A Lean, Mean Snapple Machine

The planned spinoff of the North American
beverage business from confectionery maker Cadbury Schweppes Plc certainly holds the potential to roil the beverage business on this continent. And with last summer’s credit squeeze coming just as the company was fielding bids from private-equity players, it’s not lacked for thrills and chills either – not that the beverage business is exactly somnolent these days itself!

As this issue of Beverage Spectrum went to press, it appeared as though – barring some unpredictable
un-squeezing of credit that would put the private bidders back in the game – Cadbury would be proceeding with its Plan B, spinning the beverage unit off to shareholders under the name Dr Pepper Snapple Group Inc. by mid-2008.

There will be ample time in coming months to deal with the implications for Cadbury’s stable of powerful core brands – from Dr Pepper and 7 Up to Snapple and Mott’s. For now, though, it’s interesting to examine the effect of the protracted
sale/spinoff process on smaller brands – both inside and outside the company. That’s because, in my view, Cadbury’s unique mixture of assets and needs together create a fertile opportunity for the development of innovative brands in North America.

Let’s first look at CSAB’s assets. First, there’s the rich matrix of brands on both the carbonated
and non-carb sides: stalwart Dr Pepper, flavor brands playing in one of the few CSD sectors that’s still growing, and powerful tea and juice brands. That guarantees a certain amount of attentiveness
from retailers when the company’s account execs and distributors come calling. Another
key asset is the company-owned Bottling Group, a captive distribution arm that guarantees
that Cadbury’s brands will receive focus in key markets like Texas, California, New York and parts of the Midwest.

The liabilities? For all its mass of brands, the company still has big gaps in its portfolio, in energy
drinks, dairy products, bottled waters and other segments. (We’ll see how well Snapple’s newly launched Antioxidant Water performs
in plugging the latter gap.) And as the abortive launch of Accelerade recently proved, the company
remains innovation-challenged, particularly
when it tries to work outside the CSD realm.

To me, this combination of assets and liabilities
opens up two sets of opportunities that could prove fertile for beverage innovation. One is the potential for Cadbury, recognizing its innovation
challenges, to establish broad alliances with outside brands in some of these segments. The company’s reach and infrastructure could offer a fertile avenue for newer brands looking to achieve geographic scope and volume scale. The company tried that when it teamed with innovative energy player Hansen, which created Monster Energy, to launch an energy line under the Ace brand. At the time, CEO Todd Stitzer noted the pragmatism of teaming with a proven outside player so Cadbury’s own development resources wouldn’t be spread too thin. Although Ace didn’t fare well, that partnership model held considerable promise. Thanks to an active and energetic staff, the company in recent months seemed to be quietly pursuing similar alliances with other outside companies.

Unfortunately, as the sale/spinoff process continued,
Cadbury’s beverage execs found themselves
barred from entering into any binding financial
commitments, rendering many of those negotiations moot. (A quietly rumored partnership
with Bravo, for one, might have helped that company stay afloat.) With that stricture unlikely to be dropped before the spinoff is concluded
in late spring, some opportunities to deal will likely slip away. Further, a recent downsizing
in preparation for the spinoff eliminated the jobs of most of the executives who were exploring
those alliances – a considerable brain drain, not that they were empowered to get much accomplished
anyway. At some point, Dr Pepper Snapple Group will be back in this game, and it could yield some very interesting partnerships.

Let’s also look at this from the other direction:
the chance that smaller brands lurking within Cadbury’s portfolio – think Stewart’s, Nantucket Nectars, Yoohoo, Orangina, new age pioneer Mistic – could be pried loose. Many of these brands came with the Snapple Beverage acquisition
and there’s little question they’ve been neglected. In a conglomerate that waited several years before turning its focus to a brand like Snapple, it’s not surprising that these got lost in the shuffle. It’s interesting to consider what fate may await these brands. It’s possible that a leaner,
more limber Dr Pepper Snapple Group will find a way to re-invigorate them. Even if it can’t, the pressures to maintain a robust-seeming top line may encourage the company to milk them a while more. But if the company decides instead to sell the brands and use the proceeds to pay down debt, it likely would find a line of ready bidders. That would liberate a flock of smaller brands that retain much of their equity and are still important to many distributors.

Bottom line: as the spinoff (or less likely, a sale) approaches completion, Cadbury could prove to be a fertile catalyst to innovation both for the brands it brings into its orbit, and for the ones it allows to slip out of its gravitational pull. In a market that can always use greater product and marketing innovation, that could be an intriguing,
if now overlooked, ancillary benefit of the transaction.

Longtime beverage-watcher Gerry Khermouch
is executive editor of Beverage Business
Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.