FTSE 350: Beverage companies have not lost their fizz

The Britvic portfolio is now packed with well-known, low-or-no sugar brands such as J2O and Robinsons, as well as drinks licensed from PepsiCo, such as PepsiMax. The consumer shift towards lower sugar consumption, prompted not only by the tax changes but also by the general desire for healthier lifestyles, hasn’t meant that AG Barr has disregarded its signature orange IRN-BRU fizzy drink. The traditional version may be loaded with sugar, but its lighter version contains none at all.

While the push to provide consumers with lower-sugar products is difficult to argue with, the timing of the sugar tax is rather unfortunate. The price of sugar has plummeted over the past year after the EU quotas on production were lifted, leading to a surge in supply. While this would have led to lower input costs for the drinks makers, the spend on reformulation should help these businesses stay relevant over the longer term. The reformulation spend resulted in a slight margin hit to AG Barr last year, but analysts think this should recover in the coming year.

Sugar isn’t the only thing that consumers have been avoiding, as the increasingly teetotal tendencies of some age groups and demographics show. Not one to miss a growing gap in the market, Britvic has launched its own line of premium alcohol substitutes under its Monte Rosso and Thomas & Evans brands, although it would make sense if its other brands should benefit from increased abstinence, too.

Such a trend might be worse news for booze makers like Diageo (DGE). But fortunately for the global spirits company, those who continue to indulge tend to go for more premium options. These products are invariably pricier, which should translate into better profit margins.

Management at Diageo is clearly preparing the business for this trend to continue – in November it sold 19 of its non-core brands, including Goldschlager, Romana Sambuca and Parrot Bay, to Sazerac for $550m (£423m). Chief executive Ivan Menezes said the deal enables the group to have “even greater focus on the faster growing premium-and-above brands in the US spirits portfolio”, which now make up around two-thirds of Diageo’s portfolio.