Read the Article posted below, then answer the following questions, Please fully answer the following questions about the case.

(500 words all together if possible with charts or tables)

(typed no pictures)

1) Assess the beverage industrys attractiveness in terms of growth and profitability. Specifically, present a comparative chart on the beverage industry on ROA, ROE, Debt to Equity (D/E), Current Ratio, and end of year stock prices between 2006- 2011 inclusive.

Article:

Larry Young, President and CEO of Dr Pepper Snapple Group, Inc. (NYSE: DPS) seemed to be on roll. Named 2010 Beverage Executive of the Year by Beverage Industry magazine, he led the company through three very difficult economic years since it separated from the London-based food and beverage giant Cadbury Schweppes. Reflecting on that time, he chuckled, "There couldn't have been a worse year to go public."" Triggered by the collapse of mortgage- backed securities, the recession froze credit markets and led to unprecedented commodities prices. In spite of adverse economic conditions and fierce competi- tion, the company managed to obtain modest growth in sales in 2010. Perhaps most satisfying of all was the recent turnaround of the Snapple brand, which had been struggling for many years.2 Sales volume for the brand grew 10 percent in 2010, fueled by new products, packages, and distribution. In addition, Dr Pepper Canada Dry, Crush, Mott's, and Hawaiian Punch all experienced increases in demand. A healthy cash flow allowed the company to reduce its debt, increase dividends, and repurchase shares. A question remained as to whether the company was simply taking advantage of some fairly obvious opportunities that it could not pursue when it was owned by Cadbury Schweppes, or whether this number three firm could actually begin to prosper in an industry dominated by two of the strongest brands in the world. After all although DPS sales were up almost 2 percent in 2010 profits were lower than in 2009. In comparison, Coca- Cola Company experienced revenue growth in 2010 of 13.3 percent, with operating income increasing by 2.7 percent. During the same time period, PepsiCo had revenue growth of 33.8 percent and growth in operating profit of 3.6 percent The Dr Pepper Snapple Story The original Dr Pepper soft drink was invented in 1885 by a young pharmacist named Charles Alderton. At the time, Alderton was working at Morrison's Old Corner Drug Store in Waco, Texas, which served carbonated soft drinks from a soda fountain. Using that resource, Alderton began to experiment with his own recipes and soon discovered that one particular drink, referred to as "the Waco," was gaining popularity among his customers. As demand grew, Alderton and Morrison brought in a third partner to help with the manufacturing and bottling of the soft drink. The partner was Robert S. Lazenby, owner of the Circle "A" Ginger Ale Company. Alderton left the business shortly thereafter, but Morrison and Lazenby continued, eventually forming what would come to be known as the Dr Pepper Company, named after a friend of Morrison. The company was introduced to the general public in 1904 at the World's Fair Exposition in St. Louis. From its humble beginnings in Morrison's Old Corner Drug Store, the company Morrison and Lazenby started has become one of the largest beverage manufacturers in North America. DPS's current product portfolio is closely tied to the history of mergers and acquisitions of its one- time parent company, Cadbury Schweppes plc (Cadbury Schweppes). Cadbury Schweppes emerged in 1969 from the merger of Cadbury ple, a British confectionary and a soft drink company, and Schweppes, an international beverage brand. In the three decades that followed Cadbury Schweppes gained the third largest share of the beverage market in North America through strategic acquisitions. Some notable acquisitions included the Duffy-Mott Company (later known as Mott's), Canada Dry, Sunkist, Crush, and Sun Drop in the 1980s. In 1993, the company bought the A&W brands Squirt and Vernors as well as its signature root beer and cream soda flavors. Cadbury finally purchased Dr Pepper/Seven UP Inc., in 1995, an acquisition that brought Dr Pepper 7UP IBC Root Beer, and the Welch's soft drink line into the company portfolio. In 2000, Cadbury Schweppes acquired the Snapple Beverage Group (Snapple). Snapple had previously been part of a failed acquisition by Quaker in 1994. The acquisition was intended to help Quaker strengthen its beverage division, which at the time included Gatorade. However, after failing to successfully integrate the contrasting corporate cultures, in 1997 Snapple was acquired by Triarc Companies, an investment company with a history of purchasing struggling assets. It was from Triarc that Cadbury Schweppes ultimately acquired Snapple. Three years after acquiring Snapple, Cadbury Schweppes combined its four North American beverage companies-Dr Pepper/Seven UP, Snapple, Mott's, and Bebidas Mexico-into Cadbury Schweppes Americas Beverages (CSAB). By 2006, CSAB had developed common vision, business strategy, and management structure and established its own bottling and distribution network. In May 2008, under the direction of Larry Young, CSAB officially spun off from Cadbury's confectionary manufacturing division and became known as Dr Pepper/Snapple Group, Inc. Today, DPS manufactures, markets, and distributes over 50 brands of carbonated soft drinks, juices, mixers, teas, and other beverages. In addition to Dr Pepper and Snapple brand drinks, DPS products include Mott's juices, 7UP, A&W, RC Cola, Squirt, Sunkist soda, Canada Dry, Schweppes, Hawaiian Punch, Yoo-Ho0, and other well-known beverages.' It has a market share of over 40 percent in the non-cola carbonated soft drink category president and CEO Larry Young, chief financial officer Martin Ellen, and President of Packaged Beverages Rodger L. Collins. President and CEO: Larry Young. Larry Young has been president and CEO of the company since October 2007 and led the separation of DPS from Cadbury in 2008. Before coming to the company, Young worked for more than 25 years in the PepsiCo system, where he began a truck driver and worked his way up to president and CEO of Pepsi-Cola General Bottlers. In 2005, he joined the Dr Pepper/Seven UP Bottling Group, again as presi- dent and CEO. Young finally joined Cadbury Schweppes in April 2006 when it acquired Dr Pepper/Seven Up. as Chief Financial Officer: Martin Ellen. Martin (Marty) Ellen joined DPS in April 2010. He has 25 years of experience as chief financial officer in companies in the manufacturing, franchising, distribution, and service industries. His previous appointment was at Snap-on Inc., a manufacturer and marketer of professional tools, equipment, and software. His beverage industry expe- rience took place at Whitman Corporation, owner of Pepsi-Cola General Bottlers, where he helped realign and expand Pepsi bottling territories in the United States and Europe. a President of Packaged Beverages: Rodger L Collins. Rodger Collins has been affiliated with the bot- tling group of Dr Pepper Snapple or its predecessors for more than 30 years, having survived numerous acqui sitions, restructurings, and the spin-off of DPS from Cadbury Schweppes. In his current role, he manages a coast-to-coast sales force and fleet with responsibility for direct-to-store delivery and warehouse distribution. The Company Board of Directors As a publicly traded company, DPS management is directed by a board of directors chaired by Wayne Sanders, who served as Chairman and CEO of Kimberly- Clark Corporation until retiring in 2003,10 As stated in the company's Corporate Governance Guidelines, the board's responsibility is to manage the business affairs of the company, including regular evaluation of strategic direction, policies and procedures, and top management It must ensure that the company's managers act in the best interests of the company and its stockholders and maintain a high level of ethical conduct," In addition to Chairman Sanders, there are eight more members of the board of directors, including John Adams, formerly of Trinity Industries and Texas Commercial Bank; Terence Martin, former senior vice president and CFO of Quaker Oats; and DPS CEO Larry Young (for full information on directors, see Exhibit 1) Dr Pepper Snapple Group, Inc. is a major beverage company with an integrated business model including brand ownership, bottling, and distribution of nonalcoholic beverages in the United States, Canada, and Mexico. The company's portfolio includes dozens of brands of flavored (non-cola) carbonated soft drinks and noncarbonated beverages like mixers, juice drinks, and ready-to-drink teas and juices, Since the spin-off of Cadbury in May 2008, the company has established itself as the top non-cola carbonated soft drink company in the United States, and has maintained the number three spot in the broader beverage industry in North America The Management Team Current DPS management includes seasoned professionals with decades of experience in the food and beverage industry. Most notable in the organization are Company Strategies Since it was spun off from Cadbury Schweppes, DPS management has concentrated a great deal of time and attention on strategy development and implementation Through focused strategic development, management has sought to establish the firm as a leader in the higher margin segments of the nonalcoholic beverage industry Consistent with this strategic direction, management has established six specific strategies: focus on marketing (for a detailed explanation of DPS strategies, see Exhibit 2) Marketing Shortly after DPS demerged from Cadbury, the economy in the United States began to struggle and discretionary spending was constricted. As a result, sales in the industry tanked, leading many companies to drastically cut marketing budgets. In contrast to the mainstream reaction, DPS intensified its focus on marketing and advertising. This decision was based on an analysis of the early 1980s recession conducted by Nielson, a major marketing research company and a partner of DPS. The analysis looked at brands across multiple consumer categories in 1983 and 1984, and fournd that the most successful brands all pursued a common strategy- continued investment in core brands. Consequently, DPS dramatically increased its marketing budget for its core brands and focused its marketing money on brand development, availability, and advertising.14 Build and enhance leading brands. Focus on opportunities in high-growth and high margin categories Increase presence in high-margin channels and packages Leverage the firm's integrated business model Strengthen the firm's distribution channels through acquisitions Improve operating efficiency. While most of the strategies are centered on internal development, management is attempting to broaden the firm's market through continued acquisition activity and contractual agreements with other organizations. Whether internally or externally focused, however, the key to implementing each of these strategies has been a Brand Development. Despite slow sales in the over all non-cola carbonated soft drink market, many top managers within the company believe that flavored soft drinks showed room for growth. As Young put it, they - Exhibit 2 Strategy THE KEY ELEMENTS OF OUR BUSINESS STRATEGY ARE TO: Build and Enhance Leading Brands. We use an angoing process of market and consumer analysis to identify key brands that we believe have the greatest potential for profitable sales growth. We intend to continue to invest most heavily in these key brands to drive profitable and sustainable growth by strengthening consumer awareness, developing innovative products and brand extensions to take advantage of evolving consumer trends, improving distribution, and increasing promotional effectiveness Focus on Opportunities in High-Growth and High-Margin Categories. We are focused on driving growth in our business in selected profitable and emerging categories. These categories include ready-to-drink teas, energy drinks, and other functional beverages. We also intend to capitalize on opportunities in these categories through brand extensions, new product launches, and selective acquisitions of brand and distribution rights. Increase Presence in High-Margin Channels and Packages. We are focused on improving margin channels, such as convenience stores, vending machines, and small independent retail outlets, primarily by increased selling activity and investments in coolers and other cold drink equipment. We also intend to increase demand for high- margin products like single-serve packages for many of our key brands through increased promotional activity and innovation. product presence in high- our Leverage Our Integrated Business Model. We believe our integrated brand ownership, bottling, and distribution business model provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our bottling and distribution businesses. We intend to leverage our integrated business model to reduce costs by creating greater geographic manufacturing and distribution coverage and to be more flexible and responsive to the chang ing needs of our large retail customers by coordinating sales, service, distribution, promotions, and product launches Strengthen Our Route-to-Market through Acquisitions. The acquisition and creation of our Bottling Group is part of our longer-term initiative to strengthen the route-to-market for our products. We believe additional acquisitions of regional bot- tling companies will broaden our geographic coverage and enhance coordination with our large retail customers. Improve Operating Efficiency. We believe our recently announced restructuring willl reduce our selling, general, and admin- istrative expenses and improve our operating efficiency In addition, the integration of recent acquisitions into our Bottling Group has created the opportunity to improve our manufacturing, warehousing, and distribution operations Operations DPS is headquartered in Plano, Texas, and employs approximately 20,000 people throughout North America and the Caribbean. It operates 24 production plants and more than 200 distribution centers in those areas.9 Almost all beverage concentrates are produced in a plant in St. Louis, Missouri. The business model includes support and staffing for DPS. Since the separation, the company has developed completely independent IT operations, with primary hosting based in Toronto, Canada, and two primary vendors for application support and maintenance outsourced to India. Under the leadership of Marty Ellen, CFO, the company has embarked on a program it calls Rapid Continuous Improvement (RCI). According to Ellen, "RCI is about excelling at delivering customer value and improving productivity by eliminating all non- value-adding activities, thereby enhancing growth opportunities." The company is examining its supply chain, including innovation, manufacturing, marketing, distribution, and administration, and looking for ways to increase efficiency, consistent with Six Sigma improvement methods. both company-owned direct-store-delivery (DSD) distribution networks and third-party distribution. Within the model, approximately 40 percent of the company's volume is distributed through company- owned networks; another 40 percent through third party distributers in the Coca-Cola, Pepsi-Cola, and independent bottler systems; and the remainder split between warehouse direct and food-service distributors, 10 All of the internal DSD distribution is carried out by railroad and truck, operating on a hub-and-spoke supply chain system with major distribution centers in key areas. The hub-and-spoke system is set up to provide manufacturing capabilities in all five major US regions-northeast, southeast, midwest, southwest, and western. It allows for orders to be filled closer to 34 Financial Performance Overall, DPS's financial performance since the spin-off has exceeded analysts' expectations. While many of the company's brands experienced moderate to high growth in 2010, sales of Sunkist, 7UP, and A&W declined, leading to overall company sales of $5.6 billion, up about 2 percent from 2009. Even so, in spite of the sales increase and measures the company took to increase efficiency, profits were down approximately 5 percent from the prior year. Nevertheless, the company experienced a huge loss in 2008, and the economy was very challenging in 2009 and 2010, so financial performance should be considered in its appropriate context (for detailed financial statements, see Exhibit 3). The company experienced large increases in cash flow from operations during 2010 and used the additional cash to increase dividends, pay down debt, and buy back common stock. customers, increasing customer service and controlling transportation costs. As stated by Joe Rowland, senior vice president and business unit general manager for the central and southeast regions, DPS has "the ultimate goal of providing better service to the customer, because that will translate to sales."9 A good example of DPS's operations is its largest hub, which is based in Northlake, Illinois and distributes to Chicago and its surrounding areas. The facility is about one million square feet in size and employs 1,250 people, of which 750 work on site and the rest in the field. On-site operations consist of nine manufacturing lines, including plastic bottle, can, and hot-fill glass lines for DSD distribution, and a bag-in-box line for soda fountains at food-service locations. Most of the lines are versatile, allowing for variations in batches, but some also have unique capabilities. For example, Line 1 produces cold-fill glass and plastic bottles, while the Snapple line produces hot-fill products. The Northlake facility produces about 220,000 cases of product a day that are stored in the company's 25-dock warehouse until they are loaded onto one of the 150 trucks owned by the facility. In addition to line manufacturing the facility utilizes a quality assurance program to check for both internal specifications and external requirements. DPS works closely with external auditors such as the American Institute of Bakers, to ensure that manufacturing and other processes conform to product requirements To facilitate business operations, DPS makes use of highly integrated information systems and networks. Prior to 2008, Cadbury Schweppes supplied all IT The Industry The Dr Pepper Snapple Group (DPS) competes in the US beverage manufacturing and bottling industry (NAICS: 42119). The industry is made up of about 3,000 companies, including manufacturers, bottlers and distributers of nonalcoholic beverages. Despite the vast number of companies in the industry, revenues are highly concentrated. Over 90 percent of the combined $70 billion in annual revenues are generated by the three largest companies-Coca-Cola, PepsiCo, and DPS-and their subsidiaries. Carbonated soft drinks, including colas and other flavors, bottled waters, juices, and a variety of syrups and mixes, are this industry's major products. Beverage Consumers and Market Trends The beverage manufacturing and bottling industry is greatly influenced by economic and other market rends associated with consumers. Factors such as For the Year Ended December 31 DR PEPPER SNAPPLE GROUP INC. 2010 2009 CONSOLIDATED STATEMENTS OF OPERATIONS 2008 For the Years Ended December 31, 2010, 2009, and 2008 (In millions of dollars, except per share data) $5,636 Net sales $5,531 $5,710 Cost of sales 2,243 2,234 2,590 Gross profit 3,393 3,297 3,120 Selling, general, and administrative expenses 2,233 2,135 2,075 Depreciation and amortization 127 117 113 Empairment of goodwill and intangible assets 1,039 Restructuring costs 57 Other operating expense (income), net (40) 4 Income (loss) from operations 1,025 1,085 (168) Interest expense 128 243 257 Interest income (3) (4) (32) early extinguishment of debt Loss on 100 Other income, net (21) (22) (18) Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries 821 868 (375) Provision for income taxes 294 315 (61) Income (loss) before equity in earnings of unconsolidated subsidiaries 527 553 (314) Equity in earnings of unconsolidated subsidiaries, net of tax 2 2 Net income (loss) $ 528 $ 555 $ (312) Earnings (loss) per common share: Basic 2.19 2.18 (1.23) Diluted 2.17 2.17 (1.23) Weighted average common shares outstanding: Basic 240.4 254 2 254.0 Diluted 242.6 255.2 254.0 Cash dividends declared per common share 0.90 0.15 DR PEPPER SNAPPLE GROUP, INC. December 31, 2010 December 31, 2009 CONSOLIDATED BALANCE SHEETS As of December 31, 2010 and 200 (In millions except share and per share data) ASSETS Current assets Cash and cash equivalents $315 $ 280 Accounts receivable: Trade, net 536 540 Other 35 32 Inventories 244 262 Deferred tax assets 57 53 Prepaid expenses and other current assets 122 112 Total current assets 1,309 1,279 Property, plant and equipment, net 1,168 1,109 DR PEPPER SNAPPLE GROUP INC. December 31, 2010 December 31, 2009 CONSOLIDATED BALANCE SHEETS (In millions except share and per share data) As of December 31, 2010, and 2009 ASSETS Investments in unconsolidated subsidiaries 11 2,983 2,984 Goodwill 2,702 Other intangible assets, net 2,691 543 552 Other non-current assets 151 144 Non-current deferred tax assets $8,859 $8,776 Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 851 $ 850 Accounts payable and accrued expenses 65 Deferred revenue 404 Current portion of long-term obligations Income taxes payable 18 854 1,338 Total current liabilities 2,960 1,687 Long-term obligations 1,038 1,083 Non-current deferred tax liabilities 1,515 Non-current deferred revenue 777 737 Other non-current liabilities 6,400 5,589 Total liabilities Commitments and contingencies Stockholders' equity no shares issued Preferred stock, $.01 par value, 15,000,000 shares authorized, 3 Common stock, $.01 par value, 800,000,000 shares authorized, 223,936,156 and 254,109,047 shares issued and outstanding for 2010 and 2009, respectively Additional paid-in capital 2. 2,085 3,156 87 Retained earnings 400 (28) (59) Accumulated other comprehensive loss Total stockholders' equity 3,187 2,459 $8,859 $8,776 Total liabilities and stockholders' equity DR PEPPER SNAPPLE GROUP, INC. For the Year Ended December 31 SEGMENT RESULTS 2009 2010 For the Years Ended December 31, 2010 and 2009 Net sales $1,156 $1,063 Beverage concentrates 4,111 4,098 Packaged beverages 382 357 Latin America beverages $5,636 $5,531 Net sales Segment operating profit (SOP) $ 745 $ 683 Beverage concentrates 573 536 Packaged beverages DR PEPPER SNAPPLE GROUP, INC. For the Year Ended December 31 SEGMENT RESULTS For the Years Ended December 31, 2010 and 2009 2010 2009 Segment operating profit (SOP) Latin America beverages 40 54 Total SOP 1,321 1,310 Unallocated corporate costs 288 265 Other operating expense (income), net (40) Income (loss) from operations $1,025 $1,085 Interest expense, net 125 239 Loss on early extinguishment of debt 100 Other income, net (21) (22) Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries $ 821 S 868 Source: Dr Pepper Snapple Group, Inc. 2010 Report 10-K economic stability, seasonality, commodities prices, and consumer tastes and preferences are of great importance to beverage company managers who develop and implement strategies partly for the purpose of successfully dealing with changes in the industry Perhaps the most significant factor influencing food and beverage companies is economic stability. Since carbonated soft drinks are are considerably impacted by weakness in the economy. Between 2008 and 2010, the economy was the major problem facing beverage companies like DPS, Coke, and Pepsi. Intensified by the inefficiency and failure of the securities market, the United States found itself in one of the worst recessions in history. As unemployment rates increased and the credit markets froze, consumers significantly reduced spending. Discretionary spending as a percentage of total consumer spending dropped below 16 percent, its lowest level in over 50 years. As discretionary spending decreased, consumers turned from flavored drinks and colas to less expensive alternatives, including tap water. DPS CEO Larry Young explained the phenomenon, "Even though the majority of Americans are still working, the fear factor that has gripped the nation is having a significant impact on consumer psychology." As a result, Young suggested that shoppers were actively seeking out good deals and making decisions based on "product satisfaction and price." Along with influencing consumer confidence, the recession significantly increased commodity prices. Specific to the beverage industry, the prices for aluminum natural gas, resins, corn, pulp, and other commodities all increased. These commodities are used to produce beverages and, exert a considerable amount of pressure on industry margins. For instance, the price of sugar on the US commodity market rose from under 12 cents per pound in 2007 to 37 cents per pound in October 2010. Several other consumer trends influence the beverage manufacture and bottling industry. Factors such as changes in demographics, health concerns, preferences, changes in lifestyle, and seasonality all influence marketing and distribution methods. An increased concern about health and wellness is one of the most significant trends affecting the beverage industry. As consumers continue to reduce caloric intake and look for products richer in vitamins, the less-healthy sectors of the beverage industry are expected to shrink, As soft drink sales decline, however, demand for healthier alternatives such as low or no calorie soft drinks and noncarbonated drinks such as sports drinks, ready-to-drink teas, and flavored and regular bottled water are projected to grow. Through 2013, sales of bottled water were projected to grow by 9 percent, ready-to-drink teas by 24 percent, and flavored and functional waters by 71 percent. Additional consumer trends of significance to the industry are seasonality and changing demographics Relative to seasonality, beverage sales tend to be higher during the summer months and holidays. Sales are slower during the winter months and fluctuate somewhat with the weather. With regard to demographics, the most significant changes in the United States have to do with the prevalence of aging Baby Boomers and growth in the Hispanic population. a discretionary item, sales Market Channels Although the final consumer drives demand for the beverage industry, beverage companies' direct customers are bottlers/distributers and retailers. Building strong relationships with these customers is an important part of succeeding in the beverage industry Bottling and distribution companies buy beverage concentrates from beverage brand companies, from which they manufacture, bottle, and distribute finished beverages. Additionally, bottlers manufacture and distribute syrups and mixes used in soda fountains for the food-service industry. Major beverage bottling companies include Coca-Cola Enterprises PepsiAmericas, the Pepsi Bottling Group, and the Dr Pepper Snapple Bottling Group. For DPS, a substantial portion of net sales in beverage concentrates is generated through bottlers not owned by the company As much as two-thirds of DPS volume in concentrates is sold to third-party bottlers. Some of these are owned by competitors such as PepsiCo and Coke. In 2010, 71 percent of Dr Pepper's sales volume was generated through distribution of its products through Coca Cola- and PepsiCo-affiliated bottlers.9 Productive relationships with these bottlers are possible because of the strength and position of the Dr Pepper brand Retail companies buy finished beverages from company's position post spin-off, Coke and Pepsi had significant head start on acquiring healthier juices, teas, and enhanced waters. Analysts suggest that DPS had insufficient resources at the time to maintain pace with competing acquisitions."7 Aside from its problems gaining overall market share in the United States, DPS has also had difficulty competing internationally. The company generates about 89 percent of its revenues in the US market, 80 percent of which come from carbonated soft drinks. In comparison, Coke collects about 74 percent of its sales outside of North America, and Pepsi generates over 40 percent of its sales internationally. Still, DPS management has expressed an intention to maintain its focus on North America. In general, while DPS has strong brands and distribution, the company has struggled to compete head- to-head with industry leaders Coke and Pepsi. Based in Atlanta, Georgia, the Coca-Cola Company (Coke) is the largest manufacturer, distributer, and marketer of nonalcoholic beverage concentrates and syrups in the world. Coke markets four ofthe world's top five carbonated soft drinks-Coca-Cola, named the world's most valuable brand, Diet Coke, Fanta, and Sprite. Coke also owns and licenses nearly 500 other brands including diet and light beverages, enhanced waters, juice drinks, teas, coffees and sports and energy drinks. Coke is primarily a brand owner and manufacturer, selling its concentrates and syrups to bottling and canning companies, fountain wholesalers and retailers, and distributers. As outlined on its company website, the three- phase mission of Coke is "to refresh the world, to inspire moments of optimism and happiness, and to create value and make a difference."o Consistent with its mission statement, Coke maintains an focus, marketing and distributing its products in over 200 countries.1 To facilitate its international focus, Coke spends a significant amount of capital technological development and marketing. For example, Coke introduced a new fountain beverage machine that used "micro-dosing" technology to dispense over 120 beverages from one machine. The machine takes up the same space as the eight-valve machine currently being used by food-service businesses.52 International sales technology development, and marketing have made Coke one of the most widely recognized and profitable companies in the world (for selected financial data on the Coca-Cola Company, see Exhibit 4) PepsiCo, Inc., another major DPS competitor is based in North Carelina and is a global leader in beverage, snack, and food manufacture and distribution. Pepsi is divided into three major business units PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. These business units manufacture, market, and sell a variety of convenient a distributers for mass merchandise and sale to the final consumer. Recent trends in the industry have caused many retailers to consolidate, resulting in a smaller number of large, sophisticated retailers with greater buying power. Major retailers tied to the beverage industry include Walmart, Target, Kroger, SuperValu, and Safeway. In addition to these retailers, beverage manufacturers also depend on food-service customers that buy syrups for fountain drinks. Major food-service companies include McDonald's, Burger King, and Yum! Brands, which includes KFC, Pizza Hut, and Taco Bell. international The Competition The beverage manufacturing and bottling industry is highly competitive and constantly shifting to respond to changes in consumer tastes and preferences. Competitive position is most effectively attained through brand recognition and based on factors such as price, quality, taste, selection, and availability. Major competitors in the manufacturing segment include the Coca-Cola Company (Coke), PepsiCo, Inc. (Pepsi), Nestl, S.A., and Kraft Foods, Inc. Major competitors in the bottling and distribution segmeent include Coca Cola Enterprises, Pepsi Bottling Group, and numerous smaller bottlers and distributors. Relative to the competition, DPS is the third largest beverage business in North America, behind Coke and Pepsi, which collectively account for 63 percent of the sales in the industry4" According to analysts, part of the reason that DPS is so much smaller than its competitors in the United States can be attributed to the spin-off of DPS from Cadbury in 2008. Taking advantage of the on 45 COCA-COLA COMPANY AND SUBSIDIARIES Year Ended December 31 2010 2009 2008 Net operating $35,119 $30,990 revenues $31,944 Cost of goods sold 12,693 11,088 11,374 Selling, general and administrative expenses 13,158 11,358 11,774 Other operating charges 819 313 350 Operating income 8,449 8,231 8,446 Net income after taxes 11,809 6,824 5,807 Total current assets 21,579 17,551 12,176 Total assets 72,921 48,671 40,519 Total current liabilities 18,508 13,721 12,988 Total long-term debt and other liabilities 23,096 9,604 7,059 Total equity 31,317 25,346 20,472 PEPSICO, INC. Fiscal Years Ended December 25, 26 and 27 2010 2009 2008 Net operating revenues $57,838 $43,232 $43,251 Cost of goods sold 26,575 20,099 20,351 Selling, general, and administrative expenses 22,814 15,026 15,877 Amortization of intangible 117 assets 63 64 Operating profit 8,332 8,044 6,959 Net income after taxes 6,320 5,946 5,142 Total current assets 17,569 12,571 10,806 Total assets 68,153 39,848 35,994 Total current liabilities 15,892 8,756 8,787 Total long-term debt and other liabilities 30,785 13,650 14,625 Total equity 21,476 17,442 12,582 Note: Much of the difference between operating income and net income in 2010 is attributable to a gain from reclassifying the value of the company's previous investment in a business it acquired during the year. The acquisition is also reflected by the large increase in total assets in 2010 Sources: Coca-Cola Company 2009 and 2010 Report 10-K; PepsiCo, Inc. 2009 and 2010 Annual Reports salty, sweet, and grain-based snacks, carbonated soft drinks, noncarbonated beverages, and other foods in approximately 200 countries. Some of the company's key brands include Pepsi, Pepsi One, Diet Pepsi, Mug, Mountain Dew, Sierra Mist, Frito-Lay, Doritos, Cheetos, Tostitos, Sunchips, SoBe and SoBe Lifewater, Propel, Quaker, and Tropicana. Pepsi also holds the trademarks for many valuable products, including Lipton, Starbucks, Dole, and Ocean Spray.5 Pepsi's goal is to be the world's best consumer products company in convenient foods and beverages The company seeks to accomplish its goal by producing "financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate." An important part of Pepsi's mission statement is its socially responsible approach, concentrating on improving all aspects of the world in which it operates-the environment, societies, and economies. The company puts its vision into action through meeting consumer needs, environmental stewardship initiatives, societal benefits, employee support and organizational programs, and operations that increase shareholder value.5 As is the case for Coca-Cola, Pepsi's strategies maintain an international focus and include improvements in product development and marketing. The company has recently made significant changes to packaging, redesigning Pepsi brand products, Sierra Mist, and others. Additionally, Pepsi introduced a new advertising campaign that put a modern twist on the "Pepsi Generation" campaign used in the 1960s. The campaign combined footage from the old advertisements with current images to express the new tagline, "Every Generation Refreshes the World." By focusing on social responsibility and diversifying its brand and product portfolio, Pepsi has become one of the most successful global food and beverage companies in history (for selected financial data on the PepsiCo, Inc., see Exhibit 4). of the company's individual brands, Young knew the firm had to cut costs in order to improve profit margins However, DPS could not afford to make any cuts that would damage its strong brands or alienate consumers. Furthermore, DPS's rivals, Coke and PepsiCo, were experiencing much higher performance levels than DPS and were not going to stand still. How can DPS continue to grow at levels that will satisfy shareholders? To what extent should acquisitions, joint ventures, licensing agreements, and/or internal growth tactics be pursued? Should DPS diversify into other product markets? What other growth options are available to the company? Should any products or brands be divested? Young had a great deal to think about Possible Future Actions Moving into 2011, Larry Young had many decisions to make. While he was pleased by the performance of many Larry Young, President and CEO of Dr Pepper Snapple Group, Inc. (NYSE: DPS) seemed to be on roll. Named 2010 Beverage Executive of the Year by Beverage Industry magazine, he led the company through three very difficult economic years since it separated from the London-based food and beverage giant Cadbury Schweppes. Reflecting on that time, he chuckled, "There couldn't have been a worse year to go public."" Triggered by the collapse of mortgage- backed securities, the recession froze credit markets and led to unprecedented commodities prices. In spite of adverse economic conditions and fierce competi- tion, the company managed to obtain modest growth in sales in 2010. Perhaps most satisfying of all was the recent turnaround of the Snapple brand, which had been struggling for many years.2 Sales volume for the brand grew 10 percent in 2010, fueled by new products, packages, and distribution. In addition, Dr Pepper Canada Dry, Crush, Mott's, and Hawaiian Punch all experienced increases in demand. A healthy cash flow allowed the company to reduce its debt, increase dividends, and repurchase shares. A question remained as to whether the company was simply taking advantage of some fairly obvious opportunities that it could not pursue when it was owned by Cadbury Schweppes, or whether this number three firm could actually begin to prosper in an industry dominated by two of the strongest brands in the world. After all although DPS sales were up almost 2 percent in 2010 profits were lower than in 2009. In comparison, Coca- Cola Company experienced revenue growth in 2010 of 13.3 percent, with operating income increasing by 2.7 percent. During the same time period, PepsiCo had revenue growth of 33.8 percent and growth in operating profit of 3.6 percent The Dr Pepper Snapple Story The original Dr Pepper soft drink was invented in 1885 by a young pharmacist named Charles Alderton. At the time, Alderton was working at Morrison's Old Corner Drug Store in Waco, Texas, which served carbonated soft drinks from a soda fountain. Using that resource, Alderton began to experiment with his own recipes and soon discovered that one particular drink, referred to as "the Waco," was gaining popularity among his customers. As demand grew, Alderton and Morrison brought in a third partner to help with the manufacturing and bottling of the soft drink. The partner was Robert S. Lazenby, owner of the Circle "A" Ginger Ale Company. Alderton left the business shortly thereafter, but Morrison and Lazenby continued, eventually forming what would come to be known as the Dr Pepper Company, named after a friend of Morrison. The company was introduced to the general public in 1904 at the World's Fair Exposition in St. Louis. From its humble beginnings in Morrison's Old Corner Drug Store, the company Morrison and Lazenby started has become one of the largest beverage manufacturers in North America. DPS's current product portfolio is closely tied to the history of mergers and acquisitions of its one- time parent company, Cadbury Schweppes plc (Cadbury Schweppes). Cadbury Schweppes emerged in 1969 from the merger of Cadbury ple, a British confectionary and a soft drink company, and Schweppes, an international beverage brand. In the three decades that followed Cadbury Schweppes gained the third largest share of the beverage market in North America through strategic acquisitions. Some notable acquisitions included the Duffy-Mott Company (later known as Mott's), Canada Dry, Sunkist, Crush, and Sun Drop in the 1980s. In 1993, the company bought the A&W brands Squirt and Vernors as well as its signature root beer and cream soda flavors. Cadbury finally purchased Dr Pepper/Seven UP Inc., in 1995, an acquisition that brought Dr Pepper 7UP IBC Root Beer, and the Welch's soft drink line into the company portfolio. In 2000, Cadbury Schweppes acquired the Snapple Beverage Group (Snapple). Snapple had previously been part of a failed acquisition by Quaker in 1994. The acquisition was intended to help Quaker strengthen its beverage division, which at the time included Gatorade. However, after failing to successfully integrate the contrasting corporate cultures, in 1997 Snapple was acquired by Triarc Companies, an investment company with a history of purchasing struggling assets. It was from Triarc that Cadbury Schweppes ultimately acquired Snapple. Three years after acquiring Snapple, Cadbury Schweppes combined its four North American beverage companies-Dr Pepper/Seven UP, Snapple, Mott's, and Bebidas Mexico-into Cadbury Schweppes Americas Beverages (CSAB). By 2006, CSAB had developed common vision, business strategy, and management structure and established its own bottling and distribution network. In May 2008, under the direction of Larry Young, CSAB officially spun off from Cadbury's confectionary manufacturing division and became known as Dr Pepper/Snapple Group, Inc. Today, DPS manufactures, markets, and distributes over 50 brands of carbonated soft drinks, juices, mixers, teas, and other beverages. In addition to Dr Pepper and Snapple brand drinks, DPS products include Mott's juices, 7UP, A&W, RC Cola, Squirt, Sunkist soda, Canada Dry, Schweppes, Hawaiian Punch, Yoo-Ho0, and other well-known beverages.' It has a market share of over 40 percent in the non-cola carbonated soft drink category president and CEO Larry Young, chief financial officer Martin Ellen, and President of Packaged Beverages Rodger L. Collins. President and CEO: Larry Young. Larry Young has been president and CEO of the company since October 2007 and led the separation of DPS from Cadbury in 2008. Before coming to the company, Young worked for more than 25 years in the PepsiCo system, where he began a truck driver and worked his way up to president and CEO of Pepsi-Cola General Bottlers. In 2005, he joined the Dr Pepper/Seven UP Bottling Group, again as presi- dent and CEO. Young finally joined Cadbury Schweppes in April 2006 when it acquired Dr Pepper/Seven Up. as Chief Financial Officer: Martin Ellen. Martin (Marty) Ellen joined DPS in April 2010. He has 25 years of experience as chief financial officer in companies in the manufacturing, franchising, distribution, and service industries. His previous appointment was at Snap-on Inc., a manufacturer and marketer of professional tools, equipment, and software. His beverage industry expe- rience took place at Whitman Corporation, owner of Pepsi-Cola General Bottlers, where he helped realign and expand Pepsi bottling territories in the United States and Europe. a President of Packaged Beverages: Rodger L Collins. Rodger Collins has been affiliated with the bot- tling group of Dr Pepper Snapple or its predecessors for more than 30 years, having survived numerous acqui sitions, restructurings, and the spin-off of DPS from Cadbury Schweppes. In his current role, he manages a coast-to-coast sales force and fleet with responsibility for direct-to-store delivery and warehouse distribution. The Company Board of Directors As a publicly traded company, DPS management is directed by a board of directors chaired by Wayne Sanders, who served as Chairman and CEO of Kimberly- Clark Corporation until retiring in 2003,10 As stated in the company's Corporate Governance Guidelines, the board's responsibility is to manage the business affairs of the company, including regular evaluation of strategic direction, policies and procedures, and top management It must ensure that the company's managers act in the best interests of the company and its stockholders and maintain a high level of ethical conduct," In addition to Chairman Sanders, there are eight more members of the board of directors, including John Adams, formerly of Trinity Industries and Texas Commercial Bank; Terence Martin, former senior vice president and CFO of Quaker Oats; and DPS CEO Larry Young (for full information on directors, see Exhibit 1) Dr Pepper Snapple Group, Inc. is a major beverage company with an integrated business model including brand ownership, bottling, and distribution of nonalcoholic beverages in the United States, Canada, and Mexico. The company's portfolio includes dozens of brands of flavored (non-cola) carbonated soft drinks and noncarbonated beverages like mixers, juice drinks, and ready-to-drink teas and juices, Since the spin-off of Cadbury in May 2008, the company has established itself as the top non-cola carbonated soft drink company in the United States, and has maintained the number three spot in the broader beverage industry in North America The Management Team Current DPS management includes seasoned professionals with decades of experience in the food and beverage industry. Most notable in the organization are Company Strategies Since it was spun off from Cadbury Schweppes, DPS management has concentrated a great deal of time and attention on strategy development and implementation Through focused strategic development, management has sought to establish the firm as a leader in the higher margin segments of the nonalcoholic beverage industry Consistent with this strategic direction, management has established six specific strategies: focus on marketing (for a detailed explanation of DPS strategies, see Exhibit 2) Marketing Shortly after DPS demerged from Cadbury, the economy in the United States began to struggle and discretionary spending was constricted. As a result, sales in the industry tanked, leading many companies to drastically cut marketing budgets. In contrast to the mainstream reaction, DPS intensified its focus on marketing and advertising. This decision was based on an analysis of the early 1980s recession conducted by Nielson, a major marketing research company and a partner of DPS. The analysis looked at brands across multiple consumer categories in 1983 and 1984, and fournd that the most successful brands all pursued a common strategy- continued investment in core brands. Consequently, DPS dramatically increased its marketing budget for its core brands and focused its marketing money on brand development, availability, and advertising.14 Build and enhance leading brands. Focus on opportunities in high-growth and high margin categories Increase presence in high-margin channels and packages Leverage the firm's integrated business model Strengthen the firm's distribution channels through acquisitions Improve operating efficiency. While most of the strategies are centered on internal development, management is attempting to broaden the firm's market through continued acquisition activity and contractual agreements with other organizations. Whether internally or externally focused, however, the key to implementing each of these strategies has been a Brand Development. Despite slow sales in the over all non-cola carbonated soft drink market, many top managers within the company believe that flavored soft drinks showed room for growth. As Young put it, they - Exhibit 2 Strategy THE KEY ELEMENTS OF OUR BUSINESS STRATEGY ARE TO: Build and Enhance Leading Brands. We use an angoing process of market and consumer analysis to identify key brands that we believe have the greatest potential for profitable sales growth. We intend to continue to invest most heavily in these key brands to drive profitable and sustainable growth by strengthening consumer awareness, developing innovative products and brand extensions to take advantage of evolving consumer trends, improving distribution, and increasing promotional effectiveness Focus on Opportunities in High-Growth and High-Margin Categories. We are focused on driving growth in our business in selected profitable and emerging categories. These categories include ready-to-drink teas, energy drinks, and other functional beverages. We also intend to capitalize on opportunities in these categories through brand extensions, new product launches, and selective acquisitions of brand and distribution rights. Increase Presence in High-Margin Channels and Packages. We are focused on improving margin channels, such as convenience stores, vending machines, and small independent retail outlets, primarily by increased selling activity and investments in coolers and other cold drink equipment. We also intend to increase demand for high- margin products like single-serve packages for many of our key brands through increased promotional activity and innovation. product presence in high- our Leverage Our Integrated Business Model. We believe our integrated brand ownership, bottling, and distribution business model provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our bottling and distribution businesses. We intend to leverage our integrated business model to reduce costs by creating greater geographic manufacturing and distribution coverage and to be more flexible and responsive to the chang ing needs of our large retail customers by coordinating sales, service, distribution, promotions, and product launches Strengthen Our Route-to-Market through Acquisitions. The acquisition and creation of our Bottling Group is part of our longer-term initiative to strengthen the route-to-market for our products. We believe additional acquisitions of regional bot- tling companies will broaden our geographic coverage and enhance coordination with our large retail customers. Improve Operating Efficiency. We believe our recently announced restructuring willl reduce our selling, general, and admin- istrative expenses and improve our operating efficiency In addition, the integration of recent acquisitions into our Bottling Group has created the opportunity to improve our manufacturing, warehousing, and distribution operations Operations DPS is headquartered in Plano, Texas, and employs approximately 20,000 people throughout North America and the Caribbean. It operates 24 production plants and more than 200 distribution centers in those areas.9 Almost all beverage concentrates are produced in a plant in St. Louis, Missouri. The business model includes support and staffing for DPS. Since the separation, the company has developed completely independent IT operations, with primary hosting based in Toronto, Canada, and two primary vendors for application support and maintenance outsourced to India. Under the leadership of Marty Ellen, CFO, the company has embarked on a program it calls Rapid Continuous Improvement (RCI). According to Ellen, "RCI is about excelling at delivering customer value and improving productivity by eliminating all non- value-adding activities, thereby enhancing growth opportunities." The company is examining its supply chain, including innovation, manufacturing, marketing, distribution, and administration, and looking for ways to increase efficiency, consistent with Six Sigma improvement methods. both company-owned direct-store-delivery (DSD) distribution networks and third-party distribution. Within the model, approximately 40 percent of the company's volume is distributed through company- owned networks; another 40 percent through third party distributers in the Coca-Cola, Pepsi-Cola, and independent bottler systems; and the remainder split between warehouse direct and food-service distributors, 10 All of the internal DSD distribution is carried out by railroad and truck, operating on a hub-and-spoke supply chain system with major distribution centers in key areas. The hub-and-spoke system is set up to provide manufacturing capabilities in all five major US regions-northeast, southeast, midwest, southwest, and western. It allows for orders to be filled closer to 34 Financial Performance Overall, DPS's financial performance since the spin-off has exceeded analysts' expectations. While many of the company's brands experienced moderate to high growth in 2010, sales of Sunkist, 7UP, and A&W declined, leading to overall company sales of $5.6 billion, up about 2 percent from 2009. Even so, in spite of the sales increase and measures the company took to increase efficiency, profits were down approximately 5 percent from the prior year. Nevertheless, the company experienced a huge loss in 2008, and the economy was very challenging in 2009 and 2010, so financial performance should be considered in its appropriate context (for detailed financial statements, see Exhibit 3). The company experienced large increases in cash flow from operations during 2010 and used the additional cash to increase dividends, pay down debt, and buy back common stock. customers, increasing customer service and controlling transportation costs. As stated by Joe Rowland, senior vice president and business unit general manager for the central and southeast regions, DPS has "the ultimate goal of providing better service to the customer, because that will translate to sales."9 A good example of DPS's operations is its largest hub, which is based in Northlake, Illinois and distributes to Chicago and its surrounding areas. The facility is about one million square feet in size and employs 1,250 people, of which 750 work on site and the rest in the field. On-site operations consist of nine manufacturing lines, including plastic bottle, can, and hot-fill glass lines for DSD distribution, and a bag-in-box line for soda fountains at food-service locations. Most of the lines are versatile, allowing for variations in batches, but some also have unique capabilities. For example, Line 1 produces cold-fill glass and plastic bottles, while the Snapple line produces hot-fill products. The Northlake facility produces about 220,000 cases of product a day that are stored in the company's 25-dock warehouse until they are loaded onto one of the 150 trucks owned by the facility. In addition to line manufacturing the facility utilizes a quality assurance program to check for both internal specifications and external requirements. DPS works closely with external auditors such as the American Institute of Bakers, to ensure that manufacturing and other processes conform to product requirements To facilitate business operations, DPS makes use of highly integrated information systems and networks. Prior to 2008, Cadbury Schweppes supplied all IT The Industry The Dr Pepper Snapple Group (DPS) competes in the US beverage manufacturing and bottling industry (NAICS: 42119). The industry is made up of about 3,000 companies, including manufacturers, bottlers and distributers of nonalcoholic beverages. Despite the vast number of companies in the industry, revenues are highly concentrated. Over 90 percent of the combined $70 billion in annual revenues are generated by the three largest companies-Coca-Cola, PepsiCo, and DPS-and their subsidiaries. Carbonated soft drinks, including colas and other flavors, bottled waters, juices, and a variety of syrups and mixes, are this industry's major products. Beverage Consumers and Market Trends The beverage manufacturing and bottling industry is greatly influenced by economic and other market rends associated with consumers. Factors such as For the Year Ended December 31 DR PEPPER SNAPPLE GROUP INC. 2010 2009 CONSOLIDATED STATEMENTS OF OPERATIONS 2008 For the Years Ended December 31, 2010, 2009, and 2008 (In millions of dollars, except per share data) $5,636 Net sales $5,531 $5,710 Cost of sales 2,243 2,234 2,590 Gross profit 3,393 3,297 3,120 Selling, general, and administrative expenses 2,233 2,135 2,075 Depreciation and amortization 127 117 113 Empairment of goodwill and intangible assets 1,039 Restructuring costs 57 Other operating expense (income), net (40) 4 Income (loss) from operations 1,025 1,085 (168) Interest expense 128 243 257 Interest income (3) (4) (32) early extinguishment of debt Loss on 100 Other income, net (21) (22) (18) Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries 821 868 (375) Provision for income taxes 294 315 (61) Income (loss) before equity in earnings of unconsolidated subsidiaries 527 553 (314) Equity in earnings of unconsolidated subsidiaries, net of tax 2 2 Net income (loss) $ 528 $ 555 $ (312) Earnings (loss) per common share: Basic 2.19 2.18 (1.23) Diluted 2.17 2.17 (1.23) Weighted average common shares outstanding: Basic 240.4 254 2 254.0 Diluted 242.6 255.2 254.0 Cash dividends declared per common share 0.90 0.15 DR PEPPER SNAPPLE GROUP, INC. December 31, 2010 December 31, 2009 CONSOLIDATED BALANCE SHEETS As of December 31, 2010 and 200 (In millions except share and per share data) ASSETS Current assets Cash and cash equivalents $315 $ 280 Accounts receivable: Trade, net 536 540 Other 35 32 Inventories 244 262 Deferred tax assets 57 53 Prepaid expenses and other current assets 122 112 Total current assets 1,309 1,279 Property, plant and equipment, net 1,168 1,109 DR PEPPER SNAPPLE GROUP INC. December 31, 2010 December 31, 2009 CONSOLIDATED BALANCE SHEETS (In millions except share and per share data) As of December 31, 2010, and 2009 ASSETS Investments in unconsolidated subsidiaries 11 2,983 2,984 Goodwill 2,702 Other intangible assets, net 2,691 543 552 Other non-current assets 151 144 Non-current deferred tax assets $8,859 $8,776 Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 851 $ 850 Accounts payable and accrued expenses 65 Deferred revenue 404 Current portion of long-term obligations Income taxes payable 18 854 1,338 Total current liabilities 2,960 1,687 Long-term obligations 1,038 1,083 Non-current deferred tax liabilities 1,515 Non-current deferred revenue 777 737 Other non-current liabilities 6,400 5,589 Total liabilities Commitments and contingencies Stockholders' equity no shares issued Preferred stock, $.01 par value, 15,000,000 shares authorized, 3 Common stock, $.01 par value, 800,000,000 shares authorized, 223,936,156 and 254,109,047 shares issued and outstanding for 2010 and 2009, respectively Additional paid-in capital 2. 2,085 3,156 87 Retained earnings 400 (28) (59) Accumulated other comprehensive loss Total stockholders' equity 3,187 2,459 $8,859 $8,776 Total liabilities and stockholders' equity DR PEPPER SNAPPLE GROUP, INC. For the Year Ended December 31 SEGMENT RESULTS 2009 2010 For the Years Ended December 31, 2010 and 2009 Net sales $1,156 $1,063 Beverage concentrates 4,111 4,098 Packaged beverages 382 357 Latin America beverages $5,636 $5,531 Net sales Segment operating profit (SOP) $ 745 $ 683 Beverage concentrates 573 536 Packaged beverages DR PEPPER SNAPPLE GROUP, INC. For the Year Ended December 31 SEGMENT RESULTS For the Years Ended December 31, 2010 and 2009 2010 2009 Segment operating profit (SOP) Latin America beverages 40 54 Total SOP 1,321 1,310 Unallocated corporate costs 288 265 Other operating expense (income), net (40) Income (loss) from operations $1,025 $1,085 Interest expense, net 125 239 Loss on early extinguishment of debt 100 Other income, net (21) (22) Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries $ 821 S 868 Source: Dr Pepper Snapple Group, Inc. 2010 Report 10-K economic stability, seasonality, commodities prices, and consumer tastes and preferences are of great importance to beverage company managers who develop and implement strategies partly for the purpose of successfully dealing with changes in the industry Perhaps the most significant factor influencing food and beverage companies is economic stability. Since carbonated soft drinks are are considerably impacted by weakness in the economy. Between 2008 and 2010, the economy was the major problem facing beverage companies like DPS, Coke, and Pepsi. Intensified by the inefficiency and failure of the securities market, the United States found itself in one of the worst recessions in history. As unemployment rates increased and the credit markets froze, consumers significantly reduced spending. Discretionary spending as a percentage of total consumer spending dropped below 16 percent, its lowest level in over 50 years. As discretionary spending decreased, consumers turned from flavored drinks and colas to less expensive alternatives, including tap water. DPS CEO Larry Young explained the phenomenon, "Even though the majority of Americans are still working, the fear factor that has gripped the nation is having a significant impact on consumer psychology." As a result, Young suggested that shoppers were actively seeking out good deals and making decisions based on "product satisfaction and price." Along with influencing consumer confidence, the recession significantly increased commodity prices. Specific to the beverage industry, the prices for aluminum natural gas, resins, corn, pulp, and other commodities all increased. These commodities are used to produce beverages and, exert a considerable amount of pressure on industry margins. For instance, the price of sugar on the US commodity market rose from under 12 cents per pound in 2007 to 37 cents per pound in October 2010. Several other consumer trends influence the beverage manufacture and bottling industry. Factors such as changes in demographics, health concerns, preferences, changes in lifestyle, and seasonality all influence marketing and distribution methods. An increased concern about health and wellness is one of the most significant trends affecting the beverage industry. As consumers continue to reduce caloric intake and look for products richer in vitamins, the less-healthy sectors of the beverage industry are expected to shrink, As soft drink sales decline, however, demand for healthier alternatives such as low or no calorie soft drinks and noncarbonated drinks such as sports drinks, ready-to-drink teas, and flavored and regular bottled water are projected to grow. Through 2013, sales of bottled water were projected to grow by 9 percent, ready-to-drink teas by 24 percent, and flavored and functional waters by 71 percent. Additional consumer trends of significance to the industry are seasonality and changing demographics Relative to seasonality, beverage sales tend to be higher during the summer mon