Fevertree tackles cost pressures and reduces exposure to logistics risks

Anyone familiar with the product range of Fevertree Drinks (FEVR) will know that glass is often the preferred packaging material. Unfortunately, the manufacture of glass is an energy-intensive process, so the upmarket mixer producer saw profits narrow throughout 2022 due to volatility in wholesale gas markets. But it wasn’t just about rising input prices.

The company also had to contend with increases in the underlying cost of sea freight and US port congestion, the impact of which was exacerbated by a slow ramp-up in US production, which meant that UK production was required to supplement US inventory levels. The upshot was that the company’s gross margin fell by 7.6 percentage points to 34.5 per cent.

The company plans to increase US production to offset some of the input cost increases, but it will also be raising prices on a regional basis where appropriate. Even given its “asset-light” production model, the company was unable to avoid industry-wide cost pressures, although it could be argued that Fevertree is more exposed than most on the packaging front given its premium brand status.

Profits continue to be constrained, although the marked fall-away in energy costs through the early part of this year should be reflected at the half-year mark. And it should be remembered that the company registered a double-digit increase in revenue despite on-trade disruption in its markets in the first quarter of 2022, along with “subdued consumer confidence as the cost of living rose during the year”. We think that last point might be slightly specious given that alcohol sales generally hold up during economic downturns and it’s unlikely that consumers would trade down on mixers given Fevertree’s brand cache. It’s perhaps significant that there has been no slowdown in the marketing budget.  

Fevertree has also taken steps to diversify its product offering by moving into what’s termed the ‘adult soft drink’ category, “a potentially significant adjacent opportunity”, with its ginger beer and Sicilian lemonade products already among the top performers in the category. Indeed, Fevertree’s products are seen as standalone beverages in the US market, rather than solely mixers.

Management reiterated guidance from earlier in the year, with full-year revenue pitched at £390mn-£405mn and cash profits of £36mn-£42mn. Like the rest of the western world, the company is intent on localising production wherever possible, thereby mitigating exposure to elevated logistics costs. The company’s short-term moving average recently crept above its 200-day average, suggesting that market sentiment has improved, but a forward rating of 57 times consensus earnings still reads more like a tech stock. Hold.

Last IC View: Sell, 1,048p, 26 Jan 2023