Dr. Pepper Snapple Merger With Keurig – Impact on the Beverage Aisle

The merger of Dr. Pepper Snapple Group with Keurig Green Mountain, which was initially announced in January, was finalized recently. The deal creates the new publicly traded company known as Keurig Dr. Pepper, according to Bev Net is the 3rd largest beverage company in North America.

The merger is going to have a direct impact on the beverage aisle because the combined entity will be utilizing their respective strengths together to create unique delivery systems for the consumer in the future.

The beverage industry is another sector of the economy which is in a “grow or die” phase at this point. In my professional experience in the industry as well as my time covering mergers and acquisitions, the key factor in this segment of business is the distribution network.

That is the main determining factor behind why Coca-Cola and Pepsi dominate the beverage aisle at the grocery store: it is all driven by distribution and shelf space. The smaller brands have a very difficult time competing with the big players in this space because of the costs associated with distributing the product and gaining shelf space for the product.

The executives at the former Dr. Pepper Snapple Group were faced with having to grow in order to compete with the top two players in the industry. The deal with Keurig allows them to do precisely that, it grows their business and their market share.

The deal also includes Allied Brands which is a distribution network that will now be run by the combined Keurig Dr. Pepper which features 125 different brands. This collection of brands are a mix of beverage offerings that are either wholly owned, partially owned, or not owned at all by Keurig Dr. Pepper.

The news over the past five days is about which brands will be dropping out of the new Allied Brands distribution situation. The ripple effect left by these changes will have a definite impact on the beverage industry. Some brands will be promoted on a regional basis in a more visible way.

Conversely, some brands most notably Fiji bottled water will be leaving Allied Brands, according to CNBC, in order to start their own distribution network. The result of these changes will most certainly have a price impact on the consumer, especially if the new or spin-off brands from the Allied distribution network fold into smaller distribution agreements.

The combined strengths of Keurig Dr. Pepper could translate into lower prices or more advantageous bulk sale pricing for the consumer, but that remains to be seen. The single serve delivery system technology that Keurig has mastered could translate into some new concepts that integrate the Snapple iced tea beverage line or create some new innovations on the delivery of Dr. Pepper and its signature flavor.

The merger also helps both entities compete in a grocery channel that is being shaped by Wal-Mart and Amazon/Whole Foods. The persistent pursuit of low prices by Wal-Mart which they require of their suppliers can put the squeeze on profit margins. The combined Keurig Dr. Pepper now has the distribution and production capabilities to compete in a profitable way against the forces of Wal-Mart and Amazon.

It is in this perspective where the consumer will see enhanced value on their favorite soft drinks whether it is Dr. Pepper, 7UP, A&W Root Beer, or Snapple. The distribution of Keurig and their famous pods of all types and varieties and the Green Mountain Coffee products will all see a significant increase into the grocery channel. In addition, perhaps the drug store channel as well given the relationships that Dr. Pepper/Snapple/Allied Brands have developed over decades of time.

The other consideration here is that the combined Keurig Dr. Pepper company can now be an active player in acquisitions which will alter the landscape of the beverage industry. The combined publicly traded entity could target consolidations within the beverage industry, or could seek to enhance their delivery systems or packaging with a purchase of a smaller player in those industry sub-classes.

Keurig Dr. Pepper has a significant positive component working for them in the future: they have a very loyal base of consumers. The consumers in various survey data have identified as “fans” of Keurig and “fans” of Dr. Pepper. The new leadership team of the combined company will utilize new technologies through social media to build deeper relationships with those loyal consumers with cross-branding opportunities to grow revenue further.

The newly combined company features brands that are iconic in America: Dr. Pepper, Snapple, A&W, 7UP, and Sunkist. These brands have multiple products merchandised around them from tee shirts, cups, keychains, and more. They have an identity of their own and this merger promises that these brands will be relevant for a long time to come.

Keurig Dr. Pepper is the largest beverage merger in history and it will dynamically shape the future for the beverage aisle and provide new innovations to the delivery of beverages in an increasingly fast paced way of life for the consumer.

(some background information and industry data courtesy of Bev Net and CNBC)

Follow Up: Toys R Us Buyout Bid From Larian Revisited

The fallout from the liquidation of the iconic toy retailer, Toys R Us, is back in the news cycle. The news about a week ago was that billionaire toy retail brand owner, Isaac Larian, the man behind the Bratz franchise; placed a bid to purchase about 270 stores in the former Toys R Us chain plus their operation in Canada.

The bid was rejected by the courts that oversee the liquidation of the once premiere toy retailer because they deemed the valuation was too low. The court and the management of Toys R Us have an obligation to get the best value for their creditors in selling the business. They deemed that the offer from Larian was not the best value they could obtain at this point.

In the past couple of days, Larian is back in the news stating that he will put another bid into play for the U.S. stores that he has targeted that are viable for his new concept for the rebooted brand.

Larian was outbid for the Canadian operation of Toys R Us by another investment group. His new bid is focused on saving a portion of the U.S. stores, would involve retaining the U.S. corporate headquarters in New Jersey, and would save between 7,000 and 10,000 workers according to CNN Money.

Toys R Us originally had 735 stores and 31,000 workers in the United States and the potential liquidation of the chain is already showing signs of impacting the toy industry in a deleterious manner. Hasbro, according to CNN Money, has just reported a 16% drop in sales based on the absence of Toys R Us from the equation.

Mr. Larian has a theory that the job losses at other toy companies and vendors that marketed products with Toys R Us will be significant if the company is not rebooted in some form. He has a vision for the company where each location will be renovated to be a type of “mini-Disney World” in each neighborhood. The visits to the store will be very experiential for the children and their parents and family members.

This plan may sound great on paper especially because it addresses some of the core issues behind the precipitous decline of Toys R Us; customer feedback in recent years centered on the shopping environment being cold, sterile, and not inviting. The renovation of the stores and the focus shifting to one of experiences and interactivity is necessary to breathe new life into a once prominent brand.

However, that plan will have to overcome some barriers, namely a brand that has been tarnished by underperformance and a liquidation proceeding. It is similar to any brand that struggles or fails the public perception of that brand is very powerful. The public could have made a decision in their mind about Toys R Us based on past experiences which will be difficult for Mr. Larian and his group to overcome.

The perception of the consumer public has doomed many other brands throughout the course of history. In the case of Toys R Us the brand does have value because it is the only retailer which focused solely on toys. The Larian group or whomever gains the winning bid for the brand has to refocus their business around the core niche of toys.

The unfortunate reality is that it is going to take a great deal of time and money to bring back Toys R Us in a form that will be relevant and competitive in today’s consumer marketplace. The competition from Target, Amazon, Wal-Mart, and other online retailers is very fierce. Those are the barriers that any rebooted form of Toys R Us must be ready to contend with in the future.

The demise of Toys R Us was a very sad side effect of a much larger issue that faces retailers today: the consumer today has different expectations from a brick and mortar shopping experience than they did even five years ago. Toys R Us in their original form could not afford to change with the times due to the debt load they were carrying on loans from private equity investors.

The potential for Mr. Larian or the next group to submit a bid to reinvent the brand should have one central theme: they can be the niche “go-to” place for toys. This is an important attribute in an increasing focus on specialization. They can be the experts on toys and the showcase area for people to experience toys. It can still be a place where children can go to dream.

The next few weeks will be critical in the future of the Toys R Us brand in the U.S. and the decisions made will then take several months to determine the progress or the chances of success for the revamped concept. In my own personal view, if the reboot of the store experience fails, I still stand behind the idea that the brand has definite value as an online only presence. This is substantiated by the visibility and nostalgia components of the brand and the connectedness with a variety of age demographics.

This is just another chapter in what could be a long story: whether it will be one of redemption is what time will reveal.

The Inevitable Demise of An American Icon: Sears

Sears has been in the news again this week with news regarding the potential sale of one of their iconic brands. I wrote a post for another site a few months ago when Sears first decided to put three of their mainstay brands up for sale: Craftsman tools, Kenmore, and Die Hard. This is most certainly an effort to increase cash flow through both the sale of the brands and through the almost certain jump in Sears stock as a result.

The news that an as yet unnamed bidder (rumor has it the bidder is Black & Decker) is interested in paying a significant amount of money for the Craftsman name with some estimates in the $2 billion range; has Sears stock trading at an increased level in the past two days. Craftsman is a symbol of uncompromising quality in tools and related hardware products that is well established in the consumer marketplace.

The unfortunate other side to this transaction is that many industry experts and financial market insiders with great knowledge of the situation indicate that even if Sears divests Craftsman in this deal, the cash flow is not enough to make a reversal of the outlook for the company.

In fact, those same experts as well as some other reports I reviewed state that even if Sears sold all three of those brands at a premium it still would not help their cause. This is where the Sears merger and acquisition of Kmart stores again looms large in the negative outlook for the company.

In my understanding of the situation having covered this as well as other failing retail brands in the past is this: essentially while the sale of the brand, in this case it is Craftsman, may help Sears in the short term; Sears will lose the profit generated by the sale of those branded products which it currently owns outright.

The mere fact that Sears put these three well established brands on the block to be sold is (if some of you remember my previous work on this subject) an indication that the times are desperate there. It is an indication that the company is definitely preparing for “reorganization” (i.e. bankruptcy) in the near future.

Sears also owns a great deal of real estate between the buildings of their brick and mortar retail stores and the land that those stores are situated on which contributes to their profit and loss situation. It is expensive to maintain both buildings and land, so Sears has either been divesting itself of one or both, as well as determining some other methods of cost reducing those components of their business model.

A couple of prime examples of these strategies are right in my backyard in New Jersey. Sears owns the building that is home to their Freehold Raceway Mall location, in order to control some of the costs the company consolidated their inventory from multiple levels of the store onto one level. They subsequently rented out the other two levels to an Ireland based company called Primark, a retailer of discounted products, mostly clothing brands.

In Middletown, the Sears location and the large piece of land it sits upon was sold to Investors Bank. The bank is now constructing a new branch location at that site, and most certainly has some kind of long range plan for the development of that land in the future. Most retail and financial market experts put the time frame for the bankruptcy and demise of Sears at 18 to 24 months from now.

It still boggles my mind that Sears, such an iconic retailer will cease to exist in potentially that short a period of time. I always think of those employees who will be out of work, some of whom have undoubtedly served the company for many years. These same workers have a set of skills and experience in the retail field which is shrinking and may have a difficult time finding new employment.

Conversely, Sears could not seem to get it right, they were missing that connection with the consumer. They were the retailer that was an afterthought in the minds of the average consumer. Sears is thought of as a place where you get tools or tires or a dishwasher; and not where you would get a television, a jacket, or a pair of sneakers. They could not seem to connect the value of their full complement of products to the consumer in the way that Wal-Mart and Target most certainly have accomplished.

The management at Sears keeps telling Wall Street that they are in the middle of a “turnaround” but that has not seemed to materialize. I liken it to the professional sports team that is in seemingly a constant rebuilding mode and never seems to turn that corner where the results manifest themselves tangibly.

Sears CEO, Eddie Lampert, has stated again this week that the company will not close down the Kmart division of the business, which is seen as an anchor around the neck of the entire business operation. They will continue to close Kmart stores that are “underperforming” as they recently closed my local Kmart here in New Jersey. They will not shutter the entire division. I think that this is a mistake and that there is a point where you have to start bailing the water out of the ship before it sinks further.

The business model for Sears in this turnaround phase is a case of “too little, too late” as the saying goes. The damage has already been done. The executive team is now focusing on selling off the brands that are most profitable, closing down lapsed consumer credit lines, and whittling down their overhead costs through the sale of real estate holdings or through sublet type agreements as I mentioned similar to the location in Freehold.
Those are all signs that the executives are trying to maintain what little profitability remains in the business. Therefore they can divide up those revenues when it comes time for them to take the “golden parachute” ride before the operation shutters the doors for good.

The demise of Sears is inevitable it seems, and it is sad because I am sure that most of us at a certain age have memories of shopping there, or of our parents bringing home a picture of the new Kenmore refrigerator. I remember going in the garage and seeing all of my father’s Craftsman tools or getting a Die Hard battery for one of the cars during a harsh winter. My mother would take me to Sears to get clothes for an athletic team I had joined.

All of those instances and so many more will remain memories that other generations of American children will never have. That is due to poor business decisions by Sears, marketing campaigns that consistently missed the target, and the societal shift towards online shopping and away from traditional retailers. It is a scenario where it is essentially “adapt or fail” and Sears failed to adapt in time to save an iconic American retail brand from joining the long list of other retailers who no longer exist. It is a sad trend overall, but one that is a harsh new reality.