Have you ever had a conversation about a clothing brand or ad campaign and then start to see it everywhere? Of course, it was always there, you’re just primed to notice it more now. And if you don’t know what I’m talking about, count the red cars on your way home - it’s funny how many there are when you look. It’s what behavioural economists call the Baader-Meinhof phenomenon and it’s been driving me mad recently.
The reason is that, as a gin drinker and investor, I can’t get away from Fever-Tree. I’m either pouring it, talking about it or writing about it (or writing about writing about it). This fits with the Baader-Meinhof theory because the company is now an established name that most of us know and recognise. It’s easy to start noticing something new and novel but Fever-Tree left that realm a while ago, slipping into everyday life in our trolleys, hotel mini-bars and plastic aeroplane cups.
However, no matter how exciting the growth story, sooner or later the market will always start to question the sustainability of that growth. For Fever-Tree, the doubt crept in around September last year, starting a wave of selling that lasted until Christmas, and putting a lot more pressure on what the company had up its sleeve in 2019.
This morning’s results go some way to giving investors a clear picture of the opportunities and hurdles facing the mixer maker from now on.
Pre-tax profits hit £75.6 million in 2018, up 35% on the previous year, however due to the introduction of the UK’s sugar tax, profit margins fell by almost 2% to 51.8%.
Sales soared 40% compared to 2017, hitting £237.4m - slightly ahead of January’s guidance of £236 million, but it is the geographic breakdown of revenues that investors will be keen to keep an eye on. Perhaps unsurprisingly, the UK accounted for the lion’s share of sales, jumping by 53% on the previous year to £134 million, as the nation toasted summer events including the World Cup and royal wedding. European sales rose 25% after additional retail listings in Germany, Denmark, Italy and Ireland.
The US saw revenues rise by around 20% to £35 million thanks to a tie-up with Southern Glazer’s Wine and Spirits, North America’s largest wine and spirits distribution company.
It’s this final part that contains the biggest opportunity but also presents the biggest risk for the company. Shareholders have got used to rapid success since the firm listed in 2014 but the US is a very different market. Gin might be experiencing a sustained renaissance in the UK and across Europe but the excitement hasn’t travelled across the pond just yet.
On the whole, Americans prefer their beer light and their spirits neat - neither of which are particularly encouraging for a mixer brand. And when they do opt for a splash of fizz, the Jack & Coke crowd rarely deviate from the norm.
Taking on Schweppes with a better product is one thing but displacing Coke with an own-brand cola is a different level completely. Shareholders here to take advantage of the gin craze might have to get used to a new strategy, or might need to be a bit more patient until US tastebuds opt for clear spirits and clear mixers over their darker cousins. It might seem like a long shot but then again, not even Fever-Tree’s competitors saw it coming first time around.
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