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Dr Pepper Snapple bought antioxidant drink maker Bai earlier this year for its first major acquisition as a standalone company. Now it's learning what it takes to buy a brand and grow it.
Ten months after closing the $1.7 billion deal, Dr Pepper Snapple was pummeled with questions from analysts in its earnings call about its recasting of volume and sales growth projections for its newly acquired brand. It also altered the effect the acquisition would have on earnings for the fourth time since announcing the deal last year.
"You can say we've tempered the volume a little bit, but I don't know if there's a business reason other than sort of clarifying a foggy crystal ball just because of the law of numbers here," CEO Larry Young said.
Dr Pepper Snapple refined Bai's volume growth forecast to 40 percent from a range of 40 to 50 percent. It now expects Bai to add more than 1 percentage point to Dr Pepper Snapple's total sales growth this year — down from about 2 percentage points.
Shares of Dr Pepper Snapple slid nearly 4.7 percent Wednesday, closing at $85.52. The stock is down nearly 5.7 percent so far this year.
Dr Pepper Snapple had previously invested in Bai as one of its "allied brands," or young brands it distributes on its network. It acquired Bai this year in a bid to diversify away from the carbonated drinks that dominate its portfolio and are increasingly out of favor.
But the company only has experience managing and forecasting larger, slower-growing brands. It has little experience with a brand like Bai that has much smaller sales and is growing at a far faster clip.
"There's more variability in the prediction" of brands like Bai, Young said on the call.
Jefferies analyst Kevin Grundy pointed out that Dr Pepper Snapple doesn't have as robust a history of integrating new acquisitions compared to other consumer-goods companies like Procter & Gamble or Church & Dwight. "They haven't done this and they haven't done the due diligence before," he said.
Still, Grundy noted that Dr Pepper Snapple's previous position as an investor in and distributor of Bai could have given the company more context.
Dr Pepper Snapple has also been refining its advertising, promotion and distribution strategy for Bai. It spent $20 million in the quarter on marketing, tweaked its pricing, and pulled back from club stores that sell beverages in bulk at a discounted price.
The company also told investors it would scale back its marketing and promotional spending on Bai next year as the brand gains more recognition.
Bai has gone through management changes. Five months after Dr Pepper Snapple closed its acquisition of the beverage brand, founder Ben Weiss exited the company and was replaced by Dr Pepper Snapple executive Lain Hancock as CEO.
Dr Pepper Snapple still said it expects Bai to nearly double sales by the end of next year.