Fever-Tree Drinks is set to benefit from a nascent premiumisation trend in the mixers category over the coming years, particularly in the US, a leading analyst has suggested.
Nico von Stackelberg of Liberum said that the premium mixer market could occupy as much as 40% of the US market by the end of the decade, putting the UK drinks firm in a prime position to drive profitability.
Group Performance
In a trading update in June, the group said that it was shifting much of its focus to the off-trade during the coronavirus crisis, and had seen a 24% increase in sales in this channel in the first month of lockdown.
It also noted that its asset-light business model 'continues to support [its] secure financial position', with the group boasting a well-balanced portfolio across multiple regions, channels and customers.
According to von Stackelberg, the group's continued distribution gains in international markets will enable it to exceed its pre-COVID earnings levels next year and into the future.
"Over the next five years, we expect Fever-Tree to grow sales at a 8.4% CAGR from 2019 and earnings at 9.9% from 2019, whilst achieving an average CROCE of 62% in the decade ahead," he said, adding that he believes international growth will be key.
"The [group's US business] can nearly double in three years, as the latest Nielsen data suggests the price reset is going according to plan, driving trial and a trade up from standard mixers, coupled with continued distribution gains.
"While growth in the US is a headwind to margins today, we believe the company can increase local production. This reduces logistics and warehousing from 7.1% of sales in 2019 to 4.5% by 2023, enabling the company to beat margin expectations."
Currently, premium mixer penetration stands at 7% in the US, competed to 40% in the UK, despite the fact that the US is a much more premium-focused spirits market, according to von Stackelberg.
"We believe the premiumisation trend observed in spirits will spread to mixers over the next decade, taking the premium segment to 40% of the mixer market in the US by the end of 2030. Fever-Tree’s key partnerships with spirits companies and their distributors unlocks this trade up as the value chain is heavily incentivised to drive the premiumisation trend to enhance the profitability of all parties."
Increased Investment
Fever-Tree also appears to be taking advantage of the COVID situation to ramp up its presence in the US, with competitors scaling back spend recently.
"The decision to upweight investment in the US gives us greater confidence and enables us to increase our estimates over the medium term," said von Stackelberg. "We believe improving brand awareness is key to future success, based on speaking with 50 bartenders, shop owners and consumers across 35 outlets in Austin, TX and New Orleans, LA in October 2019."
Fever-Tree already has a 50% share of the US premium mixers category, Liberum says, and is three times the size of its closest competitor, Q-Drinks, meaning that by the close of the decade, the company could be generating sales of £300 million in its US arm.
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