins! President and CEO: Larry Young. Larry Young has been president and CEO of the company since October 2007 and led the separation of DPS from Cadbury in 2008. Before coming to the company, Young worked for more than 25 years in the PepsiCo system, where he began as a truck driver and worked his way up to president and CEO of Pepsi-Cola General Bottles. In 2005, he joined the Dr Pepper/Seven UP Bottling Group, again as presi- dent and CEO. Young finally joined Cadbury Schweppes in April 2006 when it acquired Dr Pepper/Seven Up. Chief Financial Officer: Martin Ellen. Martin (Marty) Ellen joined DPS in April 2010. He has 25 years of experience as chief financial officer in companies in the manufacturing, franchising, distribution, and service industries. His previous appointment was at Snap-on Inc, a manufacturer and marketer of professional tools, equipment, and software. His beverage industry expe- rience took place at Whitman Corporation, owner of, Pepsi-Cola General Bottlers, where he helped realign ‘and expand Pepsi bottling territories in the United States and Europe. Prosident of Packaged Beverages: Rodger L. Collins. Rodger Collin has been afiliated withthe bot- tling group of Dr Pepper Snapple or its predecessors for ‘more than 30 years, having survived numerous acqui- sitions, restructacings, and the spin-off of DPS from Cadbury Schweppes. In his current role, he manages @ coast-to-coast sales force and fleet with responsibilty for direct-to-store delivery and warehouse distribution. Board of Directors ‘As a publicly traded company, DPS management is directed by a board of directors chaired by Wayne Sanders, who served as Chairman and CEO of Kimberly- Clark Corporation until retiring in 2003." As stated in the company’s Corporate Governance Guidelines, the board's responsibility is to manage the business affirs of the company, including regular evaluation of strategic direction, policies and procedures, and top management. It mast ensure that the company’s managers actin the best interests of the company and its stockholders and maintain a high level of ethical conduct." In addition to ‘Chairman Sanders, there are eight more members of the board of directors, including John Adams, formerly of Trinity Industries and Texas Commercial Bank; Terence Martin, former senior vice president and CFO of Quaker (Oats; and DPS CEO Larry Young" (for full information oon decors, sce Exhibit 2).ols, ign aot for au for Exhibit 1 Boacd of Director Wayne R, Sanders, Chairman Mi Sandors has setved as 2 director since May 2008 ends chairman ofthe board of drectore and chairman of the nominating and corporate governance committee. Mr. Sanders served as the chairman and the chit executive officer of Kimbry-Clare Corporation from 1992 unl Nis retirement in 2003, Mi. Sanders curently serves on the boards of drectors of Texas inetn- ‘ents inc, and Belo Carp. He previously served onthe board of directors of Adolph Coors Company. Mr Sanders is azo 2 National Twstes and Gaverno® ofthe Boys & Girls Club of America and was 2 member of the Marquette University Board af Trustees from 1992 t0 2007, serving as chairman fom 2001 ¥0 2003. Larry D. Young, Prosident, Chief Executive Officer, and Director Lacy Young is president and chef executive officer for Dr Pepper Snapple Group, Inc. one of the worlds leading beverage companies Mr: Young was namiad president and chisf executive oficer in October 2007 after serving as president ang chief ‘operating ofcer for the companys Botting Group division, anc led the spin-off of Dr Pappar Snapple Group from Cadbury ‘Schweppes pl in May 2008. Nc Young jeined the company in April 2006 through ite full acquistion of Dr Pepper/Saven Up Botting Group, where he was president and CEO since 2005, As heed of operations, he played a central olan helping te create new business model for» fully integrated beverage company. In his 0.year career, Me Young has beon involved with producing and seling virwally every type of beverage in the Amaricas and across Evrope ond Rusia, He served more than 25 years in the Paps! sytom, most recently with PepsiAmercas and before that with Pepa Cola General Bottles, where he bbegan on 2 route uc and worked his way to president and chiet operating officer. John L. Adams, Director Mec Adams has served s 2 diactar since May 2008. Mc Adams sowed a¢ Executive Vice President of Tity Industrie, In. from “January 1999 to June 2005 and held the postion of Vice Cheirman fom July 2005 to March 2007. Pro to ning Tit Indus ‘es, Mr Adams spent 25 yearsin various positions with Taxas Commerce Bank, NA. and its successor, Chase Bank of Tora, [National Assocation. From 1997 to 1998, he served as Chairman and Chief Executive Officer of Chase Bank of Texas Mc ACams ‘correntiy serves onthe boards of dractors of Trinity Incisti, nc and Group 1 Automotive, Ine, here he has served ae ait rman since April 2005. He previculy served on the boards of cirectors of American Express Bank Lid and Philips Gas Company ‘Terence D. Martin, Director [Me Marin has served 2s e director since May 2008 and serves as chairman of the audit committee. Mr Martin soved 2s ‘Senior Vice President and Chief Financial Ofcer of Gusher Oats Company from 1996 untl hs retirement in 2001. From 1995 16 1998, he wes Executive Vice Present and Chief Financial Oficer of General Signal Cocporation. Mi. Martin was Chief Finoncil Ofices and Member ofthe Executive Committee of American Cyanamic Company from 1991 to 1995 and served as sure rom 1988 to 1991, Since 2002, Mr Marcin has served on the board of cractors of Dal Monte Foods Company and rly serves asthe chsicmen ofits audit commie Pamela H.Patslay, Director Ms. Patsloy has served aso dvecto since May 2008. Ms, Patsley served os Senior Executive Vice Present of First Dato CCorporatian from March 2000 to October 2007 and President of Fist Data international fom May 2002 to October 2007 Sha retired for those positions in October 2007. From 1991 to 2000, she served as President and Chief Executive Officer cf Poyrentocn, Inc. pror ta its acquisition by First Data, Ms, Paley also previously served as Chef Financial Officer of First USA, Ine. Ms. Paley current sarvas on the boards of directors of Molson Coors Brewing Company nd Texas Instruments Incorporated, and she is the cher of tre audit committan of Texas Instruments Incorporate. Ronald G. Rogers, Director Me Rogers hae served as a droctor since May 2008. Mr. Rogers sarve in vatious positions with Bank of Montreal bowoon 4972 end 2007, From 2002 to 2007, he served as Deputy Chai, Enterprise Risk & Portfolio Management, BMO Financial Group: and from 1994 to 2002 he served as Vice Chairman, Personal & Commercial Clant Group. Prior to 1994, Me: Rogers hold various executive viee president positions at Bank of Montreal Jack L Stahl, Diroctor Mr Stahl has served a a doctor ence My 2008 and earvee ae chairman of thé compensation committee, Mr: Stahl served as (Chief Executive Oicar and President of Revlon, Ine. rom Febra'y 2002 unt his airmen in September 2005, From February £2000 9 March 2001, he served 2s President and Chief Operating Oficer of The Caca-Cola Compery and presiously served as Chief Financial Oficer and Senior Vics President af Te Coca-Cola Company's North America Group and Senor Vice President of ‘The Coca-Cola Company's Americas Group. Mr. Stahl curently setves onthe board of dractrs ef Schering-Plough Corporation. 1M. Anne Szostak, Diractor IMS, Stottak hos served as director since May 2008, Since Lune 2004, Ms, Szostakhas served as Prasdent and Chief Execu tive Officer of Szostak Partners LLC, 9 consulting frm that advises executive ofcers on strategie and human resoutee issues. From 1998 untiherretrerentin 2008, she served as Executive Vice President and Corporate Director-Human Resources ard Diversity of FleetBoston Financiel Corporation. she also servad as Chairman and Chiet Executive Oficer of Fleet Bank-Rhode Island fem 2001 to 2003. Ms, Stostek cumentl is @ director of Belo Corp, ChoicePoint, ne, Tupperwore Brands Corporation, and Sphertn Comparation, where she serves #8 chair ofthe compensation committee ‘Mike Weinstein, Director Mr Weinstein was elected a a directorin February 2009. Mr. Weinstein fs cofounder of INOS, which specializes in develop ing and commarcaizing imovative beverage prosucts, such 08 the HYDRIVE energy chink Me Weinstein served as president and cho aparating officer of ABW Brands, Ine inthe coy 1990s and later a3 chia executive officer of Snapple Beverage Group. which was acquired ky Cadbury Schweppes in 2000. During his creer, he alo has overseen such brands as RC Cole, SSquit, Mise, Stowars, and Vernore and has lea globe innovation ana business development team. Mr. Weinstein was named {0 Beverage World magazine's Hal of Fame in 2000 and receivad Beverage Digests prestigious "Visionary Award” in 2004, 7011 Boar of deo, haplinor cipeppernapele corPat Cases Company Strategies Since it was spun off from Cadbury Schweppes, DPS ‘management has concentrated 2 great deal of time and. attention on strategy development and implementation. ‘Through focused strategic development, management has sought to establish the firm as 2 leader in the higher ‘margin segments of the nonalcoholic beverage industry. ‘Consistent with this strategic direction, management thas established six specific strategies: Build and enhance leading brands. HE Focus on opportunities in high-growth and high rargin categories Increase presence in high-margin channels and packages. Leverage the firm's integrated business model 1 Strengthen the firm's distribution channels through acquisitions. Improve operating efficiency. ‘While mast ofthe strategies are centered on internal development, management is attempting to broaden the firm’s market through continued acquisition activity and contractual agreements with other organizations.” Whether internally or externally focused, however, the key to implementing each of these strategies has been @ Exhibit 2 Svateqy focus on marketing (for a detailed explanation of DPS strategies, see Exhibit 2) Marketing Shorlly after DPS demerged from Cadbury, the economy in the United States began to struggle and discretionary spending was constricted. As a result, sales in the industry tanked, leading many companies to drastically cut marketing budgets. In contrast to the mainstream reaction, DPS intensified its focus on marketing and advertising. This decision was based on an analysis of the early 1980s recession conducted by Nielson, a major ‘marketing research company and a partaer of DPS. The analysis looked at brands across multiple consumer ‘categories in 1983 and 1984, and found that the most successful brands all pursued a common strategy— continued investment in core brands. Consequently, DPS dramatically increased its marketing budget for its core brands and focused its marketing money on brand development, availability; and advertising. Brand Development. Despite slow sales in the over- all non-cola carbonated soft drink market, many top managers within the company believe that davored soft drinks showed room for growth. As Young put it, they Hoon aneaeeenes utd and Enhance Leading Brands, We use an onging proces of market and consumer anasto ident key brands thot Ste bs favs have te goats ptental fo: proftsle sles rout, We intr to coin to vest most heavy in these key ‘brands to drive profitable and sustainable growth by strengthening consumer awareness, developing innovative products: | Sd bond extonion to tte advantage of owhing consumer trends, improving dtb.cion, an8 neeasng rome eficvenen. Focus on Opportunities in High Growth and High Margin Categories, Wr ae focused on drving grow in our busines {Scere rca ne emerging eatogain, Tow catogorer include rad-o-done twos, energy dens, ae other functional treveragen. ie eso intend to coptaize on opportunites nthe catagories though brand extensions, new product nunchos, | td selective scqusions of brand and cntbton rights | Increase Presence in High-Mergin Channels and Packages. We are focused on improving our product presence in high- rmorgin chennels, such as convenience stores, vending machines, and «mall independent retail outets, primary by increased Sling activity and investments in coolers and ether cold drink equipment. We also intend to increase demand for high ‘margin products tke single-serve packages for many ef cur key brands through increased promotional atiity nd innovation Leverage Our Integrated Business Model. We beliove our integrated brand ownership, botling, and distibuton business ‘model provides oxportnities for net seles and proft growth though the alignmant ofthe economic interests of out brand Clmersip and o-r botting and éstibution businesses. We intend to levecage cur integrated business model to reduce costs by creating greater geographic manufacturing and distribution coverage and to be more flexible and responsive to the chang- ing needs of our large retal customers by coordinating sales, service, distibution, promotions and produc launches. ‘Strengthen Our Routeto-Market through Acquisitions. The acquisition and creation of our Botting Group is part of our longer tern intatve 1o sengthen the route-torarket fr our products. We believe additional acquisitions of regional bot- ting companies wil broselen cur geographic coverage and enhance coordination with our large real customers, Improve Operating Effiency. We believe our recently announced restuctuing will aduce ur sling, general, and admin isvative expenses and improve our operating efficiency In adtion, the integration of recent acquishions into our Bowling Group hat created the opportunity 1o improve our manufacturing, warehousing, and distribution operations Sauces 201, Sueegy,hapyinasordpepparnaplazmn gre for 200 ac for: alsc slec hea sale oc Ine the Dn the its ch: We tru sign act gro theDps ong. believe that while consumers are growing tired of colas, flavored soft drinks are the “sweet spot” in the indus- uy. By developing its flavored brands like Dr Pepper, Sunkist, and A&W, DPS believes it has the potential to gain matket share over its rivals” ‘DPS has made a number of changes to its soft drink brands, including the addition ofa new Green Tea Ginger Ale to the Canada Dry line, the extension of a 7UP line with added antioxidants, an updated recipe for A&W Root Beer that includes aged vanilla, and the development of Dr Pepper Cherry for consumers who prefer a lighter tasting Dr Pepper Tn addition to soft drink development, the company seeks to recover lost distribution in ts ine of healthier flavored water and energy drinks. For example, it invested in Hydrive Energy LUC, a small energy drink maker, and created Snapple Antioxidant water to compensate for the loss of Vitaminwater to Coca-Cola.” ‘Also, DPS created Venom, a new energy drink to recover losses from two previous brands." ‘More than just adding and investing in new product line extensions, DPS also refocused its efforts related to ‘existing products. The most dramatic change occurred svithin its Snapple brand, which had been struggling before separating from Cadbury. In the third quarter of 2008, Snapple sales had fallen 10 percent, contributing greatly to the company’s 31 percent drop in profits for that quarter.” In response to the drop in sales in 2008, DPS changed everything about the product—its ‘packaging and look, taste, and the marketing thrust associated with the brand. Snapple presented new formulations for its teas to increase consumer interest, and began to focus on the product's health benefits. DPS also started distributing Snapple juices and lemonades in sleek 16-ounce glass bottles with labels indicating their health benefits” These and other changes paid off, as sales of Snapple actually increased in 2010, in spite of @ poor economic climate Increasing Advertising and Availability. Despite the company's strong history of brand development, many of its brands, such as Mott's, A&W, and Canada Dry, had not received any serious advertising invest- ment since the end of the 1990s. Beyond developing the brands, the company recognized the need to increase its efforts in advertising and distribution, Marketing Chief Jim Trebilcock explained the strategy: We have, in our portfolio, a host of brands that are very trusted, high-quality brands and at times like these, wwe believe if we invest in them...we can make a prelty significant impact on our business moving forward and actually strengthen and position ourselves for consistent {growth when we come out ofthis economic downturn ‘Most notable among the changes in advertising was the use of celebrities, a strategy that had worked for Snapple in the late 1980s and early 1990s in connection with De Pepper, DPS’s most heavily supported brand, the company launched a television commercial campaign including celebrities like the rapperproducer Dr. Dre and Gene Simmons of the rock band Kiss. In the commercials, the celebrities endorse Dr Pepper by referring to its superior teste and flavor and then simply stating, “Trust me, 'm a doctor.” In addition to television commercials, DPS also ‘began to target specific demographic segments through online viral marketing. In 2009, for example, the entire ‘budget for Sunkist was allocated to a viral campaign targeted towards teenagers and 20 percent of the budget for Dr Pepper was allocated to Internet advertising Although this was a fairly significant change compared to earlier DPS marketing strategies, management believed that reaching out through the Internet would help the company connect to its markets in a more relevant way.™ To supplement the increase in advertising, DPS also focused more attention on distribution. One ofthe major ‘methods for increasing distribution was by investing in coolers, vending machines, and fastfood fountains containing DPS products. In 2008, DPS added 31,000 fountain placements in fastfood restaurants throughout the United States. In 2009, the company announced that it would add its products to 14,000 McDonald's franchises in order to increase its availability in that chain from 60 to 100 percent. In that same year, the ‘company also outlined a strategy that would add 175,000 coolers (units in which soft drinks are stored and Kept cool) and vending machines throughout the country over a five-year period Again, Trebilcock commented on the strategy: If you have people drinking your products at work, at play, when they go into the grocery store, they're going to buy that product and take it home with them. So we put avery strong focus on what we like to refer to as our lower ‘per-cap markets. We beefed up our marketing there, we've made sure we were closing distribution voids, placing cold drink equipment. Our fountain/foodservice team has done an excellent job of getting Dr Pepper and some of the other brands om the fountain equipment. Other major investments in distribution came in the form of joint ventures with proven distributers ‘that significantly increased the availabilty of particular soft drink brands. For example, agreements with Pepsi Bottling Group in New York and PepsiAmericas in ‘Minnesota more than doubled the availability of Crusb, ‘aking it the second best-selling orange-favored soft dink behind Sunkist, which DPS also owns” Also, in 2010, DPS signed a $715 million deal that gives Coke the rights to distribute Dr Pepper and Canada Dry in the US* og 099220 oz nots oc 5 ePac: Operations DPS is headquartered in Plano, Texas, and employs approximately 20,000 people throughout North America and the Caribbean. It operates 24 production plants and more than 200 distribution centers in those areas.” _Almostall beverage concentrates are produced ina plant in St, Louis, Missouri. The business modet includes both company-owned direct-store-delivery (DSD) distribution networks and third-party distribution. Within the model, approximately 40 percent of the company’s volume is distributed through company- fowned networks: another 40 percent through third- party distributers in the Coca-Cola, Pepsi-Cola, and independent bottler systems; and the remainder split between warchouse directand food-service distributors.” Al of the internal DSD distribution is carried out by railroad and tcuck, operating on a hub-and-spoke supply chain system with major distribution centers in key areas. The hub-and-spoke system is set up to provide manufacturing capabilities in all five major US regions—northeast, southeast, midwest, southwest, and western, It allows for orders to be filled closer to ‘customers, increasing customer service and controlling transportation costs. As stated by Joe Rowland, senior vice president and business unit general manager for the central and southeast regions, DPS has “the ultimate goal of providing better service to the customer, because {hat will transate to sales.” ‘A good example of DPS's operations is its largest hhub, which is based in Northlake, Iinois and distributes to Chicago and its surrounding areas. The facility 1s about one million square fet in size and employs 1,250 people, of which 750 sork on site and the rest in the field. On-site operations consist of nine manufacturing lines, including plastic bottle, can, and hot-Aill glass lines for DSD distribution, and a bag-in-box line for soda fountains at food-service locations. Most of the lines are versatile, allowing for variations in batches, but some also have unique capabilities. For example, Line 1 produces cold-fill glass and plastic bottle, while the Snapple line produces hot-l products. The Noxthlake facility produces about 220,000 cases of product a day ‘that are stored in the company's 25-dock warehouse until they are loaded onto one of the 150 trucks owned by the facility2® In addition to line manufacturing, the facility utilizes a quality assurance program to check for both internal specifications and external requirements. DPS works closely with externa auditors, such as the American Institute of Bakers to ensure that manufacturing and other processes conform to product requirements “To facilitate business operations, DPS makes use of highly integrated information systems and networks Prior to 2008, Cadbury Schweppes supplied all IT support and staffing for DPS. Since the separation, the company has developed completely independent IT operations, with primary hosting based in Toronto, Canada, and two primary vendors for application support and maintenance outsourced to India. Under the leadership of Marty Ellen, CEO, the ‘company has embarked on a program it calls Rapid Continuous Improvement (RCD. According to Ellen, “RCT is about excelling at delivering customer value and improving productivity by eliminating all non- value-adding activities, thereby enhancing growth opportunities,” The company is examining its supply chain, including innovation, manufacturing, marketing, distribution, and administration, and looking for ways to increase efficiency, consistent with Six Sigma improvement methods, Financial Performance Overall, DPS's financial performance since the spin-off hhas exceeded analysts’ expectations. While many of the ‘company’s brands experienced moderate to high growth {in 2010, sales of Sunkist, 7UP, and ABW declined, leading to overall company sales of $5.6 bilion, up about 2 percent from 2009, Even so, in spite of the sales increase and measures the company took to increase efficiency, profits ‘were down approximately 5 percent from the prior year. Nevertheless, the company experienced a huge loss in 2008, and the economy was very challenging in 2009 and 2010, so financial pecformance should be considered in its appropriate context (for detailed financial stternents, see Exhibit 3). The company experienced large increases in cash flow from operations during 2010 and used the additional ash to inexease dividends, pay down debt, and Dbuy back common stock The Industry ‘The Dr Pepper Snapple Group (DPS) competes in the US beverage manufacturing and bottling industry (NAICS: 42119). The industry is made up of about 3,000 companies, including manufacturers, bottlers, and distributers of nonaleoholic beverages. Despite the vast number of companies in the industry, revenues are highly concentrated. Over 90 percent of the combined $70 billion in annual revenves are generated by the three largest companies—Coca-Cola, PepsiCo, and DPS—and tic subsidiaries, Carbonated soft drinks, including colas and other favors, bottled waters, juices and a variety of syrups and mixes are this industry's major products.” Beverage Consumers end Market Trends ‘The beverage manufacturing and bottling industry is greally influenced by economic and other market trends associated with consumers. Factors such asthe 7] sahibie 3 Fon! Sterns for Or Papper Snapple Group Tr ¢ a eee erage : ion Cee ene ements 2010 2009 9 q aon een Chicora i be 4 Net sales $5,636 9 wi a ‘ g 4 Cost of als Jen, . | | = ital F | Srsprote 3398 : on- |_| Seng, gener and administrate expanses 2233 | a oo 12 | >ely | ) | tnpsment of saad andiancibe asst - ing, | es * - or Rescuing cots = 9 gma 7 | Other operating expense income. net 8 4 a Income os) fom operations 1025 (188) 4 interest expense 128 ar | 2 5 vo Interest ncome ® a | € the | Loss on eat entinaushment of debs 100 e gS Other income, net en oa | § tg) BI eto xtreproon recast ayeargs | at 35 ctonconsolisstes ibn anet : and E i Provision ornceme axes 258 wy | £ = Income os) before equity in eerrings of unconsolidted subs als 27 Gia) sin Equiyn aming of urcorsldatd abs net oft 2 sia uly eating rg Netincome os) _ sera sais, | Exrins oss per common shar: as sone 29 ihe Died an at | woichtas verge common sates cusanding ; Bose 20a 2580 . Dito 226 2580 | cesshevidends decored percammon share 070 the ce sey Eee December31,2010 || December 31,2007 soot Neer ters, RR Pesce ed ee eee) she se ASSES ined P| Carrentasete bee Cash nd ash ecalents sans $280 a | Account resi: ~~ Trade, net 536 540 x Other 35 32 1 Inventories 248 202 j Defers tox ase ” 2 sstry Propsid expenses and other curen assets wz 12 ket Total eurent asses 1309 1278 he [| Peeper plant and equipment net 18 107 ; 4 {Contiwed)Bens eos Rests aiuto a iN Par: Caeat Investments in uncarsolideted subsidiaries Good ther ineangibe assets, net Other non-current assets Non-cuent deferred tax assets Deferred revenue Current portion of long-term obligations | isi wea pte Total cuert bios igs ogre Terr ter ts SS Noreen! Sefered vee Cer orca aioe Total ibis Commitments and ingencies ‘Stockholders equity = Pesfared stock $.01 parvalu, 15,000,000 shares autherized no shores ised Common stack, $01 par velue, 809,000,000 hares authorized, 223,936,156 and 254,109 047 shores issued and outstanding for 2010 ‘and 2008, respectively Additonal pein capital Retained earings Accumulated other compzehensive loss Total stockholders equity “otal lables and stock Bese nena Eats eee Beverage concentrates Pockaged baverages Lath Ameren beverages Net sales eo Beverage concenvates Packages beverages ee 8st 2,085 400 2 2.459 ee S156 4,098 382 $5,636 5745 5% Penner) See et) 3,186 a fe) 3.157 Eo $1,083 aa 387 $5531 5 683 S73 (Continued) and imp deve ofsu F and carbs Betw prob Peps of th rates signi belos tune alters expke ofa sripy shop, decis Speci all in bever[Exhibit Financial Statements for Dr Pepper Snapple Group (Continued) == arora SEGMENT RESULTS ce econ ee ener 2010 atin America beverages _40 _# Total SOP 1a 4310 Unallocated corporete costs 288 ae thor operating expanse (income, net 5 (aa) Income (loss) from operations 51,025 5,085 Interest expense, net 18 239 Loss on ealy extinguishment of debt 109 a Other income, net 2 2 Income los) before provision for income taxes and equity in earnings of § 821 S 866 unconsolidated subsidiaries Sure! Or Paper Staple Group Ine 2010 Repo 10K economic stability, seasonality, commodities prices, and consumer tastes and preferences are of great importance to beverage company managers who ‘develop and implement strategies partly forthe purpose ‘of successfully Gealing with changes inthe industry. Perhaps the most significant factor influencing food and beverage companies is economic stability. Since carbonated soft drinks are 2 discretionary item, sales are considerably impacted by weakness in the economy. Between 2008 and 2010, the economy was the major problem facing beverage companies like DPS, Coke, and Pepsi. Intensified by the inefficiency and failure of the securities market, the United States found itself in one ‘of the worst recessions in history. As unemployment rates increased and the credit markets froze, consumers significantly reduced spending. Discretionary spending 4 a percentage of total consumer spending dropped below 16 percent, its lowest level in over 50 years. As discretionary spending decreased, consumers turned from flavored drinks and colas to less expensive alternatives, including tap water. DPS CEO Larry Young ‘explained the phenomenon, “Even though the majority ‘of Americans are still working, the fear factor that has ripped the nation is having significant impact on consumer psychology.” Asa result, Young suggested that shoppers were actively seeking out good deals and making decisions based on ‘product satisfaction and price.”” Along with influencing consumer confidence, the recession significantly increased commodity prices Specific to the beverage industry, the prices for aluminum, natural gas, resins, com, pulp, and other commodities all increased. These commodities are used to produce beverages and, exert a considerable amount of pressure oon industry margins. For instance, the price of sugar on the US commodity market rose from under 12 cents per pound in 2007 to 37 cents per pound in October 2010." Several other consumer trends influence the beverage manufacture and bottling industry. Factors such as changes in demographics, health concerns, preferences, changes in lifestyle, and seasonality all influence marketing and distribution methods. An increased concern about health and wellness is one of the most significant trends affecting the beverage industry. As consumers continue to reduce caloric intake and look for ‘products richer in vitamins, the less-healthy sectors of the beverage industry are expected to shrink.” As soft drink. sales decline, however, demand for healthier alternatives such as low or no calorie soft drinks and noncarbonated drinks such as sports drinks, ready-to-drink teas, and flavored and regular botled water are projected to grow:#* Through 2013, sales of bottled water were projected to grow by 9 percent, ready-to-drink teas by 24 percent, and flavored and functional waters by 71 percent* Additional consumer trends of significance to the industry are seasonality and changing demographics Relative to seasonality, beverage sales tend to be higher uring the summer months and holidays. Sales are slower daring the winter months and fluctuate somewhat with the weather. With regard to demographics, the most significant changes in the United States have to do with the prevalence of aging Baby Boomers and growth in the Hispanic population ® Market Channels Although the final consumer drives demand for the beverage industry, beverage companies’ direct customers 09 AYE © acho 0 Buns 1408 draip dceus mcg 0 98D weraae coves are bottlers/distributers and retailers, Building strong. relationships with these customers is an important part of succeeding in the beverage industry. Bottling and distribution companies buy beverage concentrates from beverage brand companies, from ‘which they manufacture, bottle, and distribute finished beverages. Additionally, bottlers manufacture and distribute syrups and mixes used in soda fountains for the food-service industry. Major beverage bottling companies include Coca-Cola Enterprises, PepsiAmericas, the Pepsi Bottling Group, and the Dr Pepper Snapple Botiling Group. For DPS, a substantial portion of net sales in beverage concentrates is generated through bottlersnot owned by the company. ‘As much as two-thirds of DPS volume in concentrates is sold to third-party boitlers. Some of these are owned by competitors such as PepsiCo and Coke. In 2010, 71 percent of Dr Pepper's sales volume was generated through distribution of its products through Coca- Cola- and PepsiCo-afliliated bottlers." Productive relationships with these bottlers are possible because of the strength and position of the Dr Pepper brand. Retail companies buy finished beverages from istcibuters for mass merchandise and sale to the final consumer. Recent trends in the industry have caused many retailers to consolidate, resulting in a smaller number of large, sophisticated retailers with greater buying power. Major retailers tied to the beverage industry inchude Walmart, Target, Kroger, Super Valu, and Safeway. In addition to these retailers, beverage ‘manufacturers also depend on food-service customers ‘that buy syrups for fountain drinks, Major food-service companies include McDonald's, Burger King, and Yumt Brands, which includes KFC, Pizaa Hut, and Taco Bell The Competition ‘The beverage manufactoring and bottling industry is highly competitive and constantly shifting to respond to changes in consumer tastes and preferences. Competitive position is most effectively attained through brand recognition and based on factors such as price, quality taste, selection, and availability. Major competitors in the manufacturing segment include the Coca-Cola Company (Coke), PepsiCo, Inc. (Pepsi), Nestlé, S.A. and Kraft Foods, Inc. Major competitors in the bottling and distribution segment include Coce- Cola Enterprises, Pepsi Bottling Group, and numerous smaller bottlers and distributors. Relative to the competition, DPS isthe third largest beverage business in North America, behind Coke and Pepsi, which collectively account for 63 percent of the sales in the industry. According to analysts, part ofthe reason that DPS is so much smaller than its competitors {n the United States can be attributed to the spin-off of DPS from Cadbury in 2008. ‘Taking advantage of the company's position post spin-off, Coke and Pepst had a significant head start on acquiring healthier juices, tas, and enhanced waters. Analysts suggest that DPS had insufficient resources at the time to maintain pace with competing acquisitions.” ‘Aside from its problems gaining overall market share in the United States, DPS has also had difficalty competing internationally. The company generates about 89 percent of its revenues in the US market, 80 percent of which come from carbonated soft drinks, In comparison, Coke collects about 74 percent of its sales outside of North America, and Pepsi generates over 40 percent of its sales internationally. Still, DPS ‘management has expressed an intention to maintain its focus on North America." In general, while DPS has strong brands and distribution, tae company has struggled to compete head- to-head with industry leaders Coke and Pepsi. Based in Atlanta, Georgia, the Coca-Cola Company (Coke) is the largest manufacturer, distributer, and marketer of, nonalcoholic beverage concentrates and syrups in the ‘world, Coke markets four ofthe world’stopfivecarbonated soft drinks —Coca-Cola, named the world’s most valuable brand, Diet Coke, Fanta, and Sprite. Coke also owns and licenses nearly 500 other brands including diet and light beverages, enhanced waters, juice drinks, teas, coffees, and sports and energy drinks. Coke is primary «brand owner and manufacturer, selling its concentrates and syrups to bottling and canning companies, fountain ‘wholesalers and retailers, and distributers° ‘As outlined on its company website, the three- phase mission of Coke is “to refresh the world, to inspire moments of optimism and heppiness, and to create value and make a difference.”® Consistent with its mission statement, Coke maintains an international focus, marketing and distributing its products in over 200 countries." To facilitate its international focus, Coke spends a significant amount of capital on technological development and marketing. For example, ‘Coke introduced a new fountain beverage machine that used “micro-dosing” technology to dispense over 120 beverages from one machine, The machine takes up the same space as the eight-valve machine currently being used by food-service businesses.* International sales technology development, and marketing have made ‘Coke one of the most widely recognized and profitable companies in the world (for selected financial data on the Coca-Cola Company, see Exhibit 4). PepsiCo, Inc, another major DPS competitor, is based in North Carolina and is a global leader in beverage, snack, and food manufacture and distribution. Pepsi is divided into three major business units— PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. These business units ‘manufacture, market, and sell a variety of convenient, salty, drink appre key b Mow Tosti Quak form Dole, P prod Th prod! ‘oppo emplhaa Exhibit 4 Selected Compettor Financial Data millions) w | eer f 5 had een 2 ame ee ap = 4 eee 8 a eo a Ea 2008 ; 4 ‘Net operating revenues | sa5.nn9 $30.990 sagas | 9 at Cost of goods sold | 12608 11088 nan | £ we | Seling. gonera and adminsvative expenses } raise nae nme |e arhct, | Oherapansting ehages a8 313 aso | fl sinks 7 | operating income 8449 8231 sae |B vs Netineome ater taxes 1108 a28 sor | 3 SDps | Tealcurent asats 218579 17581 rave | & units Total asets 72901 49671 ws | & i a Total current abilities 18.508 13721 12,988 g ia a Total long-term debt and other fables 23.0% 9.608 7059 || $ sed in pe | Total equiy 31317 25,346 wan | = ke) is i CEE : twof TEER ° inte 1 [Galore nae | Cost of oods sold 26595 = Sight | Sot, general end acministratie expanses zest 5 affees, | Amorinatin often ossas 7 ane | Operating protic 8,332 sq | Netincome after taxes 6.320 q Total curren assets 17589 three: P| Total assets 62.153 uo @ Teual event bili 13892 ui to 7 | 1m dab an other tabi “a | Yet ong sum deb andthe bios 30,785 ational Tet! equity 21476 asin ‘adh ftir bron oping ese wnt nee n 210 beets ov ash ton chagrin pen itional inert ins Beats gf yo Te ston ak ees by fer rons nol aes 200 talon | Sew Coen ole Congeny 200 ard 210 Report 10K Pepi, e209 ane 2010 Ar Reps ample, aethat er 120 salty, sweet, and grain-based snacks, carbonated soft in which we operate.” An important part of Peps up the drinks, noncarbonated beverages, and other foods in mission statement is its socially responsible approach, being approximately 200 countries. Some of the company’s concentrating on improving all aspects of the world U sales, key brands include Pepsi, Pepsi One, Diet Pepsi, Mug, in which it operates—the environment, societies, and made Mountain Dew, Sierra Mist, Frito-Lay, Doritos, Cheetos, economies* The compeny puts its vision into action sfable ‘Tostitos, Sunchips, SoBe and SoBe Lifewater, Propel, through meeting consumer needs, environmental tata on Quaker, and Tropicana. Peps also holds the trademarks stewardship initiatives, societal benefits, employee for many valuable products, including Lipton, Starbucks, support and organizational programs, and operations vetitor Dole, and Ocean Spray. that imerease shareholder value. vder in Pepsi's goal is to be the world’s best consumer As is the case for Coca-Cola, Pepsi's strategies ation. Products company in convenient foods and beverages. maintain an international focus and include anits— ‘The company seeks to accomplish its goal by improvements in product development and marketing rages Producing “financial rewards to investors as we provide ‘The company has recently made significant changes ‘nits opportunities for growth and enrichment to our — to packaging, redesigning Pepsi brand products, Sierra enient employees, our business partners and the communities Mist, and others. Additionally, Pepsi introduced a newadvertising campaign that put a modern twist on the “Pepsi Generation” campaign used in the 1960s. The campaign combined footage from the old advertisements with current images to express the new tagline, “Every Generation Refreshes the World.” By focusing on social responsibility and diversifying its brand and product portfolin, Pepsi has become one of the most successful slobal food and beverage companies in history (for selected financial data on the PepsiCo, Inc, see Exhibit 4) Possible Future Actions Moving into 2011, Larry Young had many decisions to make. While he was pleased by the performance of many —_— eee NOTES 1. 5: Thoodae, 2008, DPS puts the favor bck in CSDs, Beverage Indy, July 15, 1-16. 2. ICE tne, 2002, Dr Pepper rot ses but Sapp best Contines to fer, Te Wl Stee Jour May 1,810 3. Mi Ball 2009, The teeny of Dr Pepper, About cm, inventors bout conbrfiertaicpeppec hor. Nove 27. 4, Zi0R, Compury Hist, Br Pooper Seppe Grup, hepiinvetor “ipeppennappl sanfngex cpageectonstary, Novribe 22 5, J Deighton, 2005 Sapp, Soar: Harvard Business Pushing, 6 Zao, Camouny htoy, Dr Pepper epee Goup, op. ct 1 ies 8 8 Dr Fepoee Snapple Group, ne. Anus Report 2010 Bott Leade pts, O: Pepper Seppe Group, hapinesor ‘ipepperrappiecomimanogemen:c March 3 10. 200, Soars of Drecoe, Dr FappatSracpe Group, hpovestor reeppernappe com/racorcim, Moe) 2 11, abn, Coperste governance guidelines, Dr Pepper Stapp Grou, ‘pie shreolae cnn doyroe7OFSGI7 258525010. Zraoreroed4e 115-420 bea 67781841APIDPS “yabDoe 5102 pal Decor td 12. 200, Board of Brecon, Dr Pepper Snappe Group, op 13.2007, Suategy, Or Peppa Sopple Group, hilinvesr “pepoermoppke confindex Gnpogescrvcrstogy, Dace 14, N Zits, 2009, Dr Pepper up matting spond, races for ‘row, Advrcing Age, 808, ay 18 18, Pr Zobio, 200, Pape ee tity pces mecteing prt, WallSteet our, December 28,8 16S Theodore, op ct 437.8, May, 2008 Or Pepper gre akan energy dink, Tho Wal Stroct Jounal, uly 25, 811 18. 5 Thoodere, op ot 19, 2008, Anco lak or Snapple, Pograsive Grocer, has? pogresegrocer omiprogressivagrocv/eantent psy! eaBr ate a eaapessba2eiSST TO, 20, bik 21. N. Za, 2069, op 2. Wet. 2. 1 Deighton, Snapple op ct 24. N.2mude, 209, op. ot 25, S Trocdre, op ce 26. tot TT 21, 5 Thecdre, op. ct of the company’s individual brands, Young knew the | firm had to cnt costs in order to improve profit margins However, DPS could not afford to make any cuts thet ‘would damage its strong brands or alienate consumers, Furthermore, DPS’s rivals, Coke and PepsiCo, were ‘experiencing much higher performance levels than DPS and were not going to stand still. How can DPS continue to grow at levels that will satisfy shareholders? To what extent should acquisitions, joint ventures, Wieensing agreements, and/or internal growth tactics be pursued? Should DPS diversify into other product markets? What other growth options are available to the company? Should any products or brands be divested? Young had a great deal to think about. Jef B Ariza Robia Intr Dart Com certsi afer 28.2010, FIC approves Co's ote de, Wal Sree cual One Eon tte leur groquan con/eaeven/ SOSE266Tecounh F173), Septeber 2) 23, 7009, Cempany history, Dr Pepper Snapple Group, ap et longe 30, Theodore, op. ct ie 1B § Scam, 2008, Pant focus: Pent wanstons to 8 DPS hub Boverage hs, ly 18, 1007, 2-22 enou 32 hi. leade 131. Dr Pepper Snapple Group, In, 2009 Annual Report bew 34, _DrPepper Snapple Group, ne 2010 Annusl Repo, 10. 135, 2009, dusty profle: Beverage manufacure and betting, Fit enter Research Onin, hpfinewrransichmand eds 2581 industry prod: _asaxtchaptor-Oipide 164, November Z7 cou. 36 B. Mekay & KE. Grace, 2007, Dr Poppa’ outlck iced by value dink, The Wall Street Journal, March 27,82. at lee 3 ibid mark 38, T.Graves &E.Y. Kon, 200%, Industry Survey: Foods & T ‘Nonaicohoie Beverages New Yo Standard & Poor's 139. J. Rin, 2009, Rerstinly healthy, Cntract Manufacturing & Too Packaging August 24, 12-18 have 40. Dr Peppor Snapple Group nc 2009 Annus Report rege! 44, 3 Rivkin, 2002, op. ct or 42. DrPepper Snapple Group, ne 2009 Annual Report desig {3.__DrPapper Snapple Group, Inc. 2010 Annual Repo, 6 flexit 44, Dr Pepper Snapple Group, Inc. 2009 Anual Report bette 45. (bid 445, De Pepper Snapple Group, Inc, 2016 Anus Report, 8. cross 87. E Oy, 2008, Dr Pepper Seng brad, cheap stock, Kiinger nce com, htm pings convecmns/picksarhives 2008! pickO521 hin. . 48. fo His 49, CocaCola Company 2009 Annusl Raport 50, 2009, Our company: Mision, vision & values, Coc-Cola Corp Ford hip tae theooesenlacompary.convourcrrpanyiision vin 5 sels, Dacambee 15. tion: 51. 5 Theodore, 2009, Category focus 2009 soft drnk por, Engi Beverage Inst, 1000), March 16, 16-22 yn 52 ib 58. FapaCo, Inc 2010 Annual Report Indu 52009, Company; Our mision and von, Pepe, In, hepa iby ‘pepica com/Company/OurMiscn-and:Vsion ml, December 15 ea $5, PepsiCo, ne. 2009 Arpusl Report ee) 56. Theodore, 2009, Category focus, 29. op. ct. v o that they