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Sector Watch: Drinks

Daniel Lane

Daniel Lane - Fidelity Personal Investing

“I drink Champagne when I'm happy and when I'm sad. Sometimes I drink it when I'm alone. When I have company I consider it obligatory. I trifle with it if I'm not hungry and drink it when I am. Otherwise, I never touch it... unless I'm thirsty.”

None

Lily Bollinger clearly has altogether more sophisticated tastes than I do but when it comes to having a glass of something cheerful I’d say she speaks for quite a few of us.

Whether we’re celebrating, commiserating or grabbing a quick lunch, having something to sip is so ubiquitous that we don’t even see it as a little luxury anymore. As a result, the drinks industry has grown to be one of the major forces in modern consumerism, drawing success that is especially notable when you consider that it doesn’t need to exist at all.

A little bit of what you fancy does you good

Behavioural economics tells us that our decision-making over simple pleasures reverts to three things - what’s easiest, what’s quickest and what we liked last time. Apply that logic to the beverage market and you’re well on your way to understanding how global brands make sure our next glass has their logo on it.

Huge marketing budgets and the ability to supply supermarkets, restaurants and pubs with their products through sheer scale of production means we’re more likely to develop a taste for the big brands, and stick to it rather than opt for something new. The biggest names can try to throw their weight around and make sure competitors don’t even get a look in either.

Investors often look to identify the brands that are there when existing consumers want them, as well as bringing in new fans at the same time.

What to keep an eye on

Established players with deep pockets have been able to dominate consumption until now but even the big firms know innovation is the name of the game. Some tastes do come and go so it’s becoming increasingly important for drinks producers to have a collection of popular but uncorrelated products in their stable to reinforce their presence, and adapt to new markets.

With a cabinet of brands like Guinness, Johnny Walker, Gordon’s and Smirnoff, Diageo typifies this strategy, relying on at least some of its world-beating names to be leading the pack at any one time.

Coca-Cola’s acquisition of Costa is a good example of thoughtful diversification too. The deal brings Coke into the hot beverage market through the largest coffee chain in the UK and the second largest in the world, behind Starbucks. The move also gives Coke a chance to adapt to new markets. Sugar-levies and generational shifts in consumption habits have already seen it stump up for the likes of Innocent and reinvent its core soft drinks; coffee adds another string to the bow.

And the shift to millennial-focused consumption is no mistake. Those aged 22-35 are drinking less than their parents but are willing to pay up for better quality. Market entrants often look to tap into the premiumisation of product lines that demographic changes like these impose, and for investors, the ones that manage it can be very rewarding.

The overarching example here is high-end tonic and mixer producer Fever Tree.

Even with the recent pullback, Its shares are up over 850% over five years as the craft gin boom found its partner. But it hasn’t been quite that simple. In fact, the Fever Tree story gives us an interesting case study in investor psychology. Three years ago we were telling ourselves that interest rates were bound to start rising, making discretionary consumer products less attractive in investment terms (sound familiar?) never mind premium versions.

Buying into a new company focused on disrupting a market dominated by Coca-Cola sub-brand Schweppes was not top of many to-do lists either. Even after initial stellar share price rises many investors steered clear, thinking they’d missed the boat - a classic example of framing bias that stopped me getting in.

What investors can take from all of this is that market leaders are only untouchable if they stay ahead of the curve. Industry giants become targets for disruptors and nimble market entrants can be a real nuisance for big players. In the end it comes down to asking if the product at the core of a business is strong enough to stop others competing, can beat those who choose to compete, or can afford to buy the competition if necessary.

What’s a good way to invest in drinks?

The UK market has some familiar names in drinks with Diageo and Fever Tree joined by the likes of Irn Bru producer A.G. Barr, Britvic and lesser-known Distil.

For those looking for well-diversified access to investing in drinks, the Fidelity Select 50 has a range of funds with exposure to the sector.

Liontrust UK Growth and Franklin UK Equity Income both hold Diageo among their top names, with Jupiter European Special Situations holding global lager leader Heineken in its top 10 and JP Morgan US Select holding Coca-Cola.

Five year performance

(%) As at 20 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Fever Tree Plc 177.3 103.6 113.8 14.0 -46.0

Past performance is not a reliable indicator of future returns

Source: FE, as at 20.01.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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