By Mike Esterl and Jennifer Maloney
Two of the big U.S. soda makers are scooping up fast-growing
upstarts that market healthier beverages, as the industry struggles
with falling demand for diet sodas as well as new taxes on sugary
drinks.
Dr Pepper Snapple Group Inc. said Tuesday it would pay $1.7
billion for Bai Brands LLC, which makes low-calorie, coffee-fruit
drinks. Dr Pepper estimates Bai's revenue will roughly double this
year to $230 million.
Meanwhile, PepsiCo Inc. is buying KeVita Inc., a maker of
fermented probiotic and kombucha beverages. PepsiCo is paying
slightly more than $200 million for KeVita, which also has roughly
doubled its revenue in the past year, to about $60 million,
according to people familiar with the matter.
The deals coincide with growing consumer thirst for exotic
"functional beverages" ranging from coconut water and kale juice to
fermented tea and cider that promise to deliver more than just
taste. U.S. sales of natural and organic foods and beverages alone
have grown 23% over the past two years, now topping $40 billion
annually, according to SPINS, a data service.
At the same time, U.S. volumes of carbonated soft drinks are
expected to contract for a 12th straight year as Americans
increasingly fret about rising obesity and diabetes rates and avoid
artificial sweeteners. Five local governments, including Chicago's
Cook County and San Francisco, approved special taxes on sweetened
beverages earlier this month.
A new study released Tuesday showed that efforts by Coca-Cola
Co., PepsiCo and Dr Pepper to cut beverage calories in the American
diet by 20% over a decade are off to a slow start. U.S. beverage
calories per person declined only 0.2% in 2015, according to the
study, which was funded by the American Beverage Association.
"Calorie reduction momentum has stalled," the report stated.
While U.S. consumption of bottled water surged last year, the
report found that consumers shifting to water previously drank
zero-calorie soft drinks, not full-calorie sodas. "We're trying to
figure out what engages people," said Susan Neely, chief executive
of the American Beverage Association. "How do you change their
buying patterns?"
The industry group said it still expects to meet its
calorie-reduction target by 2025 as it continues to ramp up
marketing and new retail strategies. The companies have vowed to
steer more consumers to bottled water, low-calorie drinks and
smaller-size packages.
Adding Bai lessens Dr Pepper Snapple's reliance on traditional
sodas, which account for about 80% of its annual revenue. Bai's
lightly caffeinated beverages are promoted as rich in antioxidants
but low in calories. Its lineup includes carbonated flavored water,
coconut water and ready-to-drink teas.
The sale of the Hamilton, N.J., company represents a windfall
for majority owner Ben Weiss, a 46-year-old entrepreneur and
coffee-industry veteran who sold his first case of Bai in 2009 with
the help of his father. Sales have grown more than 10-fold since
2013, when Dr Pepper Snapple became Bai's main distributor and
acquired a small minority stake.
The acquisition represents a strategic shift by Dr Pepper
Snapple, which has shied away from outright acquisitions since
being spun off by Cadbury PLC in 2008. The company increasingly has
relied for growth on its expanding stable of brands that it
distributes but doesn't own, including Fiji bottled water and Vita
Coco coconut water.
Dr Pepper said it expects Bai's revenue to more than double
again to roughly $500 million by 2018 as it broadens distribution
in convenience and gas stores. It also plans to increase the
brand's advertising budget by $25 million next year, putting more
marketing funds behind Bai than any brand except Dr Pepper.
"This is about top line growth," Marty Ellen, Dr Pepper's chief
financial officer, told analysts on a conference call Tuesday,
adding Bai also should generate about $80 million in operating
income next year.
PepsiCo is less exposed to traditional soda, which only
generates about a quarter of the company's overall revenue. Still,
KeVita is the company's largest purchase of a U.S. beverage brand
in several years, following an earlier wave of acquisitions
including Naked Juice Co. and sparkling fruit juice maker IZZE
Beverage Co. in 2006.
PepsiCo is familiar with KeVita, striking a deal in 2013 to
distribute the company's products and take a small equity stake.
KeVita got its start in an Ojai, Calif., kitchen in 2009 and is
headed by co-founder Bill Moses, a Wall Street and wine-industry
veteran.
KeVita derives most of its sales from its namesake sparkling
probiotic line, but also has posted strong growth since launching
kombucha, a fermented tea beverage. The company promotes its drinks
as organic, gluten-free and vegan.
Soda industry leader Coca-Cola has said it continues to seek
"bolt-on" acquisitions to diversify further beyond traditional
carbonated soft drinks, which still represent about 70% of company
sales. Coke paid roughly $90 million last year for a 30% stake in
San Diego-based Suja Life LLC, a maker of organic, cold-pressed
juices. Other recent acquisitions include Honest Tea, an organic
tea, and Zico coconut water.
--Austen Hufford contributed to this article.
Write to Mike Esterl at mike.esterl@wsj.com and Jennifer Maloney
at jennifer.maloney@wsj.com
(END) Dow Jones Newswires
November 23, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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