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In the Headlines-May 1st, 2015

In The Headlines

Dr. Pepper Thrives by Staying Ahead of Changing Consumer Tastes

For decades, there were few things more quintessentially American than drinking a fizzy soda at parties, at home, at barbecues, at picnics, at movie theaters—really almost anywhere. Coca-Cola and Pepsi, with memorable slogans like “Share a Coke” and “Live for Now,” vied relentlessly for soft drink supremacy. While it is far smaller than its giant rivals, Dr. Pepper Snapple first formulated its signature drink, Dr. Pepper, in Waco, Texas, in 1885. The company has managed to nimbly navigate a soft drink market that has been roiled in recent years by changing consumer tastes.

Two decades ago, Americans consumed 51 gallons of soft drinks each year on average. But as the 21st century took hold, desire for sugary drinks began to wane and, over the past five years, consumer thirst for such beverages has fallen along with their sales. Last year, sales of carbonated soft drinks fell for the tenth year in a row, returning to the levels sold in the mid-1990s, according to Beverage Digest, which tracks industry developments. By last year, average annual consumption per American had dipped considerably, to 44 gallons, taking a toll on both Coke and Pepsi.

Less scathed was Dr. Pepper Snapple, which was formed in 2008 following a spinoff by parent company Cadbury Schweppes. The Plano, Texas-based soda maker is tiny compared to beverage rivals Coke and Pepsi, which control 34% and 25% of the market, respectively. Dr. Pepper Snapple claimed 11% of that pie in 2014. Dr. Pepper Snapple has weathered the market’s startling slide better than many competitors, posting a 4% increase in net sales for the first quarter of 2015, most of which are in North America. In addition to Dr. Pepper, the company’s best-known products are Canada Dry, Schweppes, 7-Up, Sunkist, A&W, and Squirt. Last year, it racked up a 2% increase in sales for its 50-plus brands, reporting $1.2 billion in income. And its future forecasts are relatively rosy as the beverage industry wrestles with changing customer preferences. What’s its secret?

First, it made efforts to get ahead of consumer preferences after customers grew increasingly worried about excessive calories and artificial sweeteners like aspartame, a point that Chief Executive Officer, Larry Young, underscored recently when explaining company results to analysts. As customers increasingly began to skirt diet soda (the market has slid by nearly 20% in recent years), the company introduced Ten Platform, a 10-calorie drink sweetened with sugar and sugar alternatives.

Dr. Pepper Snapple dives deep to make sure it understands its customer base and how and why they purchase its brands, says Jim Trebilcock, Executive Vice President for Marketing. He goes on to say, “We’ve increased our overall market spend by about $100 million since 2008.” Their strategy includes research as thorough as going to customer homes, as well as using focus groups, market data, and advertising. Overall, the company’s budget for advertising and marketing was $473 million last year, slightly under the $486 million it spent in 2013.

When consumers began to turn to juices and flavored waters, Dr. Pepper ramped up its flavored seltzer water line to tap into increased sales of sparkling water, a category that grew 20% last year, according to industry statistics. “They recognized the trajectory of the market quicker than others,” said Stephen Powers, who analyzes the beverage industry for UBS. “They focused less on outsized growth and were more realistic in what they did to adapt to the market.”

Dr. Pepper Snapple is also distributing popular coconut water brand Vita Coco, Bai, a 5-calorie antioxidant drink, and Fiji Water, a bottled water brand that competes in the flat water segment, where sales grew 11% last year. “We have a history of partnering with emerging brands where we can minimize the risk,” says Trebilcock. Successful examples, he said, are distribution deals with Monster and Vitamin Water. Dr. Pepper has also overhauled its distribution system, allowing the company to reap savings from lower fuel costs. Five years ago, it also signed long-term agreements with Pepsi and Coca-Cola, each of which have strong distribution systems to get Dr. Pepper products on grocery and other shelves.

By hunkering down and focusing on efficiency rather than trying to rekindle volume sales growth, Dr. Pepper Snapple is continuing to steer a steady course and keep its share of the beverage profit pool. The perceived weakness of not being in overseas markets has turned out to be a strength recently, as currency swings helped push earnings downward at some of the multinational beverage companies. PepsiCo, for example, was battered last year because of currency volatility, disruption of its market in Russia, and falling gas prices according to statements from its Chief Executive, Indra Nooyi. Coca-Cola’s earnings also have been affected as both beverage giants had steep drops in diet soda sales, with Diet Coke revenues declining 6.6% last year, and PepsiCo’s Diet Mountain Dew also posting declines. Diet Dr. Pepper sales also slid, not as much as its competitors’ products, but enough that beverage analysts are questioning the wisdom of any drink maker continuing to rely too much on low-calorie sodas.

Dr. Pepper Snapple argues that there is plenty of room for growth in its flagship brands. Dr. Pepper, which is typically purchased by younger people, between 18 and 24 years old, still has room to grow on the East and West coasts, says Trebilcock, who has been with the company since 1987. And Snapple, whose customers are typically health conscious and consume its flavored drinks in daytime hours, sells best on the coasts but has room to grow in the middle of the country, he adds. The company also has plans for international sales in the future. It is assembling a team to target markets in Asia and Europe for some of its brands. The focus is on driving the growth of Dr. Pepper, Squirt, and Clamato, a seasoned tomato product that can be a standalone drink or a mixer, among Hispanic consumers. It also has added Peñafiel, a mineral water with fruit flavors from Mexico, to the portfolio. “It may not be sexy,” admits Trebilcock, “but we’re consistent in our strategies.”


Does Etsy Signal a Shift to a New Kind of Corporation?

When shares of Etsy, the online marketplace for arts and crafts, began trading for the first time recently, the company became not only the latest hot technology start-up for investors but also the best known B Corp to go public. So-called B Corps commit to upholding high social and environmental standards, even at the expense of easy profits. Certified by a nonprofit organization called B Lab, the companies attain their designation by achieving a combination of workplace wellness, philanthropy, and transparency. “B Corp is to business what Fair Trade certification is to coffee or U.S.D.A. Organic certification is to milk,” B Lab says on its website.

Some evidence suggests that the movement is gaining momentum. Etsy is just one of more than 1,000 B Corps spread across 33 countries. It is among the largest and also the third to trade its shares publicly. Other well-known companies that are also B Corps are still private, like Patagonia, the big apparel manufacturer, and the eyeglasses manufacturer Warby Parker, which may yet go public. Another public B Corp is the Brazilian cosmetics maker Natura, with annual revenue of more than $2 billion. Last week, Natura’s shareholders voted to approve amended articles of incorporation, reaffirming the company’s commitment to social and ecological responsibility. Some B Corps are subsidiaries of larger conglomerates. Plum Organics was acquired by the Campbell Soup Company in 2013 and Method, a soap maker, is owned by Ecover, a Belgian corporation. Ben & Jerry’s was acquired by Unilever, one of the largest makers of consumer goods in the world, which said it was considering becoming a B Corp itself.

The momentum suggests that it is only a matter of time before more big companies join. But the truth is that most B Corps are small businesses, not complex multinationals or even subsidiaries of big conglomerates. A recently released list of top B Corps, titled Best for the World, featured companies that almost exclusively had fewer than 50 employees. B Lab acknowledges that, for now, it is not so easy for a big company to become a B Corp. “It’s easier to make changes if you’re smaller,” said Katie Kerr, who runs communications for the organization. “Big companies are more risk-averse and are slower to adapt. We’re now working with large companies, which take longer but has a great impact.”

To become a B Corp, a company needs to be nimble enough to make changes quickly across human resources, supply-chain management, and investor relations; data collection can be challenging. B Lab requires exhaustive reporting from B Corps and those hoping to attain the certification. For a big multinational, that would mean hundreds if not thousands of hours of work, which could in turn mean additional employees. “With all the brands that are under Unilever, you’re going to have two or three extra people on each brand just to do the data analysis,” said Kyle Westaway, a lawyer who works with B Corps.

There’s another catch. Being a B Corp is not a legal designation. It has no bearing on a company’s articles of incorporation or the rights of its shareholders. For that, a company must become a benefit corporation. Benefit corporations, which are legal structures in several states, including Delaware, the cradle of American corporate law, allow companies to consider factors beyond the bottom line when making critical decisions. In theory, this shields them from shareholder litigation over a decision that forgoes near-term profits in pursuit of higher ideals. There is not yet any case law on the issue. Like B Corps, benefit corporations are gaining traction, but so far, no public company has become one. One big test is whether Etsy eventually registers as a benefit corporation. If it does not within two years, it will lose its status as a B Corp.

What is more, companies do not have to pass any stringent test or intensive analysis to become a benefit corporation. They can simply profess their intent to influence society positively and reincorporate with the blessing of shareholders. Faced with an overlapping morass of voluntary certifications and legal loopholes, it is understandable that many big companies are reluctant to jump on the bandwagon. Yet for big companies that are not yet prepared to become B Corps or benefit corporations, there are other ways to use this nascent movement to make a difference.

In the event of an acquisition of a B Corp, the buyer can pledge to allow the purchased company to remain a B Corp, as Campbell’s did with Plum Organics. And big companies could also simply set internal benchmarks and strive to become better social and environmental actors without bothering with the B Lab paperwork. But until becoming a B Corp is easier for big companies to achieve, and until there is more coordination between B Corps and benefit corporations, most big companies are likely to remain on the sidelines. “It’s just a matter of time and commitment,” Ms. Kerr said. “Hopefully in 10, 20 or 50 years, this is the way everyone will do business.”

Citations
1. http://for.tn/1QroTPl – Fortune
2. http://nyti.ms/1DsNABS – Deal Book


The Good News Is . . .

• Buyers are returning to the housing market in ever growing numbers, as indicated by continued gains in loan applications to purchase a home. Total mortgage application volume rose 2.3% week-to-week on a seasonally adjusted basis for the week ending April 17th, according to the Mortgage Bankers Association (MBA). Mortgage applications to buy a home increased 5% from the previous week and are now 16% higher than the same week one year ago. Applications to refinance increased just 1%, but they are still up 41% from a year ago.

• Janus Capital Group, Inc., a global investment firm, reported earnings of $0.23 per share, an increase of 43.8% over year-ago earnings of $0.16. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $262.7 million, an increase of 14.1%. Management attributed the company’s results to higher investment management fee income driven by increased assets under management.

• A consortium of private equity investors led by TPG has agreed to buy Cirque du Soleil for $1.5 billion (Canadian), a purchase that will pave the way for the company to expand into China. Investors and companies around the globe are trying to capitalize on the swelling leisure spending by China’s growing middle class. The Walt Disney Company is building a $5.5 billion theme park resort in Shanghai. Several American movie studies, including Lionsgate, Studio 8 at Sony Pictures, and STX Entertainment have formed joint ventures with Chinese players. TPG and its investing partner were attracted by Cirque’s high brand recognition in the West as well as the prospect of a China expansion.

Citations
1. http://bit.ly/1OPWxuw – MBA
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1aZblcN – Janus Capital Group Inc.
4. http://nyti.ms/1yLNZmt – NY Times Dealbook


Planning Tips

Tips for Saving Money on Self-Storage

The self-storage industry has been one of the fastest-growing sectors of the United States commercial real estate industry over the last 40 years. In fact, total self-storage rentable space in the U.S. is just above 2.3 billion square feet and there is a total self-storage space capacity of about 21 sq. ft. per American household. Renting a self-storage unit can be a great way to remove clutter from your home, and store items that you may not need to access on a regular basis. Although a self-storage unit may allow you to save space in your home, you are still required to pay rent for a self-storage unit. Below are tips to help you reduce your self-storage costs.

Determine what you actually need to store – Sort through all your belongings before renting a self-storage unit. This can prevent you from storing items you may never use again or may no longer need, and can also help you separate trash from valuable items. For example, you may find that you are storing old paper items that can be accessed on the Internet. Discard or shred paper items that can be digitized or that you have already backed up on your computer.

Research your options – After combing the Internet to identify all the storage options in your area, take the time to compare what they offer in terms of size and price. Take into account factors such as access and security, and always read the fine print on the contract before determining the provider that best suits your needs.

Don’t be afraid to negotiate – With about 50,000 self-storage facilities nationwide, there’s plenty of competition for your business. While some providers have strict policies on pricing, other providers have some wiggle room to accommodate customers. It never hurts to ask, and you just might end up with a lower rate or more space for your money.

Rent the smallest storage space possible – In most cases, the prices of self-storage units are based on the unit’s size, so you can often save money by choosing the smallest unit size possible, then stacking your items on top of one another in the unit. Estimate the self-storage unit size you will need by stacking your items on top of one another in a square or rectangular block format, and then use a measuring tape to measure the length and width of your belongings.

Find coupons and discounts for self-storage units – To compete for your business, many self-storage units will offer discounts or special rates for new customers such as the first month’s rent for free, or military discounts. Visit the websites for self-storage companies in your area, and then look for coupons you can print, or for web-only specials. Some companies will even give you a discount if you call them directly and mention that you found their business online.

Citations
1. http://bit.ly/1oBaQsf – Self-Storage Association
2. http://bit.ly/1GqV385 – SelfStorage.net
3. http://abcn.ws/1ij9eji – ABC News
4. http://bit.ly/1JmEZrr – WikiHow
5. http://bit.ly/1DlzxwS – TheSpareFoot.com

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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