Strategy Review

Goal 3: Profitably secure and grow our regional beverages share

2005 Priorities

• Invest, innovate and execute
• Strengthen US non-carbonates and route to market

Our beverages goal reflects our aim to focus on those markets where we have strong competitively advantaged positions and to secure and then grow our shares in those markets. In our beverages businesses, our focus in 2004 was to integrate the businesses, both to reap the synergy benefits of recent acquisitions, and to leverage scale.

Our priorities in 2005 moved from integration to innovating, investing and executing around our core brands in both the Americas and Australia to further realise the benefits of our significant positions as the tenth largest and fourth largest food suppliers to the grocery trade respectively in their markets. In addition, specifically in the US, our second priority was to strengthen our non-carbonated soft drinks (non-CSD) business and our route-to-market.

In 2005, our beverages business grew revenues by 6%, a significant increase on the 4% revenue growth in 2004, with strong results seen in both markets. We grew our share in the US carbonated soft drinks (CSD) market for the second year in a row, and in the second half saw a significant improvement in the performance of our non-carbonates business. In Australia, we maintained market share while rationalising non-core products.

In 2005, our CSD business gained 40 basis points of market share in the US led by outstanding 6% volume growth from Dr Pepper, our biggest CSD brand, which was the only major CSD brand in the US to grow.

Market share growth in US CSDs

Dr Pepper's performance was driven by the success of Cherry Vanilla Dr Pepper, the first of our innovative Soda Fountain Classic flavours, which draw on the soda fountain taste heritage. We launched Cherry Vanilla in October 2004 in Dr Pepper's heartland markets (11 southern US states) and we rolled out diet Cherry Vanilla nationally in January 2005.

Cherry Vanilla has been particularly successful in bringing new customers to the Dr Pepper franchise, with four out of the five top selling areas for diet Cherry Vanilla being outside Dr Pepper's historical heartland markets.

Part of Dr Pepper's success in 2005, particularly in non-heartland markets, has been driven by greater alignment with Dr Pepper's bottling partners, both in the cola and independent bottling systems. Progress in 2005 has included Dr Pepper's increased participation in bottlers' core promotional activities, and greater alignment of our commercial, financial and operational plans.

Dr Pepper volume growth

Dr Pepper has also been successful in winning new fountain business in 2005, both with new accounts, such as Arby's, and by increasing participation with existing customers such as McDonald's and Sonic.

Dr Pepper fountain volume growth

In non-CSDs, we focused on the revitalisation of our Core Four brands of Mott's, Clamato, Snapple and Hawaiian Punch, which account for over 65% of non-CSD sales.

Core Four non-CSD brands - volume and sales growth

We increased the frequency of Snapple advertising and Mott's returned to television advertising. We addressed the price-value relationship of Mott's relative to private label and, in addition, we launched a number of innovative products. These included, in the Mott's range, a Light product and the fortified Plus and Plus for Kids products. This Plus concept is highlighted in the case study.

We also improved our execution by rationalising the number of product lines within our non-CSD business, reducing resources focused on non-core brands like Elements and discontinuing some products such as Snapple-a-Day.

Larry Young was appointed as CEO and President of Dr Pepper/Seven Up Bottling Group, Inc (DPSUBG), our 45% owned bottling associate, in May 2005. Larry brings significant management experience in the bottling business. Since his appointment, we have further strengthened our co-operation with DPSUBG in areas such as sales, procurement and distribution.

In Mexico, part of the Americas Beverages region, we have delivered outstanding growth for several years as we have continued to focus on our core brands, principally Peñafiel, Squirt and Aguafiel. We extended our Peñafiel mineral water brand into the CSD segment through innovative sparkling flavoured mineral water products such as Peñafiel Twist and Peñafiel Naturel. In Aguafiel, we successfully launched a 10 litre product through our joint venture with San Benedetto. In CSDs, we grew our market share by 20 basis points in 2005, and in non-CSDs by 30 basis points.

In Australia, where our beverage business is a full system business and integrated with our confectionery business, we have leveraged our position as the fourth largest food supplier to the grocery trade. We have focused on developing our most advantaged brands, de-emphasising non-core products, and simplifying our price structure. Investment in innovation has also generated growth. We relaunched our Spring Valley Stills range, adding innovative products such as an Iced Tea drink, a flavoured water (Twist) and the Vibe range of fruit and vegetable blends. We also launched a number of innovations in The Natural Beverage Company range of drinks.