Kombucha as mainstream category?  Austin-based Live Kombucha Soda, whose founder Trevor Ross positions it as “gateway kombucha,” has just crossed another milestone on trek, winning acceptance into 1,536 Target stores in late Sep.  Mass-merch retailer will carry all 6 soda-style flavors, including Dreamy Orange, Culture Cola and Pure Doctor, in produce sets, at on-shelf price that hasn’t been determined yet, said vp sales Joel Skurnik.  Win at mass merchandiser comes after raw brand packed in clear longneck bottles has begun to move out to mainstream grocers, where it’s now carried in all 6 Safeway divs, 3 Kroger divs, Jewell Osco and HEB, as well as 4 divs of Whole Foods.  Joel told BBI that discussions went back to co’s Expo West appearance last Mar, and seemed to extend just to 2-week test in 140 or so stores as part of diverse mix of energy drinks, RTD coffee and other segments, before talks expanded to include much broader run of stores.  Skurnik’s taking Target commitment as “affirmation that we’re in the right place with this product,” which adopts soda-like flavors and package to demystify segment.

Coca-Cola Enterprises’ net income rose 8.8% to $198 mil in 2d qtr with EPS coming in at $0.90 on comparable basis, co reported.  That beat expectations of $0.88, per Thomson Reuters poll of 15 analysts.  CCE revenues rose 8% to $2.33 bil, in line with consensus.  Operating income rose 8.5% to $341 mil on comparable basis for qtr.  CCE volume increased 3.5% in 2d qtr despite co continuing “to face ongoing macroeconomic weakness, competitive and marketplace pressures and a dynamic customer landscape, particularly in Great Britain,” per chmn/ceo John Brock.  Volume rose 4% in Europe (including Norway and Sweden) but just 2% in Great Britain.  Bottler’s CSDs grew 3.5% while noncarbs edged up 2%.  Coca-Cola trademark brands were up 4% with Coke Zero jumping 14% and Coca-Cola up 4.5%.  Avg prices for CCE brands came in flat.  Looking at remainder of 2014, CCE still expects EPS growth of around 10%, net sales growth in “low single-digit range” and oper income in “mid-single-digit range.”

Mexican bottler Coca-Cola FEMSA reported income decline of 4.6% in 2d qtr to 2.68 bil pesos, or $206 mil.  Acquisitions of 2 bottling cos in Brazil and 1 in Mexico helped lift revenues by over 14% to $3.2 bil.  Excluding those acquisitions, KOF volume was off 1.5% in qtr as co felt impact of new soda tax of 1 peso (8 cents) per liter.  KOF earlier had said it anticipates tax to reduce volume in Mexico by 5-7% for full yr 2014, noted Reuters.

Wintergreen Advisors, which owns 2.5 mil shares of Coca-Cola and in recent months has been rattling saber over co’s compensation schemes, unveiled Web site, FixBigSoda.com, that offers menu of “modest steps” that get co “back on the path of profitable and organic growth that accrues to all shareholders.”  Elements on site echo letter to co released by Wintergreen’s David Winters on Jul 8, tho none of ideas are likely to strike BBI readers as startling in any way.  In other words, they’re literally “modest,” not ironically modest as in Jonathan Swift’s usage.  Plan calls for quicker move to refranchise N Amer bottling assets and for prioritizing pricing and profit over volume growth, as Winters notes tobacco cos have successfully done.  Winters can’t see why Coke, its margins stuck at 26% for years, can’t enjoy margins of comparably sized beer players AB InBev (40%) or SABMiller (34%), nor why its payroll has grown in 10 years from 49K to 131K staffers, at cost of 32% decline in profit per employee.  But he offers no specifics about how to boost margins or where to cut.  Other exhortations:  “No more attempts to buy growth” via deals like investment in Keurig Green Mountain, which “does not address the fundamental growth problems Coca‐Cola has encountered in its primary business of selling cold beverages,” nor cheapening brands with dodges like “mixing apple and grape juice with 0.3% pomegranate juice and labeling it as pomegranate juice,” which reflects poorly on co (tho that’s certainly a way to boost margins!).  As earlier, Winters calls for roles of chmn and ceo, both in hands of Muhtar Kent, to be separated.

CSDs are under unprecedented pressure, and among Big 3 bevcos Dr Pepper Snapple Group is by far most reliant on CSDs.  Further, DPS’ noncarb portfolio includes big exposure to Hawaiian Punch, operating in troubled segment buffeted by cost pressures.  So one might have expected roof to be caving in by now.  Yet Plano, Tex-based co released Q2 earnings report today that continued to surpass Wall Street expectations.  Net sales rose 1% to $1.63 bil on 1% increase in volume, and operating income rose 22% to $348 mil.  For first 6 months, revenues rose 1% to $3.03 bil and oper inc rose 26% to $608 mil.  Earnings per share rose 39% to $1.06.  Gross margin widened from 58% a year ago to 59.2%.  Prexy/ceo Larry Young declared it to be “good first half of the year, in what I’ve said is the most challenging CSD environment I’ve ever seen.”  In investor call today, he also declared victory on controversial value push by Snapple, which he’s now abandoning in favor of restored focus on premium.  And in call with uncommon emphasis on “allied brands” that DPS distributes but doesn’t own, Young said DPS continues to check out promising new entries but won’t overpay entrepreneurs seeking to be the next Glaceau.

Wall Streeters acknowledged continued strong results, tho not all are convinced they’re sustainable given fundamental challenges confronting co.  With latest report, DPS is “surprising us and the Street yet again,” allowed Wells Fargo’s Bonnie Herzog.  “Despite the strong beat, we believe DPS's strong H1 results are not sustainable and ultimately will reflect ongoing deterioration of top-line growth.”  Among her concerns: both CSDs and noncarbs were down, as were 2 core brands, Dr Pepper and Snapple.  Still, shares have surged 3-4% in trading so far today on heels of earnings release before market opening.

For qtr, CSDs edged up 2%, and while noncarbs declined 4%, tho that was mainly “Hawaiian Punch-driven issue,” Larry said, with juice line’s volume off 12%.  On soda side, Dr Pepper brand decreased 1%, a sequential improvement over 4% decline in prior qtr but still down.  Core 4 sodas increased 2% driven mainly by high-single-digit increase in Canada Dry, partly offset by low-single-digit decrease in A&W.  (Sunkist soda and 7 Up were flat.)  Schweppes grew double-digits on strength of sparkling waters and ginger ale.  In CSDs, “most of our growth is in sugared products,” Larry noted.  “Our issue is diet – diet has taken us down.”  But “we’re all over it, digging deep into it” and devising programs for 2H that “are really going to take it on,” both via specific programs but also by tying diet CSDs into co’s popular college-football programming.  Beyond perfunctory assertion that Ten platform is working, Young didn’t have much to say on those mid-calorie sodas, and he reminded listeners not to expect silver bullet on natural-sweetener side.

On noncarb side, Snapple also was off, but its 3% decline was “primarily driven by our de-emphasis on our value products,” co said.  But Snapple Premium increased by 1% and Mott’s was flat as decline in applesauce offset gain on juice side.  Penafiel water brand soared 25%, benefiting from innovation and tilt toward water in Mexican market where gov’t has imposed sugar tax.  Fountain foodservice volume grew 2%, DPS said.  Clamato rose 8%.  Young also offered shoutout to allied brands Fiji Water and Vita Coco coconut water as contributing.

DPS brass charted continued headway on boosting availability of key brands, an ongoing challenge as 3d-tier player.  Both CSDs and Snapple boosted their ACV penetration by 0.1 in grocery, and Snapple added 1.8 ACV gain to its c-store presence.  Mott’s gained 1.6 at grocery.  Co also added 20K new fountain valves, contributing to 2% growth in fountain biz.

Snapple Value Line Worked, so Now It’s History   Looks like DPS is pullin’ plug on value initiative behind Snapple to combat aggressively priced Lipton, Nestea and AriZona that some purists argued at time didn’t befit premium player.  “We went out with a value brand specifically for some strategic reasons 2 years ago and accomplished what we wanted to do,” Young declared.  But “Snapple is a premium tea” and that’s where co will put focus and seek growth.  Tho product innovation on brand has been scant in recent years, even as brand has made noise on marketing front, prexy Young promised more to come, including limited-time offers and experiments with different sweeteners and types of tea.  Value brand accounted for only about 10% of total Snapple biz, he said in response to analyst’s question.

Hawaiian Punch: Key Brand, but Lost Cause   Young didn’t pull punches on Hawaiian Punch, saying he won’t throw money at curing difficult challenges on brand that’s still important to co and to its retail customers.  If you look at Nielsens and other syndicated data, “It’s not just Hawaiian Punch, it’s a category issue, and peers and competitors are suffering the same way,” he argued.  Brand is big on top line “but doesn’t do a lot on bottom line,” and further spending won’t turn it around.

Allied Brands Offer Growth, Profitability, but DPS Won’t Overpay to Acquire Them    Partly because of analysts’ prodding, there was more discussion about allied brands on this call than any other we can recall, even tho brands like Fiji Water, Vita Coco and Bai-5 account only for “maybe 3%, maybe a tad more” of total biz, per cfo Marty Ellen.  But they loom more importantly at time that some on Wall Street worry that co is overcommitted to CSDs, some 80% of total biz.  Young cited new distribution deals on Bai-5 and Fruit2O brands, presumably new Sparkling Ice challenger devised by parent Sunny Delight Beverage.  Tho as finished goods purchased outside co they reduce overall gross margin, they offer good dollar profit and are growing briskly, Young noted.  Carrying them within system “speaks to our ability to seek out” entrepreneurs who’ve demonstrated better ability than large cos to create innovative entries.  “One of our strengths and advantages is offering up our DSD system to take advantage of growing categories and products created by these partners, and it is very good business for us,” he said.  Sometimes DPS can cadge sliver of equity as part of deals, but otherwise it’s been wary of buying its way into innovative categories.  While it looks into all potential deals, “we remain committed to being very shareholder-friendly and not overpaying,” Young explained.  “Some of those multiples out there are ridiculous . . . we love all these young entrepreneurs, but they want to be the next Glaceau.”

Wisdom Natural Brands, which markets SweetLeaf Stevia Sweetener and Wisdom of the Ancients herbal teas, has broadened top-mgmt team.  Wisdom, based in Gilbert, Ariz, named Sai Prakash Chaturvedula as chief scientific officer, after having had scientific roles at SelectX Pharmaceuticals, Coca Cola and Blue California.  Michael May, believed to be son of owners Jim and Carol May, takes on role of vp biz development after serving as associate prof at Air Force.  Yogi Tea vet Gurudhan Khalsa comes in as vp sales.  Co also has made moves in supply chain and finance functions.

Jim McGreevy isn’t only soft drink vet to head over to beer side lately.  Heineken USA said it’s hired Ray Faust, 18-yr Coca-Cola vet who’s been serving as svp of commercial strategy, to take over its chief sales role at co.  Ray will be replacing Scott Blazek, who’s leaving HUSA after 7 yrs to pursue other opportunities, co said.  Ray has “classical field sales experience,” prexy/ceo Dolf van den Brink told sister publication Insights Express earlier today.  He noted Ray also worked with CCE, “giving him both a ‘distributor’ and ‘supplier’ point of view.”  

About a month ago, longtime American Beverage Assn exec Jim McGreevy made move to beer side, accepting top post at Beer Institute.  Not even a month into role so far, BI prexy has hit ground running, knocking off 35 meetings with Hill staffers and legislators just since Jul 7, he indicated to BBI sibling newsletter Insights Express yesterday.  So how does vibe compare to soft drink side?  “I feel like there’s an open audience for our point of view.  It feels better,” he told Insights Express.  

While the soft drinks he represented at ABA “have taken a lot of hits in public opinion” and from some non-profits and folks on the Hill who “want to demonize” that industry, “I don’t feel the same level of animosity” towards beer, “at least from some quarters,” Jim said.  But it seems to be cyclical thing.  McGreevy recalled remark he’d gotten from city mayor during his ABA days:  “Every industry gets its time in the barrel.  For soda companies the time is now.”  By contrast, beer biz seems to reaping reward of having taken on “mantle of responsibility in a big way,” which proved to be chance to “change the dialogue.”  Talk now is more around jobs beer provides and responsibility programs.  “I feel like there’s an open audience for our point of view.  It feels better.”  Still, as noted, “political and social issues go in cycles,” Jim suggested, and “one of my most important jobs is to get the BI and membership united around a set of common goals so that when the beer business is back in the barrel, we’re ready for it.”  For now, tho, he’s enjoying ride.  On Hill, “when I walk in, people generally have smiles and want to hear our issues.”  

PepsiCo this morning cited stable 2d quarter in difficult economic environment as evidence that its focus on rational pricing and diverse food-and-bev portfolio are making for solid strategy, and it raised its guidance for full-year earnings per share from 7% gain to 8% gain.  Co is “off to a terrific start in 2014, with pieces of our complementary portfolio working together,” said chmn/ceo Indra Nooyi, citing “the power of our portfolio of products and brands.”  This of course is rebuke to those, notably activist investor Nelson Peltz, who’re angling for breakup of co and, by some reports, picking up momentum lately.

Net revenue edged up 0.5% to $16.89 bil, and operating profit advanced 1% to $2.9 bil.  For 6 mos, revenue was flat at $29.52 bil, and op profit up 4% to $4.7 bil.  But bevs were sluggish and so was usually powerful Frito-Lay biz, up just 2% in N Amer.  For Pepsico Americas Beverages, net revenue was flat at $5.28 bil, and operating profit slipped 2% to $868 mil.  For 6 mos, revenue in key region was flat at $9.7 bil and op profit off 10% to $1.3 bil.  “This is fractionally better than Coke in the period . . . and continues a trend improvement of donating decreasing amounts of share to Coke,” noted Stifel Nicolaus’ Mark Swartzberg.  (As at Garrison Keillor’s Lake Wobegon, where all the children are above average, both KO and PEP in their respective investor calls claimed to be share winner in most bev categories, using their separate metrics.  Still, PEP seems unquestionably to be better holding its own vs KO these days.)

Not much specific color was offered on key brands in N Amer, tho 2% gain in noncarbs countered 1% decline in CSDs.  Not a word on energy segment.  And Nooyi didn’t seem to have an answer to question about predicament facing diet sodas these days.  Diets “continue to see declines, this is something that seems to continue” was all she could muster on that one.  As for net price realization, that was “somewhat muted” – not because co is backing away from emphasis on profitable growth but thanks to commodity cost deflation that’s eased need to take pricing.  As rival Coca-Cola did yesterday, PEP also cited smaller new packs like mini-cans and 12-oz glass bottles as contributing to more-robust margins.  And as cfo Hugh Johnston noted, innovation that’s ramped up to point where newer items accounted for 9% of sales has also allowed co to charge more for its products.

Results seemed to get muted reception from analysts, but shares moved 3-4% higher in early trading today, in contrast to Coca-Cola shares that continued to be down 3-4% since earnings release a day earlier.  “Organic sales growth of +3.6% (volume +1%, pricing +3%) was likely at the low end of consensus expectations . . . with growth continuing to be driven by global snacks (+5%) and beverages up only 2%,” noted Morgan Stanley’s Dara Mohsenian.  That was good enough for ceo Nooyi to take victory lap, but likely not good enough to ease calls from some activists for more radical changes at co.

Nooyi on Changing Consumer and Retail Environment    Asked by analyst who so many food/bev categories in N Amer seem weak these days, Nooyi offered remarks that echoed those of Campbell Soup chmn/ceo Denise Morrison at that co’s investor day presentation on Mon, noting that retail environment has gotten tougher in part because people are consuming foods/bevs differently these days, migrating toward fresher offerings and making more of their meals at home.  For Nooyi, question was pretext to assert again that PEP’s strong brands, “complementarity” between food and bev side, and powerful DSD distribution systems are serving to make co a larger contributor to retailers’ growth.  Work being undertaken at co’s food and bev culinary centers are yielding more complementary offerings between snack and bev side, further driving excitement, she maintained.  Tho couched in sober analytical terms, remarks by Nooyi, Morrison and others lately appear to come closer to acknowledging that broad upheaval already seen among top tier of affluent shoppers is starting to percolate to broader mass of consumers, in ways that ultimately reshape big food/bevco strategies.  Aside from handful of brands like Tropicana and Naked, and dairy biz in Russia, PepsiCo doesn’t yet play much outside shelf-stable space.

Big Pension Fund Wants Peltz’s Voice Heard on PEP Board   Major investor, Calif teachers’ retirement system (Calstrs) has requested that PepsiCo give Peltz a seat on board as means to better addressing operational performance issues and opening incumbent mgmt to new ideas.  Financial Times disclosed today that letter dated Jun 30 and addressed to PEP’s sr indie board dir, Ian Cook, indicates that while Calstrs isn’t necessarily backing Peltz’s break-up idea, it views investor as having had beneficial impact at Snapple, Kraft and Heinz and deserving of voice at Pepsi.  At least one of top 10 shareholders has made similar request, paper further reported.  Calstrs holds about 0.2% ($250 mil) of PEP shares; its sister fund in Calif, Calpers, holds 0.3% but hasn’t backed Peltz.

Stumptown Coffee Roasters, whose stubby-bottled cold-brewed coffee by now has become fixture in Whole Foods and specialty grocers around country, is inching a gabletop companion entry out to market.  Its Cold Brew with Milk, packed in milk-carton-style gabletop box, has had shelf life extended to 35 days to facilitate expansion outside Pacific Northwest, to Stumptown cafes in NY and LA, and into Whole Foods stores in Southern Calif, first retailer outside Pacific NW bastion of Portland-based co, said prexy Joth Ricci.  Among rivals with whom it’s vying is a similarly packaged item from roastery rival Blue Bottle of SF.  Stumptown operates cafes in Portland, Seattle, NY and LA.