Dr Pepper/Seven Up, Inc.

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Dr Pepper/Seven Up, Inc.

5301 Legacy Drive
Piano, Texas 75024
U.S.A.
Telephone: (972) 673-7000
Fax: (972) 673-7867
Web sites: http://www.drpepper.com
http://www.7up.com

Wholly Owned Subsidiary of Cadbury Schweppes pic
Incorporated: 1988 as Dr Pepper/Seven Up Companies, Inc.
Employees: 1,200
Sales: $810.3 million (1999)
NAIC: 312111 Soft Drink Manufacturing

Dr Pepper/Seven Up, Inc. (DPSU) is the number three soft drink maker in the world, trailing only the two industry giants: Coca-Cola Company and PepsiCo, Inc. It is also the U.S. leader in noncola soft drinks, with its two flagship brands holding top ten positions among all soft drinks—Dr Pepper at number six and 7 Up at number nine. Wholly owned by U.K. confectionery and drink maker Cadbury Schweppes pic since 1995, DPSU also produces a number of other drink brands, including Welch’s, IBC Root Beer and Cream Soda, Canada Dry, Schweppes, A&W, Crush, Sunkist, Squirt, Mott’s, Hires, Sun-drop, Vernors, and Country Time.

Early Development of Dr Pepper

Dr Pepper, the elder brand of the two flagship brands, was invented in Waco, Texas, at Morrison’s Old Corner Drug Store. In 1885 a young pharmacist who worked for Morrison’s, Charles C. Alderton, experimented on his own soft drink. He mixed phosphorescent water, fruit juice, sugar, and other ingredients to produce a new soft drink unlike any tasted before. With Morrison’s approval, Alderton offered the drink to the store’s customers. One of these jokingly called the concoction “Dr. Pepper’s drink”—for Dr. Charles Pepper, the disapproving father of a woman Morrison had been courting, suggesting that Pepper might be flattered.

The name and the soft drink, with its tart, yet sweet flavor, became popular locally, and in 1887 Morrison offered beverage chemist Robert S. Lazenby the opportunity to participate in the marketing and development of this new product. After sampling “Dr Pepper’s drink,” Lazenby agreed to go into partnership with Morrison to produce the beverage at his Circle A Ginger Ale Company, also in Waco. Alderton, the drink’s inventor, dissociated himself from Dr Pepper, opting instead to turn his talents to the pharmaceutical trade.

The new product, “Dr Pepper’s Phos-Ferrates,” was available only in soda fountains until 1891, when the manufacturers began bottling the beverage. With Lazenby handling the business end, Dr Pepper became a top seller in and around Texas. Expansion was inevitable, and Lazenby sought a marketing opportunity to introduce Dr Pepper to the world.

The ideal forum was the 1904 World’s Fair, held in St. Louis. Lazenby and his son-in-law, J.B. O’Hara, demonstrated their product there, providing samples of Dr Pepper to some of the approximately 20 million World’s Fair visitors. Incidentally, the 1904 exhibition also showcased other innovations, including the ice-cream cone and buns for hot dogs and hamburgers. Dr Pepper’s success encouraged Lazenby and Morrison, who founded the Artesian Manufacturing and Bottling Company, which would eventually be renamed the Dr Pepper Company; by 1923, headquarters were moved from Waco to Dallas, Texas.

Early Development of 7 Up

Around 1920, while Dr Pepper was growing in favor, C.L. Grigg, an advertising veteran of 30 years, had formed the Howdy Company in St. Louis, Missouri. The company was named for the Howdy orange-flavored soft drink Grigg had developed, but the CEO had other ideas—specifically, to invent a new flavor of beverage. For two years, Grigg tested different combinations of lemon and other flavors. By the mid-1920s he had settled on a distinctive lemon-lime formula and in 1929 the Howdy Company introduced the soda to the general public.

Grigg and company were confident of their invention’s appeal. As an early sales bulletin noted, consumers “are tired of the insipid flavors, and the aftertaste of the heavy synthetic flavors is more objectionable…. So in our beverage we have provided seven natural flavors so blended and in such proportions that, when bottled, it produces a big natural flavor with a real taste that makes people remember it.”

The only thing that might have stood in the way of the drink’s early success was its name, “Bib-Label Lithiated Lemon-Lime Soda.” Griggs derived the new and much simpler name, 7 Up, from the beverage’s “seven natural flavors.” The new name first appeared on the bottle later in 1929. The beverage sold well, and the new name made it easy for consumers to remember. In 1936, the Howdy Company became the Seven-Up Company, and by the 1940s its product became the world’s third largest selling soft drink.

Marketing Developments: 1930s–80s

Although what distinguished both drinks from the rest of the market was unique flavor, neither beverage was marketed simply as a refreshment. Indeed, both Dr Pepper, whose name still retained the period at this time, and 7 Up were promoted as health drinks in their first decades. In the 1930s, Dr Pepper’s famous slogan “Drink a bite to eat at 10, 2 & 4” capitalized on the idea that one typically experienced an energy slump during those hours; a serving of Dr. Pepper would presumably provide the energy boost needed to make it through the day. At the same time, 7 Up boasted in ads that it “energizes .. . sets you up, dispels brain cobwebs and muscular fatigue.”

The fortunes of both companies grew during World War II, with Dr Pepper able to go public in 1946, while the postwar period saw the Baby Boom, which produced an unprecedented number of soft drink consumers. In their marketing efforts, both beverage companies sought to appeal to this lucrative market. Dr Pepper, for instance, became a regular sponsor of the hit teen show “American Bandstand,” while 7 Up became noted for its “uncola” campaign of the late 1960s, which capitalized on the individualistic tendencies of young people by distancing 7 Up from the cola market. In the 1970s Dr Pepper was marketed through the long-running “Be a Pepper” campaign.

Later advertising efforts avoided the so-called “cola wars” of the 1980s, focusing instead on what made Dr Pepper and 7 Up different. Dr Pepper ads declared the soft drink was “just what the Dr ordered,” while Diet Dr Pepper was “the taste you’ve been looking for.” 7 Up introduced an animated character, “Spot,” derived from the its long-used logo, a large 7 with a red spot in the middle, that revitalized the “uncola” theme that worked so well in the 1970s. Both companies also spent years testing and introducing new products while refining existing ones. Both Dr Pepper and 7 Up brought out “diet” versions by the early 1970s. In 1981 Dr Pepper purchased the rights to Welch’s soft drinks.

1984–95: Ownership Changes, Then Dr Pepper/Seven Up

Dr Pepper was traded on the New York Stock Exchange until 1984, when it was taken private in a $615 million leveraged buyout by Forstmann Little & Co. Some of the company’s assets were stripped to pay down debt, overhead was cut, and a new promotional campaign was launched. Meantime, Seven-Up was a privately owned family business that did not avail itself of public trading until 1967. In 1978 cigarette maker Philip Morris bought Seven-Up, which soon went into a profit slide. By 1986 Philip Morris was set to sell the struggling Seven-Up Company to PepsiCo while Coca-Cola was seeking to buy Dr Pepper. The Federal Trade Commission, however, blocked both proposed acquisitions for antitrust reasons, although Philip Morris was allowed to sell Seven-Up’s international operations to PepsiCo. Dallas-based investment bank Hicks & Haas then entered the picture, purchasing Dr Pepper in another leveraged buyout for $406 million in August 1986. Participating in the buyout was Britain’s Cadbury Schweppes, which gained a minority stake in Dr Pepper. Later in 1986, Hicks & Haas struck again, purchasing the U.S. operations of Seven-Up for $240 million. Two years later, Hicks & Haas merged Dr Pepper and Seven-Up, forming the Dr Pepper/Seven Up Companies, Inc. on May 19, 1988. The combined market strength of the two companies created a stronger contender in the soft drink market, against Coke and Pepsi. The new company began with a brand portfolio that included Dr Pepper and 7 Up (both in regular and diet versions), caffeine-free Dr Pepper and diet Dr Pepper, Cherry 7 Up (introduced in 1987), Welch’s, and IBC Root Beer and Cream Soda.

In 1990 Dr Pepper/Seven Up entered the sport drink field with Nautilus Thirst Quencher. Like rival Gatorade, Nautilus was promoted as a high-electrolyte, energy-producing beverage to revive athletes. But Nautilus also stood out in its debut as the only major brand sport drink sweetened entirely by aspartame (the artificial sweetener marketed under the name NutraSweet).

In January 1993 Dr Pepper/Seven Up went public through an initial public offering. The $15 per share IPO raised $283.5 million, which was used to redeem the company’s preferred stock and to retire debt. During the early 1990s DPSU enjoyed vigorous growth, with sales increasing from $658.7 million to $769 million from 1992 to 1994 alone. These gains came despite the continuing struggles of the 7 Up brand, which by this time had been surpassed by rival brand Sprite, owned by Coca-Cola. Dr Pepper’s popularity, however, was on the increase; it was in fact the fastest-growing U.S. carbonated beverage, garnering a compound average growth of 8.5 percent a year from 1989 through 1993. Overall, DPSU’s share of the domestic soft drink market increased from 9.8 percent in 1991 to 11.4 percent in 1994.

Company Perspectives:

Our CORE PURPOSE is: To maximize shareholder value by creating uniquely refreshing beverage experiences and a business environment that marries our talents and aspirations with our shareholders’ objective to achieve superior returns and our customers’ desires for high quality products and service.

As of mid-1993 Cadbury Schweppes held a 5.7 percent stake in Dr Pepper/Seven Up, the holding stemming from its minority interest in Dr Pepper. Prudential Insurance Co. held a 22.2 percent stake in DPSU, which it sold to Cadbury in August 1993 for $231.8 million, raising Cadbury’s stake in DPSU to 25.9 percent. Under the leadership of John Albers, DPSU quickly adopted a poison pill measure which discouraged Cadbury from making any immediate moves to further raise its stake or initiate a complete takeover. Albers also refused to grant its suitor a seat on the board as it had requested. Meantime, Cadbury in October 1993 further increased its presence in the U.S. market through the acquisition of A&W Brands Inc., thereby gaining U.S. ownership or rights to the flagship A&W root beer brand, the citrus-flavored Squirt, Vernors ginger ale, and Country Time lemonades. Cadbury already controlled the Schweppes, Canada Dry, Crush, Mott’s, and Sunkist brands.

Subsidiary of Cadbury Schweppes Starting in 1995

The addition of A&W Brands increased Cadbury’s share of the U.S. soft drink market to 5.6 percent. But the U.K. company aimed to become the leading producer of noncola soft drinks in the world; the emphasis on the noncola sector made particular sense in the U.S. market, where noncola sales were increasing at a ten percent per year clip while cola sales were merely edging ahead at four percent a year. The quickest path to achieving this goal was the acquisition of DPSU, particularly since Cadbury believed the Dr Pepper brand had untapped potential outside the United States, as it held a mere one percent of the world market. In March 1995, then, Cadbury Schweppes acquired the 74 percent of Dr Pepper/Seven Up stock it did not already own for $33 per share, or $1.7 billion. Leading the newly named Dr Pepper/Cadbury of North America, Inc. was John F. Brock, a Cadbury veteran. Although it still lagged far behind industry behemoths Coca-Cola and Pepsi, Dr Pepper/Cadbury was a much stronger number three player in the United States, with a market share of 17 percent and a strong roster of brands, including: Dr Pepper, 7 Up, Welch’s, IBC, Canada Dry, Schweppes, A&W, Crush, Sunkist, Squirt, Mott’s, Hires, Sun-drop, Vernors, and Country Time. During 1997 the name of the company was changed to Dr Pepper/Seven Up, Inc. and Todd Stitzer, another Cadbury veteran, was named president and CEO of the new DPSU.

During the late 1990s DPSU made several moves to solidify the bottling and distribution of its brands in the United States. In May 1996 Coca-Cola Enterprises Inc., the nation’s largest soft drink distributor, agreed to manufacture and distribute Dr Pepper brand products until at least year-end 2000 and several other DPSU brands-including Schweppes, Canada Dry, and Squirt—through the end of 1998. In January 1998 this licensing agreement was extended, with the above dates changed to year-end 2005 and year-end 2001, respectively. In December 1998 DPSU reached another multiyear agreement with the Pepsi Bottling Group, whereby the latter would continue bottling DPSU soft drink brands. Perhaps most importantly, Cadbury Schweppes and the Carlyle Group of Washington, D.C., in early 1998 formed a joint venture named the American Bottling Company, which was initially comprised of the merger of two leading independent bottling groups in the Midwest—Beverage American and Select Beverages. A year later American Bottling was combined with another independent bottler, Dr Pepper Bottling Company of Texas. The creation of American Bottling—whereby the company gained ownership of at least part of its bottling system—was designed to give Dr Pepper/Seven Up greater control over the distribution of its brands.

As it headed into a new century, Dr Pepper/Seven Up faced a number of challenges, perhaps most importantly the continuing need to revitalize the 7 Up brand. By the end of the 1990s, the brand had fallen to the number nine position in the U.S. soft drink market. A series of ad campaigns in the 1990s, a 1998 formula change—the first ever for the brand—and such packaging changes as the dropping of the “Uncola” slogan all failed to stem the brand’s decline. Cadbury Schweppes had also attempted in 1999 to sell its soft drink brands—principally Schweppes, Dr Pepper, Canada Dry, and Crush—outside the United States, France, and South Africa to Coca-Cola for $1.85 billion. A number of nations raised antitrust concerns about the deal, however, and its fate was uncertain. Despite such question marks, Dr Pepper/Seven Up was the clear number three soft drink maker in the United States and appeared headed for a bright future based on the increasing popularity of the Dr Pepper brand and the company’s emphasis on the hot noncola sector.

Principal Operating Units

Dr Pepper Company; Cadbury Beverages/Seven Up.

Key Dates:

1885:: Pharmacist Charles C. Alderton invents Dr Pepper soft drink in Waco, Texas.
1891:: Bottling of Dr Pepper begins.
1904:: Dr Pepper is showcased at the World’s Fair held in St. Louis.
1929:: Adman Charles L. Grigg introduces Bib-Label Lithiated Lemon-Lime Soda, soon renamed 7 Up, to the general public.
1936:: Grigg’s company, the Howdy Company, changes its name to the Seven-Up Company.
1946:: Dr Pepper Company goes public.
1967:: Seven-Up Company goes public.
1978:: Philip Morris buys Seven-Up.
1984:: Forstmann Little purchases Dr Pepper through LBO.
1986:: Hicks & Haas purchases Dr Pepper and Seven-Up in separate transactions.
1988:: Hicks & Haas merges Dr Pepper and Seven-Up to form Dr Pepper/Seven Up Companies, Inc. (DPSU).
1993:: Cadbury Schweppes increases stake in DPSU to 25.9 percent.
1995:: Cadbury Schweppes completes full takeover of the company, with DPSU becoming a wholly owned subsidiary and being renamed Dr Pepper/Cadbury of North America, Inc.
1997:: Company name is changed to Dr Pepper/Seven Up, Inc.
1998:: 7 Up is reformulated for the first time ever.