spr1311gcacioppo | Operations and Project Management in Today's Competitive Environment

Whenever you hear someone talking about the beverage industry, you immediately think Coca-Cola and PepsiCo. But what about Dr. Pepper Snapple Group? Over the past 20 years this company has built itself into a smaller beverage powerhouse via a series of acquisitions beyond the beloved Dr. Pepper and Snapple Iced Tea. It also owns Canada Dry, 7UP, A&W, Sunkist, and a number of others. The company’s stock is currently up 30% in the past 12 months and pays a very handsome dividend. The company beat expected earnings when it reported early last week. So I want to dig deeper into this companies’ prospects and look at how management is planning for a bright future.

The beverage industry is a particularly hard one to compete in. A certain Mayor has made this sector even more competitive due to recent activities. Consumers have been driven away from these beverages because of the negative publicity that high sugar beverages have received. Dr. Pepper Snapple Group has been developing new products to take up aisle space. About a year ago Dr. Pepper 10 (only 10 calories) was launched in efforts to bring back those lost customers and show them that this company is offering more choices. Much of Dr. Pepper’s business is done in the United States due to the restrictions overseas. Some of these brands would be gigantic if they were to be sold overseas. However, although they have not begun to do so yet, the company can sell a few of its non-carbonated products in the Asia-Pacific area. The company has done a stellar job in Latin America making it a gold mine for profits. But what makes this company’s future so bright, is that it is more focused on North America. Even though the behemoths out there have slowed down (Cola fatigue) Dr. Pepper Snapple Group still has many opportunities with distribution availability.

Let’s look at some brands that standout well while others standout badly. How does management plan to turn one around and keep one going up? Motts Apple Sauce had a good year even with the cold weather this year and the warm weather last year. This caused frost which ended up killing a large amount of the apple trees. Management prepared for this issue and overstocked its apple supply so it could continue to distribute to consumers. As a result Motts Q1 earnings did very well. Hawaiian Punch did not do well in Q1 due to its poor nutritional value. The company responded by doing some innovation to reduce the sugar content by 60% and add vitamins A, C, D, and E. Despite the criticism and low earnings, the company is reluctant to give up on this brand that has been around since 1934. How about some wildcard brands that are very well known but aren’t thought of as Dr. Pepper Snapple Group? Brands such as Schweepes, IBC, Mr. & Mrs. T, Stewart’s, Yoohoo and a lot more. These brands provide a very colorful portfolio and gives this company a lot of room to play in. The company has been able to make a huge amount of money without a lot of growth. If the company can increase growth, it is going straight to the bottom line which is very shareholder friendly.

In conclusion, can Dr. Pepper Snapple Group run with the big boys such as Coca-Cola and PepsiCo? Or, will this company be stuck in neutral for the years ahead? Where can the company add more value and keep expanding? From your own personal experience with beverage consumption, where do you think this company will be in the future?

http://www.drpeppersnapplegroup.com/

http://rt.com/usa/chemical-drink-bvo-gatorade-605/

http://beta.fool.com/jharry1/2013/05/10/dr-pepper-snapple-group-is-gearing-up-for-growth/33580/

http://laurennp.files.wordpress.com/2009/05/salespromotion_hawaiian-punch.pdf

http://thedailystar.com/localnews/x994535085/Drought-frost-put-squeeze-on-local-orchards/print

http://www.marketwatch.com/story/dr-pepper-snapple-q1-profit-up-sales-volume-down-2013-04-24

The current economic crisis has a renewed interest in examining the situation that lead up to the Great Depression of the 1930s. Firms like Lehman Brothers and Bear Stearns were formulated in the 19^th century or the earlier part of the 20^th century and survived the shock of the Great Depression. It is viewed as the largest economic catastrophe in the history of our financial system. Yet, the 2008 global financial crisis and recession caused both of them to collapse.

We need to take a closer look at why they did fail in relationship to the structure of the company. The question that prevails is whether risk is better controlled under a partnership or a public corporation system?

Investopedia defines partnership as “a business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business. Partnership doesn’t always mean two people. There are many large partnerships who have thousands of partners.” (LINK #1) A partnership structure where you are betting your own money is a better one at focusing on risk management. After researching various investment banks’ “business codes” or “risk management strategies”, I found Goldman Sachs to have the best business plan. (LINK #2) One of the reasons why Goldman has always been better at risk management and continued to do well throughout the 2008 meltdown is because as a partnership it really mattered to have good risk management. This is because it was the partners’ money that was at risk. Having your own money at risk is a very powerful motivator to make sure the risk and reward tradeoff is being made correctly. This view develops a culture in a company where the risk managers have equal power to the risk takers.

From what has happened, this didn’t exist in many other public companies. Even though Goldman changed into a publicly traded company, this culture of “it’s your money” stayed there to a fair extent. This is reflected by the fact that Goldman’s employees collectively still own a significant portion of the stock. (LINK #3) The same was true for Lehman Brothers and Bear Sterns employees. They also owned a significant portion of the company’s stock. No individual lost more money than Dick Fuld, CEO of Lehman Brothers. Reports say his total compensation from 2000-2007 totaled anywhere from $310 to $485 million, 85% of which was in the company’s stock. (LINK #4) Why was that economic incentive still not enough to make them be more careful? This has to do with the culture of the firms and the focus on making sure that there is a much better balance between risk takers and risk managers. Another thing Goldman does is it takes people who were traders and puts them on the risk management side. (LINK #5) Any company that takes the attitude that risk management is a low level function and the traders are the kings is setting themselves up for a problem. When you have good leadership at the top of your firm you will recognize the value of good risk management and their compensation will reflect that. An example that combines both culture and leadership is Warren Buffet. Warren Buffet has put everything that he owns into Berkshire Hathaway. It is clear that his attitude of “the risk for my shareholders is the same as the risk for me” reflects the overall success of the company. (LINK #6)

In closing I believe that it is the CEO’s job to protect the shareholders by investing in good risk management. The CEO’s who did not do this during 2008, for whatever reason, failed in their jobs.

Link #1-

http://www.investopedia.com/terms/p/partnership.asp

Link #2-

http://www.goldmansachs.com/what-we-do/investment-management/private-wealth-management/intellectual-capital/risk-mgmt-report/risk-mgmt-report.html

Link #3-

http://finance.yahoo.com/q/mh?s=GS+Major+Holders

Link #4-

http://www.businessweek.com/magazine/content/10_19/b4177056214833.htm

Link #5-

http://www.goldmansachs.com/careers/why-goldman-sachs/our-people/sarah-man-profile.html

Link #6-

http://finance.yahoo.com/echarts?s=BRK-A+Interactive#symbol=brk-a;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;