Keurig Dr Pepper (KDP) Part I - Beginnings Of The World's Favorite Non-Cola

by Alex Mason | Companies, Episodes

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Mental Details


  • Dr. Pepper began as a pharmacist’s concoction in the small town of Waco, TX. Over time its popularity grew and spread around the United States. Other brands like 7-Up and Schweppes also grew in influence. These brands, and many others were combined and broken up again various times and corporate influencers fought for control over the soda market.
  • In today's episode we cover the history of the carbonated beverage business that ultimately became one half of Keurig Dr. Pepper.


  • Alex Mason: Today, we're going to talk about Keurig Dr. Pepper is one of the largest beverage companies in the world. In fact, they're only behind PepsiCo and Coca-Cola in terms of size in North America. So today we're going to talk about this beverage giant. I'm Alex Mason, host of stock stories. This is the podcast where we decode investing principles by analyzing the business behind the stock, as well as learning about mental models in order to help you become a better investor.
  • [00:00:31] You ready? Let's go
  • [00:01:03] Welcome to the show. This is the stock stories, podcast and yes, I'm Alex Mason. I'm your host and stock storyteller. Thanks so much for joining me again today. Oh man, I have got another great one for you. We are going through the entire S&P 500 as part of this podcast. And we're also talking about mental models now, what are those?
  • [00:01:28] So mental models are kind of the philosophical underpinnings. Of what makes for good decision-making. So we're going through those usually on a monthly basis, but today's episode is different. We are going to go through a company that is part of the S&P 500. In fact, it is Keurig Dr. Pepper. We've covered beverage companies on the podcast before.
  • [00:01:51] So go ahead and check out Pepsi and Coca-Cola, if you haven't already. Listen to those episodes and I'll put the link to those episodes in the show notes for this show. But today we're going to talk about that third part of the beverage triangle, I guess you could call it. You've got Coca-Cola Pepsi and Keurig Dr.
  • [00:02:13] Pepper. Now before we get going. I just want to say a quick note. This series of episodes, I would like to dedicate to my grandmother who passed away last year. She absolutely loved Dr pepper. So I love you, grandma. So thanks for listening to today's episode. This one will be a little bit different. As I began to do research on this company, I realized just how vast and complex the history is.
  • [00:02:43] It's not your typical S&P 500 company. It's not your typical company in general, as far as the investing history goes. And the company in its current form is very different than the company was even just 10 years ago. And the history of it 10 years ago is different than it was 20 years ago. So yeah.
  • [00:03:06] It's a company that has gone through a lot of changes. Well, having a long story doesn't necessarily mean it's a good story, but I do really think that this is a good story. That happens to have a lot of details in it. So there's a lot that we can learn from the history of Keurig Dr. Pepper, and I'll prove it to you over these next few episodes.
  • [00:03:27] So in the first few parts of the series, we'll explore the histories of each major. Part of what is now Curie Dr. Pepper, which is the carbonated beverage side, as well as the coffee side. And then in a subsequent part, we'll discuss what we normally talk about toward the end of most of our episodes, which is the current business model, as well as the financials like we normally do.
  • [00:03:53] So there's a lot to go through here, but I believe it's well worth it. Now if company history is not what you're feeling right now. That's fine. Just wait a couple of weeks until the later parts of the series come out. But if you enjoy learning about the context of these businesses that we talk about on the show, then.
  • [00:04:11] Let's begin. Let's get into the history of Keurig Dr. Pepper,
  • [00:04:31] the origins of Dr. Pepper. We'll start our journey by looking at the carbonated beverage business. And then we'll begin talking about the drink that became part of the company's name to this day, Dr. Pepper itself. So our story begins in the late 18 hundreds in a city known as Waco, Texas carbonated beverages, were the latest invention around this time.
  • [00:04:57] And people used to love going to soda fountains to refresh themselves. Now, as we talked about in past episodes about Coca-Cola and Pepsi, again, see episode links in the show notes for those episodes, sodas were marketed to people, not just as refreshing drinks, but as sort of these elixirs with a myriad of health benefits, after all the recipes were often concocted by pharmacists.
  • [00:05:23] That's part of what they did as part of their job was come up with and serve these fountain drinks. One uchs pharmacist was named Charles Alderton and he worked with a man named Wade Morrison in Waco, Texas. Now Wade ran a drug store called Morrison's old corner drugstore. One thing that Charles noticed was that customers seemed to tire of drinking the same old flavors.
  • [00:05:50] So these were flavors like vanilla lemon. And sarsaparilla now, when I read about this, I was like, wow, I've never had sarsaparilla before myself, but Hey, it must have been popular back in those days. But one thing to note here is that a lot of the great entrepreneurial insights that we discovered on the show, they come from someone just simply noticing something different, something that doesn't seem right.
  • [00:06:17] Something that feels like. There's a gap that needs to be filled. And that's exactly what Charles Alderton notice here. He noticed that people were just tired of the same old thing. They were tired of the same old flavors. So he went to work and he started experimenting. He went through his pharmacy cabinets, took out all these different syrups and flavors and ended up creating a secret recipe.
  • [00:06:42] That was a mixture of exactly 23 flavors. He shared it with Morrison who liked it. And after creating more batches of it, they started selling it at the drug store in 1885, which was actually a year before Coca-Cola was invented. So it actually got invented pre Coca-Cola and it started to make a name for itself in this little town of Waco, Texas.
  • [00:07:08] Now it didn't actually have a name at this time. So people just called it a Waco as the name of the drink, and then word soon spread about the drink. And it started becoming sold at other drugstores in the area. So the drink became a little bit more popular over the next decade or so. And then in 1904, the drink debuted at the world's fair in St.
  • [00:07:33] Louis, Missouri. And this was where millions of people were exposed for the first time to the new drink. And then things started to really pick up Charles and Wade teamed up with a chemist named Robert Lazenby who was a businessman as well. And then at this point, Charles left the business. He, he wanted to create a brand new flavor and wanted to create something special, but he didn't really want to grow this huge business, this used soda business.
  • [00:08:02] So he decided to leave, but Wade and Robert stayed on. And they ended up relocating the bottling operations to Dallas, Texas, since they needed a place that had the capacity to keep up with the growing demand for the drink. Now around this time, the drink was officially named Dr. Pepper. No one knows for sure about the origins of the name, but there's speculation that there was a real man named Dr.
  • [00:08:28] Charles pepper, who was a friend of both of the pharmacists and that it was named after him. But there's all sorts of stories surrounding this mysterious name. And there isn't any historical evidence that I found that conclusively says that this is the story, but that's one speculation about where the name Dr.
  • [00:08:50] Pepper actually came from over time. The brand grew, especially in the state of Texas and over time it grew into a national brand and Dr. Pepper eventually went public in the forties in 1946. And was in fact, one of the original components of the S&P 500. So it was an original S&P 500 component and is an & P 500 components today
  • [00:09:16] although it took quite a journey for it to get there. And we'll discuss that. So for decades, Dr. Pepper enjoyed a lot of success and America, and later the world began to consume more and more sugary carbonated beverages. This was kind of this macro trend. Around this time, really throughout the entire 20th century soda, pretty much grew in popularity across the board and Dr.
  • [00:09:41] Pepper benefited from that. One of the things that distinguished Dr. Pepper from other contemporary sodas was that it was technically not a Cola. A Cola is a very specific type of drink, but in fact, it had these distinctive flavors that made it different from the juggernauts of Coca-Cola and Pepsi Cola.
  • [00:10:02] So now we're going to fast forward in Dr. Pepper's history, a few decades to the year 1984. So by now, Dr. Pepper, the company had been publicly traded in the market for a few decades. It had had enjoyed success as a national brand, but it didn't have much of a global reach. Yet. One problem though, was that the debt burden of the company had gotten somewhat high and they started struggling just from a management perspective.
  • [00:10:29] So the popularity of the drink was really good, but the business itself wasn't being run as optimally as it probably could have been. So what happened next is kind of interesting. They got bought out, they got bought out by an investment firm called Forstman Little & Company for around $650 million. Now, the way that this bio happened was through what's called a leveraged buyout.
  • [00:10:55] Now I want to just take a moment, a few minutes to explain exactly what a leveraged buyout is because the process of going private and then public, again, it's really integral in Keurig Dr. Pepper story. So in simple terms, a leveraged buyout is when an investment firm or other company buys another company, but primarily uses debt to do it.
  • [00:11:19] So this means the transaction is highly leveraged. In this case, Forstman Little and company. They only put up $30 million of their own cash for the equity, but they borrowed the remaining $620 million. So they borrowed the vast majority of the money to do this transaction. Now, why would anyone do this?
  • [00:11:40] Why not just buy the company outright in cash? Well, the reason is it's because leverage can give you higher returns. If things go well for you. So let's say that you buy a company for $100. Let's say that you put up $10 yourself, but you borrow the other $90 from a bank. Now, of course, the money that you borrow from the bank is going to cost you an interest.
  • [00:12:05] The bank wants to get paid in interest. So let's say that the bank charges you 10% interest. So in a year's time of that $90 that you borrow, you end up owing $9 in interest to the bank. But let's say that within the same year, the company's value doubles and goes from $100 to $200, and then you sell the company to someone else to make your profits.
  • [00:12:30] Well, what just happened financially? So you put in $19, right? You put in $10 of your own principal, plus you put in $9 in interest. So 10 plus nine is 19. And then once you got out of the transaction is $100 because the company sold for $200, but the purchase price of the company was $100. So think about that.
  • [00:12:54] You got out $100 and you only put in 19. That just means you got. Uh, 526% return on your money now to see the power of this truly let's contrast this with you buying the company outright for $100. If you make $100 on the transaction, if it goes from 100 to 200, then your return is only 100%. So you see what's going on.
  • [00:13:20] Leverage can really. Amplify those returns. And this is a big way that private equity companies make money. So that's how they do it. They'll borrow a lot of money but find a situation or an opportunity where they think they can add value or somehow increase the value of the business that they're buying.
  • [00:13:39] And then their personal rate of return is, is multiplied because they didn't use a lot of their own cash to make the deal. And as long as they can sell out at a higher price, things work really well, but there is a dark side to this. If you use leverage to buy a company and its value declines, not only is the company itself worth less, but you're on the hook to pay the principal and interest back to the bank, no matter what.
  • [00:14:08] So you might have to sell some of the company's assets and thereby decrease its earnings power, just to pay all of your bills. So that's kind of the dark side of this leverage buyout mechanism. But as we'll see for the Dr pepper story, it actually worked out positively for Forstmann Little and company, but that is just a quick summary of how leveraged buyouts work and why they're important.
  • [00:14:40] let's get back to the story. So after the buyout, Dr. Pepper ended up selling off some assets in order to pay off some debt and then put the company in a better position financially. So they also ran a new promotional campaign in order to increase their sales. And one of the brands that they owned at this time was Canada dry.
  • [00:15:00] And this is a brand that they had acquired over the years. And then they also had some bottling plants and some real estate, and they were able to sell all of these assets and use that cash in order to pay down debt. They ended up paying down the debt to $170 million. So a reasonable debt load for a company that large.
  • [00:15:20] So things started to turn around for them. And then earnings started growing fast between the years of 1983 and 1985. I calculated that Dr. Pepper increased their earnings at a rate of 24% annually. So they were pretty fast growing company in the mid, early to mid eighties. And it was around this time that the giant of the beverage world Coca-Cola itself, they started eyeing Dr.
  • [00:15:46] Pepper for an acquisition of their own. They wanted to buy Dr pepper, although they announced it and ended up agreeing upon terms even. The deal ultimately fell through because the federal trade commission was just not comfortable with Coke, having such a huge market share. So that merger ended up failing.
  • [00:16:07] But another investment firm, this one was from Dallas and they were named Hicks and Haas. They came in and bought the firm for around $400 million in 1986 in. Guess what yet? Another leveraged buyout. So we see this pattern of going public, going private and being bought out yet again in, in a leveraged buyout.
  • [00:16:32] So that is the history of Dr. Pepper. Now let's talk about the history of seven up seven up is another brand. It's another iconic brand that became part of a Keurig Dr. Pepper story. So let's talk about how 7up came to be. So in the early 19 hundreds, another soda startup called the howdy company was operated by a man named C L Griggs in St.
  • [00:16:58] Louis Missouri now like Dr. Pepper. He also wanted to create a new non Cola soda that was interesting and tasted good, and that people would like by mixing seven different natural flavors. He created a new drink with this lemon lime tastes. And he started selling it in 1929 and get this initially he called it the Bib label, lithium lemon lime soda.
  • [00:17:25] But luckily for us, he changed the name to just seven up. And of course the seven is for the seven different natural flavors that he used to create it. Now the name change happened around the mid 1930s and by the 1940s seven up was the third best selling soda in the country. Now I personally never knew 7up was this popular, but apparently at one point in history, it was and non Cola sodas were really taking off around this time.
  • [00:17:58] So keep in mind too. This is around the same time that Dr. Pepper was really gaining steam and in fact had just gone public. So Dr. Pepper was growing really fast. Seven Up was growing really fast and this was big business. Now in 1967, that's when seven up ended up going public and the company continued to thrive.
  • [00:18:20] So as with with many successful businesses, again, they often get approached by suitors who want to acquire them. So remember the old Phillip Morris. The cigarette company, we talked about them way back at the beginning of the show a few years ago, way way back in episodes, 14 and 15, where we talked about Altria and Phillip Morris international.
  • [00:18:43] Now around this time, they were trying to diversify their business outside of tobacco. So they ended up buying seven up as a company in 1978. So similar to how Coca-Cola was eyeing Dr. Pepper. Guess what? Pepsi-Co, they're a competitor. They wanted seven up and then Phillip Morris said, you know what? We're happy to sell the brand to you.
  • [00:19:06] But again, the federal trade commission and blocked the acquisition because they believed the monopoly that Pepsi would have would be too great. So again, Pepsi was blocked from buying 7up, just like Coca-Cola was blocked from buying Dr. Pepper. So, this is where Haas and Hicks comes in. Again, the investment firm Haas and Hicks who had recently purchased Dr.
  • [00:19:30] Pepper. They came along and bought up seven up instead and did so. For $240 million. Now, Haas and Hicks. Having now owned two of the country's premier beverage brands decided to merge the two into a single company in 1988, and it stayed private for a few years, but in 1993, the new Dr. Pepper 7up company went public.
  • [00:19:58] So it went public yet again, and the combined company raised over $280 million through their IPO and they were able to pay off some debt. So they kind of get this new wind of a life in them, in the public markets. And for the next few years, sales grew at about 8% per year. So moderately successful sales growth, but the thing is, this was almost entirely due to the strength of the Dr.
  • [00:20:21] Pepper brand. Seven up it more or less fizzled out in popularity because Coca Cola by this time had a competitor named sprites and Sprite was really beginning to take market share from seven up. However, the overall success continued for Dr. Pepper because the Dr. Pepper brand carried the company and it thrived overall.
  • [00:20:45] And it ended up gaining over 11% of the soda market by 1994. So they remained a dominant player, but they just started to lag with their 7up brand.
  • [00:21:00] Now we're going to switch gears again and we're going to talk about the origins of Cadbury Schweppes. This is another company that plays a really key role in the curate Dr. Pepper story. So let's travel now back in time before seven up before Dr. Pepper. And in fact, before any soft drinks were invented, we're going way back on this one, but don't worry.
  • [00:21:25] We'll catch right back up to where we left off these other stories or other parts of the story. The year is 1783 and the place is Geneva and there was a man named Johann. Jacob Schweppe. And he created the world's first carbonated mineral water. He learned some valuable knowledge from one of his contemporaries named Joseph Priestley, who is the man credited with discovering oxygen.
  • [00:21:53] So Johan ended up using that knowledge to create the first carbonated water ever. This was a big deal. This was a technology that just didn't exist yet. People were still drinking, still beverages at this time, pretty much exclusively. So Johanne ended up moving to London in the late 17 hundreds, and he began selling his fountain drink there.
  • [00:22:15] Now he was successful and then we're going to fast forward by a hundred years. So in the late 18 hundreds, Schweppes tonic water became available. So tonic water and sparkling mineral water were really the first products in the entire sparkling category to ever exist. And then by the time of the 20th century came around, Schweppes ended up becoming this flagship beverage company in the United Kingdom and so much so that it attracted the eyes and capital of the famous confection maker.
  • [00:22:49] Cadbury. So, if you're not familiar, Cadbury is one of the biggest chocolate makers in the world. They compete directly with Hershey company as well as other companies. So Cadbury purchased Schweppes in 1969 and ended up becoming Cadbury Schweppes. So this is when things got really interesting in the global beverage industry.
  • [00:23:10] So Cadbury Schweppes, they were not content to let Coca-Cola and Pepsi dominate the global market because by then they had already expanded well beyond the borders of America and were having a lot of success. So in order to compete with them, Cadbury Schweppes began acquiring smaller companies in order to increase their market share in the beverage space.
  • [00:23:33] So in 1986, this was a big year for Cadbury swept. This was right around the time that Dr. Pepper and seven up were being consolidated. So Cadbury Schweppes bought a few brands. One of them was Sunkist and another was Canada dry. Remember how Canada dry had been sold off? Well, they bought Canada dry from RJR Nabisco for $230 million.
  • [00:23:57] Again, along with sun kiss. And then in the same year, this was the same year that Haas and Hicks made their deal to buy Dr. Pepper. And they ended up selling a 30% stake of Dr. Pepper to Cadbury Schweppes. So Cadbury swaps was slowly consolidating their control. At this point, they had a 10% share in the global soft drink market.
  • [00:24:21] And I think that was pretty impressive. Considering Coca Cola and Pepsi had already been dominating for a long time. So Coca Cola at this point had 39% market share and Pepsi had a 29% market share. So Cadbury swaps was a distant third. But they started consolidating more and more power. So now is where we'll see the stories come together by 1993, Dr.
  • [00:24:47] Pepper seven up had its IPO now because of their prior minority stake in Dr. Pepper Cadbury Schweppes owned 5.7% of the combined company at this point. So then Cadbury Schweppes, bought a large block of shares from a company called Prudential insurance company for over $230 million. Now, this is what really boosted their stakes.
  • [00:25:12] And they went from owning less than 6% of the business, truly a minority shareholder to over 25%. So now they owned a whole quarter of the company, but they were hungry for more Cadbury, Schweppes, wanting to lead. The non Cola beverage market, because this was the faster growing market in the United States at the time non Cola's were growing in the us at about 10% annually, whereas the Cola beverage market.
  • [00:25:40] So Coca-Cola Pepsi-Cola that whole market was more mature and it was only growing by about 4% a year. So 10% growth versus 4% growth and Cadbury Schweppes wanted the 10% growth market and they were going to fight to get it. Now, Dr. Pepper, seven up management. Meanwhile, they didn't like this minority shareholder gaining a bigger and bigger influence over time.
  • [00:26:08] So they adopted, what's known as a poison pill strategy. Now, what does that mean? What is a poison pill? Strategy sounds, sounds kind of weird, right? A poison pill strategy. This is a strategy that's kind of a defensive measure. When a company doesn't want another company to acquire them. And the way that this works is a company's management will offer things like special voting rights or share discounts to existing shareholders and that kind of strategy discourages potential acquirers from trying to take them over.
  • [00:26:40] But it doesn't always work. So Dr. Pepper, 7up management was against the potential takeover so much that when Cadbury Schweppes proposed that, Hey, we own 25% of this company. Can you give us a seat on the board? Well, they refused them and said, no, you don't get a board seat. So that just fueled the fire even more.
  • [00:27:02] So Cadbury Schweppes kept buying brands from other companies increasing their influence. It was around this time they bought well-known brands like A&W root beer squirt soda and a whole lot more. Then in 1995, Cadbury Schweppes made their move. They purchased the remaining 74% of outstanding stock that they didn't already own in a buyout worth.
  • [00:27:27] $1.7 billion. This equated to $33 per share at the time. Now Cadbury Schweppes had Dr. Pepper, seven up and many other brands completely under their control. So that's when Cadbury swept really took over the company fully and realizing that they were still a distant competitor to Coca-Cola and PepsiCo Cadbury, Schweppes management truly realized that they didn't have to beat them completely.
  • [00:27:59] They could just own their niche in the non Cola beverages and work with these big companies. So in the late 1990s, in order to solidify their distribution network, Cadbury Schweppes may deals for Coca-Cola and Pepsi to bottle and distribute a lot of their products. So over time they continue this trend of buying out other brands, and we had another big acquisition.
  • [00:28:24] That's important in the story in the year 2000, they bought Snapple for over $1.4 billion and they also bought another popular soda brand named RC Cola. So you could see what they were doing here. They're buying out just continually buying out all these brands as much as they could get their hands on and getting Coca-Cola and Pepsi to distribute a lot of them to kind of solidify their influence.
  • [00:28:50] Now over time, they ended up acquiring some of their own bottlers. And their brands expanded. Eventually the UK based Cadbury, they wanted to differentiate their confection business from what had become a much larger beverage business. So Dr. Pepper Snapple group was spun off in 2008. So this was the next corporate iteration of the company.
  • [00:29:15] So Dr. Pepper Snapple group was spun off. And in this new form, the company continued to invest in new brands. And for example, they bought the buy brands group in 2016 for 1.7, another huge acquisition. And then the company changed forms yet again, shortly afterward in 2018, Dr. Pepper Snapple group merged with a privately held Keurig brand.
  • [00:29:43] To become the company in its current form, Keurig Dr. Pepper. And it was purchased by jab holdings, which is this conglomerate from Europe and Keurig dr. Pepper ended up becoming, um, traded on the public markets around this time. And it became the third largest beverage company in North America and the seventh largest company.
  • [00:30:13] In the food and beverage sector. So there's a lot going on there, but that is the beverage side of the business.
  • [00:30:33] Well, that is the history of the beverage side of what became Keurig. Dr. Pepper. You can see there's so much going on there. Going public going private, going public again, going private going public. It's kind of kind of a lot, but there is a method to the madness because that's just shows you how valuable these brands are, right?
  • [00:30:55] Dr. Pepper and all of these other brands, Canada, dry Sunkist, A&W root beer. These are all brands that still exist today. So. The reason that they kept getting sold off and bought again is because they were valuable and various firms and companies recognize their value over time. So that's one of the lessons that I want to bring out from this first part.
  • [00:31:19] Of the series. So that is going to wrap it up today for the first part of the Keurig Dr. Pepper series. Thank you so much for listening now, tune in next time, next week. And we're going to be talking about the non beverage side of the business we're going to be talking about coffee, so be sure to listen next week, to hear more about the Keurig side of the business.
  • [00:31:44] If you're enjoying stock stories first off, thanks again for listening. And secondly, if you're enjoying the show, please share it with a friend, share it with someone who you think would benefit from hearing episodes like this, or like many of the others in what is now becoming a vast catalog of S&P 500 companies and mental models.
  • [00:32:03] So thank you in advance for that. Also, if you'd like to get in touch with me, you can reach out to me on Instagram @stockstoryteller or on Twitter also @stock storyteller. Or if you prefer an email, you can email me at Alex at stock stories, So thanks in advance for everything. And we'll see you next week.
  • [00:32:50] The information presented on stock stories is for informational educational and entertainment purposes, only you and you alone are responsible for your investment and financial decisions. Please consult inappropriate tax legal or financial advisor that analyze your specific situation in the context of your goals and circumstances.

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