What's going on?
Dr Pepper Snapple Group and PepsiCo both announced on Tuesday that they are buying startup beverage makers as they focus on adapting to people’s increasing preference for healthier drinks.
What does this mean?
Soda sales have struggled in recent years as consumers have become more health conscious and many governments have begun to levy taxes on sugary drinks. Beverage companies have responded – unsurprisingly – by shifting their focus to selling healthier, more natural products. Dr Pepper announced on Tuesday that it is paying $1.7 billion to acquire Bai Brands, a maker of flavored water and other drinks, including “coffee-fruit” beverages. Meanwhile, PepsiCo is buying KeVita, a maker of probiotic and kombucha drinks for an undisclosed sum. Both Bai Brands and KeVita make drinks that are a long way from the sugary drinks of your childhood!
Why should I care?
For the markets: Investors seem to like Dr Pepper’s thinking.
Dr Pepper’s stock was up more than 2% on Tuesday, which is a sign that its investors are happy with the deal. The rationale seems to make sense: Bai Brands appears to be a strong brand in a fast growing segment of the market, and Dr Pepper should be able to accelerate the brand’s growth by putting the full weight of its distribution and marketing power behind it.
The bigger picture: Big companies often outsource innovation.
PepsiCo actually spends billions on internal research and development, but it clearly doesn’t shy away from making acquisitions when it feels it makes sense. It’s common for huge companies in various industries to acquire smaller startups as a way to get the benefits of innovation without having to take the time, pay the expense and absorb the potential reputational costs (“New Coke” anyone?) that launching a new product requires. Selling your company to a big brand is also a typical exit strategy for many startups!