Fevertree surges offshore, but margins falter

The capital-lite nature of Fevertree Drinks (FEVR) has generated a stream of investor analysis down through the years, but there are certainly other features worth pondering. For a start, it’s hard to think of a company which has provided a more instructive example of scuttlebutt in recent times.

Anyone who has frequented licenced premises over the past few years couldn’t have missed the proliferation of Fevertree’s mixers, nor would they have been in any doubt that they were pitched at the premium end of the market. It’s all to do with what marketers refer to as ‘aspirational brands’. Walk into a pub 30-years ago and there might have been one or two gins hooked up to the optics; now you’re spoilt for choice.

Statistics from HMRC reveal that there were 441 distilleries in the UK prior to the pandemic, a 245 per cent increase in just 7 years. Mother’s ruin has been the main driving force since 2012, though the increase in capacity, allied to a move up the value chain, mirrors the previous experience of single malt whiskies from north of the border.

The increased willingness of bargoers to part with their cash for a premium product would not have escaped Fevertree’s founders Charles Rolls and Tim Warrillow. For if consumers had become inclined to fork out an extra couple of quid for a high-end spirit, they certainly wouldn’t balk at paying a little extra for a quality mixer.

The company was admitted to trading on London’s Aim in November 2014 at a time when the it's flagship tonic water was steadily eclipsing Schweppes as the default option in many pubs and restaurants.

A marketing campaign highlighting the brand’s provenance – and perhaps its exclusivity – contributed to an annualised sales growth rate of 34 per cent from 2015-2020, with cash profits up by 25 per cent per year over the same period. The breakneck speed of the initial sales surge was never going to be maintained and return-on-equity has been gradually pulling back to the point where it was trending below the beverage industry average of 20 per cent.

When a company is as quick out of the blocks as Fevertree, investors are invariably left wondering when sales momentum will peter out. The company reported a 36 per cent increase in sales during the first half of 2021, though top-line growth was more subdued in the UK market, which registered a rate of just 4 per cent. Some have suggested the company is approaching saturation point in the domestic market, but events over the past 18-months, specifically the periodic shutdown of pubs and nightclubs, have muddied the waters where the industry is concerned.

Off-trade sales remain above pre-pandemic levels, a possible indicator that the trend towards in-home entertaining has become ingrained as the pandemic has dragged on. 

Certainly, shareholders will be encouraged by the traction achieved in the US and in Europe, where sales were up by 32 and 79 per cent, respectively. Again, those figures must be taken in context, and it is slightly worrying that logistical issues contributed towards a 270-basis point contraction in the gross margin. Those issues might drag on for a while longer and it is likely that demand will moderate once re-stocking subsides, but the long-term buy case rests on US market penetration, where signs are encouraging.