How bad is the rain for soft drinks firms?
The UK soft drinks industry could be crying into its hands at the state of this summer’s weather. A washout June is disaster territory for the sector, particularly as last year was boosted by an unprecedented amount of sunshine and high temperatures which lasted for most of the summer.
Drinks companies should have been through volatile weather patterns plenty of times in the past and they’ve kept on going, although investors may not like the sour taste of weak sales figures should they appear in the next round of results.
Surprisingly the market doesn’t appear to be pricing in much bad news for the majority of the sector. AG Barr’s (BAG) share price has been on a tear and has only pulled back slightly in recent weeks, Britvic (BVIC) lost momentum a few months ago but hasn’t really been that weak, and Nichols (NICL:AIM) is trading close to its all-time high.
The only stock to have fallen hard in recent weeks is Fevertree (FEVR:AIM). That’s likely to be a result of figures from market research group Nielsen which show UK sales of Fevertree products for the four weeks to 19 May falling by nearly 6% compared with last year.
Last year the sector had to contend with the soft drinks industry levy and rework products to have a lower sugar content. They all seemed to cope with that pressure quite well and the industry went into 2019 with a focus on product innovation. We would expect them to carry on with these plans and stay optimistic despite recent unfavourable market conditions.
Fevertree has just launched pre-mixed gin and tonic which is an interesting move and caters for the type of customer looking for convenience with a ready-made product.
AG Barr is also targeting the ready-to-drink market with the recent debut of its Funkin canned cocktails, and it is launching an Irn-Bru energy drink this summer, capitalising on a very strong brand to tap into a fast-growing market. Earlier this month it also bought a 20% stake in alcohol-free adults drinks firm Elegantly Spirited.
Britvic is in a slightly different position to its peers because last year’s summer comparative period isn’t as hard to beat. Its carbonates business was heavily affected by a carbon dioxide shortage in mid-2018, leading the company to say last July that it couldn’t fully capitalise on the exceptional weather in the UK.
Putting the near-term risk of a sales slowdown to one side, one has to look at the soft drinks sector with admiration in terms of how all four businesses are coping with challenges and staying abreast with changing consumer tastes.
This sector is often overlooked by investors who are focused on big tech stocks, generous dividend payers or high quality businesses. We think it is a mistake to overlook the soft drinks companies as they also have plenty of good traits. As such, it might be worth thinking about taking some positions should we get any summer trading-induced share price weakness.