Fevertree shares fall on margin concerns
Shares in upmarket mixer supplier Fevertree Drinks (FEVR:AIM) fell flat on 14 July as investors focused on cautious comments regarding the firm’s gross margin instead of its
sales growth in its latest trading update.
Despite positive momentum in spirits and mixers in UK and US supermarket and convenience shop sales post lockdown, and the gradual reopening of the pub, hotel and restaurant trade across most regions since June, the firm advised that changes in its channel and geographic sales mix would create gross margin headwinds over the course of this year.
That was enough to send the shares down 5% to £22.95, reversing two days of strong gains.
After a solid start in January and February, the closure of the hospitality and leisure sector to Covid-19 meant that sales from March to June were almost entirely dependent on customers buying its products to consume at home, known as the off-trade.
Consultancy Nielsen estimates that the firm’s UK off-trade sales grew 34% in the 12 weeks to 14 June, which Fevertree puts down to ‘the popularity of long mixed drinks as an everyday affordable treat’ during lockdown.
In the US, Nielsen data, which covers just under half of Fevertree’s US off-trade business, said the company’s sales rose by 89% in the 12 weeks to 13 June thanks to increased in-home consumption, revised pricing and format, and improved distribution.
Sales in Continental Europe were more problematic given the huge skew towards bar culture in countries such as Italy and Spain and
the dominance of the on-trade (pubs, restaurants and hotels) as a result.
Also, uncertainty over how soon hospitality and leisure outlets would be able to reopen led some of its importers to destock, which amplified the negative impact on sales.
Despite these headwinds, the firm remains committed to its investment plan, including its sizeable marketing spend, and is looking for new ways to add value.
Along with the trading update, it announced the acquisition of Global Drinks Partnership, its sales agent in Germany.
Fevertree has worked with Global Drinks Partnership for seven years to build its presence in the German market, which it calls a ‘notable opportunity’ given its sheer size and the fact that the premiumisation trend in spirits and mixers – which has been such a key driver of its sales success in the UK and the US – is just beginning. Stockbroker Numis estimates premium mixers only accounted for 18% of the overall German mixer market at the end of 2019.
Buying Global Drinks Partnership with its established relationships is an important strategic move as it allows Fevertree to accelerate the strength and depth of its presence in Germany much faster than could have been achieved by building the same capabilities from scratch.
DISCLAIMER: The author Ian Conway owns shares in Fevertree.