FTSE 350: Drinkers go high-end

One such trend is ‘premiumisation’ – the move by consumers toward high-end, more ‘exclusive’ products, as capitalised on most notably in recent years by Aim-traded Fevertree (FEVR). The direction of travel shows little sign of letting up anytime soon, with drinks market analyst IWSR forecasting that premium alcoholic drinks will take almost 15 per cent of the total market by 2024.

Buoyed by globalisation and financial digitalisation, the new middle classes in emerging markets are ripe for the plucking by the beverage giants. In markets from Latin America to China to India, companies with global operations and distribution networks have hundreds of millions of potential new consumers at their fingertips who are keen to move up the drinks ladder and sup the premium products on offer.

Such products tend to come with fatter profit margins. Driving forward premium product opportunities is a key part of Diageo’s (DGE) growth strategy and the company is continuing to make acquisitions, recently buying premium tequila brand 21Seeds to add to its already impressive high-end list which boasts a range of high-margin products from Johnnie Walker Blue Label whiskey to Tanqueray Ten gin.

A downside for these stocks (at least from the perspective of the alcohol purveyors among them), is the trend of younger people drinking less due to health and financial reasons. Whether this stands up over the long term remains to be seen, and the data suggests that it may not have a material impact on these businesses, but this (perhaps surprising) development is certainly something to watch as the sector moves forward.

That also goes for the continuing long-term decline in soda sales, as health-conscious consumers avoid sugar and governments get more heavy-handed on anti-obesity measures. Companies such as soft drinks producer Britvic (BVIC), which has relaunched the Rockstar energy drink brand (in sugar-free and lower-sugar versions) and acquired the plant-based drinks company Plenish last year, can look to take advantage of this this as energy and alternative drinks become more popular.

The beverages sector remains one which has high barriers to entry. Networks and operations have – for some of these companies – been built up over many decades. With new trends emerging, there are major growth opportunities to be had if experience and expertise can be harnessed in diverse directions.