Oil jumps again and Fevertree shares slump on a cocktail of setbacks

“Reports that Libyan oil exports have been blocked amid fighting in the country has triggered a 1.1% rise in Brent Crude, putting the oil price back above $65 per barrel. That gave a lift to shares in Royal Dutch Shell and BP and thus benefited the FTSE 100 index, up 0.1% to 7,679.

BAE Systems was the top riser on the FTSE 100 after striking deals to buy two technology-based businesses for a combined $2.2 billion.

“Ahead of the UK’s departure from the EU in less than a fortnight’s time, the pound fell 0.3% against the US dollar to $1.2974, dragging down shares in banks including Lloyds and Royal Bank of Scotland,” says Russ Mould, Investment Director at AJ Bell.

Fevertree Drinks

Fevertree has confirmed the market’s worst fears, namely that the UK operations are finding it hard to sustain previously high rates of sales growth. Making matters worse for earnings near-term is guidance for further investment in its US operations as it tries to crack the geographic region.

“There were previously signs that the UK opportunity had matured, given that the brand already has such a strong market position. At the half year results in July it said the brand was the market leader with 39% value share in the off-trade (supermarkets and shops) and 45% value share of the on-trade (hotels, restaurants, pubs and bars). It is very hard to keep growing at strong rates when you are already at the top.

“Competition has also been intensifying and one might even suggest that the gin craze which has helped Fevertree may have peaked. For example, the Whisky Exchange, a retailer, said rum sales in the third quarter of 2019 had overtaken gin for the first time in five years.

“Imitation is the sincerest form of flattery, hence why you’re now seeing lots of copycat premium mixer products. Fevertree needs to ensure these competitors don’t eat its lunch.

“The focus for Fevertree has been trying to keep its strong position in the UK while chasing opportunities in the US. The latter has been going very well and today’s announcement that it will have to invest more money to give it a stronger platform for future growth looks like a perfectly normal thing to do. You have to spend money to make money and the US opportunity for premium mixers is more than 10 times the size of the UK.

“Weaker than expected Christmas trading in the UK is disappointing and management will need to make sure they aren’t taking their eye off the ball with their homeland operations while pursuing the US opportunity.

“The price Fevertree is now paying as a result of its incredible success over the years is increased public scrutiny. The bigger the company gets, the more the critics line up to point out any flaws and weaknesses. In reality this remains a highly commendable British success story and it is only natural in the course of business to experience trading hiccups.”

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The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.