Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:02:45} I'm excited for this talk as Will told me it would be helpful and informative. I've been doing a lot of work on the premium mixer space and you seem to have a perfect background to connect with here.

{audio:0:03:01} Tell me about yourself in your own words so I can help you with any questions you have? I saw a pre-read of some things you're curious about.

{audio:0:03:12} We are a long-term, low turnover investor, looking to find high quality companies and invest globally. We are interested in areas with a degree of structural growth and good underlying earnings, and premium mixers checks all those boxes. We have been invested in Fever-Tree for a while and are trying to decide where to take it. If Q were public, I would be looking at them just as much. In the fall I went to my first concert since Covid in Forest Hills, New York. They are multicultural and feature their foods and I was shocked to see their drink selection was two core mixed drinks with Q, priced at $18 a pop, and people were buying them over and over and I was impressed by both the willingness for people to pay the premium, and that Q had a presence in a venue like that. They were the exclusive purveyor there, so that's some of the stuff I'm interested in learning about generally, including the strategy and how competitively the two are positioned, whether they will both win or it becomes a zero-sum game.

{audio:0:04:45} I'm glad to hear; that's exciting. I'm still a substantial shareholder.

{audio:0:04:54} Yes, in Q. Jordan and Ben decided to invest in the on-premise space, where if you look at Fever-Tree which is a public company, you can see where they spend most of their energy and time. Pre-Covid, when we first got into the game in 2016, 60% of Fever-Tree's business was on-premise and Q mixers was the opposite; they were 5% on-premise and 95% grocery. Jordan was the founder and Ben joined because they were best friends from Band Camp. They realized the opportunity was to take the brand on-premise for several reasons. I don't think it's a zero-sum game because Fever-Tree cannot take all the business. With on-premise, you can control the most amount of volume. In grocery you have pallets, of Costco, Safeway and Kroger, who are the large grocery chain in the US and have a considerable investment interest in Q. 

{audio:0:06:14} There will always be multiple choices on a retail shelf, but your package and story has to be your sales person. People buy on price so they buy on what the package tells them, or they've seen some advertising. Whereas in on-premise, you walk into an account who don't carry both Fever-Tree and Q, they carry one or the other, or a gun mixer. That makes your share of mind greater in on-premise, especially when they have an established cocktail program. No bartender will pour a tonic or club soda off the gun because it simply comes out flat as it is very hard to have an effervescent mix come out of it. 

{audio:0:07:08} I was just at the TAG awards in Las Vegas and they were doing an Italian cocktail session using Q Mixers for their mixed cocktails in the demonstration, but they had a little container of club soda they pulled off the gun because Q hadn't arrived in time. A bottled mixer is very different to club soda and the club soda was flat. Because the Q didn't arrive in time, they had to fill up the bottle with what the hotel had. What a shame; the Delano Hotel is a beautiful high-end hotel and is still pouring club soda off the gun. It was absolutely tragic because the drink was flat and the club soda had been sitting in this prepped room for several hours. People are not afraid to spend $18 on a great cocktail because when you have a great cocktail, you will order a second one, whereas if you have a crappy cocktail, you will move on to something else. 

{audio:0:08:08} Your original question was is there a zero-sum game, and I absolutely do not believe that's the case. It will not come down to one mixer and you're probably seeing this. You are based back East but if you walk into a mainstream grocer such as Safeway, Kroger, Albertsons or Vaughan's, the mixer set which was only Schweppes, Canada Dry and no name are still there, but the set of mixers has exploded. It is not only Fever-Tree and Q; there are many more brands. In ginger beer that space is enormous and often if there is a growth opportunity, the grocery guys get in the game. 

{audio:0:09:00} Today every grocery chain have their own private label mixer. I don't know who is making them but I'm sure some are made by Q Mixers and Fever-Tree. When you see a lot of private label, you know there's a big opportunity for business there. This is a funny story going back almost three years, but when we gained the ginger beer contract at Buffalo Wild Wings, they became our number one ginger beer customer. Who would have thought the mule would drive that much volume, but they clearly believe in having a better mixer. That is a value driven sports bar and they put in the energy and time to pay a little more to have a better-quality cocktail and drove enormous volume for Q Mixers in that one chain. 

{audio:0:10:14} People who invest in their cocktail program can drive a ton of volume and get consumers to come back and order more. As soon as they leave that bar, they will go to the retail space and buy it because they remember that great experience. There is still a ton of runway in the mixer category, which is very cluttered but many small brands will disappear. We saw that initially when we got into on-premise; there were many small local price fighter brands like Regatta or Bundaberg, which are low quality and have a funky nose, with a low quality and high sugar content, without clean ingredients as we like to call them. They are still out there because some people simply don't care and only want the best price, so there will continue to be space for them. 

{audio:0:11:18} During Covid, consumers had all this time at home and watched live streaming cocktail programs and bartender events and as a result, got wiser. They started demanding more clarity in terms of transparency of their ingredients and what companies and brands are doing. Q Mixers have a very low carbon footprint and have been transparent since day one. Jordan and Ben are very actively involved founders and the marketing team, when we were there, certainly put the effort in to supporting the trade. Your event in Forest Hills was probably trade-driven, and when you get trade behind your brand, it makes your life easier because they spread the word within the community faster than any advertising could.

{audio:0:12:16} That is part of what drew me to this space in general. How did you end up at Q Mixers and what were your primary responsibilities there?

{audio:0:12:30} I got head hunted. I am very good at brand building and scaling brands quickly and honing in on how to rapidly get them from A to B. I did that with many brands in the past, so Q looked to my resume and things I had done. Some brands you may have heard of and others not. One is called Mike's Hard Lemonade, and I'm from Canada so I was on the team. We were in our 20s and created the copy in the back and had a lot of fun with it, then I brought it to the US. Another little brand is Belvedere Vodka; people thought we were crazy and no one would want to spend that kind of money on a fancy bottle. The good news is, when you have a product with a great package and great liquid inside, it is a match made in heaven, so I've done very well with that. 

{audio:0:13:30} Q was looking for a leadership team who also had on-premise experience, and I had luxury brand experience but also some mid-tier. Mike's Hard Lemonade isn't a luxury brand but it's certainly a premium price brand that people had to be willing to pay more for, because we used a vodka as a base rather than malt. Mike's Hard Lemonade, in the US, is malt based, not spirit based. I was recruited and Amy ran the East and I ran the West and we built out an incredible brand. I left after four years and I had accomplished what I had set out to do. We wanted to grow our space from 5% to 50% of the volume we did. As a result of Covid it has probably switched back to predominantly retail sales, but I scaled the brand in the West Coast from 15,000 to a quarter million cases in under four years.

{audio:0:14:40} What are the biggest differentiating factors between Q and Fever-Tree in how they pursue brand image, customers and growth in the marketplace?

{audio:0:14:58} In terms of consumers, it's interesting. Fever-Tree were first to market and many people had adopted it, fell in love with it and had no reason to change. Tonic, ginger beer and club soda are the three big differentiators. Our club soda has a little Himalayan salt in it which adds an interesting dynamic, because salt brings the flavor out in most things. There is sodium bicarbonate and then there is Himalayan salt, which as a finishing salt is more expensive. Chefs cook with sea salt or table salt but often finish their steak or other protein with a Himalayan style salt, something more mineral based which has a better profile to bring out the flavors. 

{audio:0:16:13} Our carbonation is also far greater to the extent that if you put the liquid of Q into a bottle of Fever-Tree, the Fever-Tree bottle would explode. When you're making cocktails, it's important to have an effervescent cocktail, because ice weighs down a cocktail and so do some of the heavier brown spirits, and carbonation lifts the liquids up. The trade who understands about making great cocktails saw that as a huge differentiator with Q versus Fever-Tree. 

{audio:0:16:45} Our packaging appeals to some, but not to others. It is fun, colorful and very descriptive. People look at Fever-Tree as a very dull, boring package and when you're in a bar, all the colors blend together. When you have a speed to service, you often grab the wrong mixer on the Fever-Tree case whereas Q didn't. Q put attention to detail and that was all due to Amy and I. The caps use different colors and have branding inside, and our package colors are different. We had twist off tops so that you can reseal the bottle whereas Fever-Tree never had that. All these little differentiating factors to the package made a difference. What was the third question you asked in terms of differentiating factors?

{audio:0:17:37} Are Fever-Tree and Q seeking growth through different paths?

{audio:0:17:43} There are many similarities, and both of them want to win the trade over, because once you do, you also win the consumer. Their road to market was very similar. Some of the top mixologists have moved away from Fever-Tree and support Q. Tony Abou-Ganim is one of the most reputable mixologists and he just had a fabulous TAG awards in Las Vegas that he executed with his two partners. It was 100% exclusive Q Mixers, with no Fever-Tree in sight. Fever-Tree consumers are older and they were established in Europe before coming to the US, whereas Q Mixers spent all their time focusing on North America, winning their back yard first. 

{audio:0:18:40} Culturally in Europe, the soda gun is uncommon, so Fever-Tree won quickly because they're used to drinking little bottles of soda and/or mixers. In the US, the soda gun is predominant because we're a Coke or Pepsi culture, whichever your poison is. Bigger and more is better, the 7-Eleven Big Gulp is a culture that is unique to the US. It was difficult to convince many bigger chains, who can get tanks or bags of flavoring and add club soda which is pennies on the ounce for a mixer cost. For a cocktail that is five to 20 times that price, is it worth it to the on-premise account to increase? It is quick math, a nickel or 25 cents added to your drink cost for a better cocktail and repeat purchase. We can sell anything so you simply determine your messaging to the buyer and convince them why to charge more or buy more. 

{audio:0:20:05} The route to market in the three available channels of on, off or chain, is the same for Q and Fever-Tree. Direct to consumer was something Q never developed. They could have during Covid where you buy off the website and there's a reason to do it and create a following. Q has done a ton of social media which is incredibly important because that rose to the forefront in ecommerce during Covid. They promote low carbon footprint and buy American. The glass and cap are produced in the US, whereas Fever-Tree ships from Europe, although I know they recently put some plants in the US and are also speaking to that low carbon footprint.

{audio:0:21:03} That's definitely something I'll ask about, but curious more on establishing some of the compare and contrast between the two. What are some of the foremost differences in pricing strategy and how do they think about it relative to each other?

{audio:0:21:19} They are pretty much line priced in the marketplace. Initially, the club soda on Q was lower than other expressions, but they became line priced. Both have taken the route to have club soda lower priced because the cost of goods are lower, even though Himalayan salt costs more. Our ginger ale in Q uses rose oil which is one of the most expensive ingredients available, but it adds a beautiful floral and depth of flavor on the palate, so it was worth investing in that. The pricing is virtually the same but the packaging was critical. Q was half an ounce less, using smaller single-serve bottles, whereas Fever-Tree was two serves per drink. They also moved over to 500 ml faster than we did. We came out with cans ahead of them but we went with a four pack and they went six or eight pack and their price was lower on cans. 

{audio:0:22:34} With the cost of aluminum during Covid with all the RTDs and seltzers out there, I'm sure the costs have gone up considerably. We had a 750 ml but they didn't, and I think Q could have put more energy into larger volumes. A lot of on-premise would like to have a liter or 750 ml, rather than using smaller bottles, but when consumers sit down and are presented with a small bottle with their cocktail, poured table side, it creates theater and drama which makes a difference in the account. Since on-premise has been shut down for so long, that is no longer a selling feature because it was all cocktails to go and the shift back to retail purchases. I don't think the pricing strategy was necessarily that different between either one.

{audio:0:23:38} How about marketing strategy? I'm more familiar with Fever-Tree who don't spend anything above the line in the US. In the UK, they do some. I'm curious about how and why they are partnering with spirits brands and not really trying to do more. What did you think in your seat about the contrasting marketing strategies?

{audio:0:24:02} Fever-Tree has put more money into PR and event execution which I truly believe is a very good strategy. Having more events allows your consumers to taste and touch and you can talk to them, which is far more impactful, especially when you're a modifier. We also tried to do that at Q but Fever-Tree were more successful at it. I am currently doing it with my bourbons and whiskeys, trying to partner with Fever-Tree as I'm in a different house than Q, who are with RNDC and I'm with Southern. 

{audio:0:24:53} Leveraging the power of all the advertising on the big spirit brands is very economical. They lean into mixers because it's a great way to use that as a discounting strategy, as opposed to discounting their spirits. When you bundle products together, when you buy a case of Maker's Mark, you get a case of Fever-Tree at a discounted price. You discount the mixer, not the spirit, because people want to keep price integrity on the spirit side. Charles Gibb and I worked together at Moët Hennessy, Belvedere and at Chopin, and he is now the president for North America at Fever-Tree. He definitely leans into the right events and builds brands that way. He is also a star struck celebrity guy, so I'm surprised he hasn't latched onto more celebrities to help promote Fever-Tree, but perhaps his PR specialist who is heading up marketing is keeping him on track with doing event strategy too. At Q we spent a ton of money on supplying free and gratis, which is completely legal to provide product for events where people can taste and fall in love with it, then they demand it on-premise and/or walk into retail stores and simply purchase it.

{audio:0:26:26} Can you explain how the bundle works where you combine it with Maker's? Who would make the price concession to discount the Fever-Tree in that package?

{audio:0:27:02} There are three different ways to do that. One is at the distributor level, so typically you would bundle a case of 24 bottles, or a different configuration if you were cans, because Fever-Tree is a different configuration than Q. When a retailer and/or on-premise account buys their case of Maker's, instead of paying $25 for that case of Q or Fever-Tree, they get it at a discount, whether it be half off or the whole thing for a dollar. The cost of that discount is split between the spirit and the mixer company, and goes out to the buyer or retailer, on or off-premise, with that discounted price as a bundle, which they call a combo. 

{audio:0:27:59} When ecommerce started to heat up, when you're shopping online and you get your bottle of vodka drops down a Tito's, the suggested image would be to get your four pack for a dollar instead of $9.99, which would be subsidized by the two brands. There are several ways to do it, depending on the state, because they all have different liquor laws. I did a lot with Forged Gin and Q tonic. You buy a Forged Gin 750 ml and get a four pack of Q tonic for a dollar instead of $6.99. Instead of discounting Forged Gin from $29.99 to $25.99, they put that on the mixer cost.

{audio:0:28:58} The incentive of the spirit company is to maintain price integrity on the actual bottle, though they do pay out of pocket, so is it simply a money illusion?

{audio:0:29:14} Exactly, and you are also serving up the occasion to make a cocktail quicker. I had a lot of fun with the Forged Gin ladies, because people often buy their gin out of the liquor store and their mix from the grocery store. Here they get their gin and mix together in the store, and could make that cocktail as soon as they get home.

{audio:0:29:48} From the perspective of the mixer company, they get some rub off the halo of this premium spirit and introduce people who may not have been inclined to do so?

{audio:0:30:01} They would have grabbed Schweppes tonic because that is all they knew, then all of a sudden that fabulous gin and tonic tastes that much better. It's a trial opportunity for us. Instead of doing demos in store where you're only tasting our product, we would often pair with a spirit company and make a mini gin and tonic or Moscow Mule; pardon the pun right now but a Texas Mule or an LA Mule. People would taste our mixer with a cocktail right in the account and we would get an increased purchase where they would have gone to the mixer set and their innate tendency would be to buy a Schweppes, Canada Dry or horrible Goslings or Bundaberg ginger beer. They try it and it's on the spot. Most people go into retail liquor stores to buy spirit; their intent isn't to buy a mixer. We want to leverage that occasion of buying spirits with the mix to force that habit.

{audio:0:31:10} That makes a lot of sense and seems smart. Do you think of RTDs as competition or opportunities for mixer companies? Are they stealing share from the seltzers, Mike's and beers of the world, or are they taking share from other drinkers?

{audio:0:31:38} That is a really good question which I don't have the answer to. I have a gut feeling but I have not looked at Nielsen, CIP or the IRI data in terms of scan in grocery, but we tried to encourage Jordan and Ben to think about going after spirit companies and creating an RTD using our mixer with Q branding on it. Believe it or not, cans are far more fragile than glass. If you stack cans of RTDs, the carbonation is high pressure and if you break any of the cans in the pallet, it will damage the entire pallet, so they didn't want to get into that game. They always wanted to focus on glass versus cans as it was a better representation of the brand. The PSI in bottles is much higher than in cans. This was on the Q side, and it's probably the same with Fever-Tree, although their PSI is much lower in bottles. 

{audio:0:32:56} That will naturally erode because you see that Tanqueray have a G&T and all through Covid people came to my house with canned simple cocktails, like a vodka and soda or a gin and tonic. I would laugh telling them I have a mixer here, bring the spirit, but surprisingly it's a convenience thing. People only want to drink two gin and tonics in a RTD can. You are holding it and it's convenient, you don't have to worry about mixing it and it's perfectly balanced in their mind. The majority of people still don't know how to make a simple highball because they don't know the proportions. They pour in gin and mix, but don't know the ratio, so RTDs in simple mixed highballs, will erode the volume on the straight mixer side. On the flip side, it could have got more consumers away from beer and wine and think more about highballs, and all of a sudden, they are looking to get a better mix because they are experimenting with gin and other spirits. I haven't thought about the erosion of that because it hasn't been top of mind while I launch and build a bourbon brand.

{audio:0:34:28} Fever-Tree and Q don't want people to have an association with a particular brand of alcohol, so is there a risk they don't want to partner with someone on an RTD because they cannot have every brand of mule?

{audio:0:35:07} You want to be androgynous, yes.

{audio:0:35:10} Is that a problem and how would you think of that working with whiskey?

{audio:0:35:18} I will partner with a good mix, but depending on which house I'm at, it's political. It also depends what the account is pouring. We want our brand to stand out more than the mix but at the same time, mules are still a popular cocktail and ginger beer from Fever-Tree versus Q is drastically different, so it will affect the taste. Depending on who I partner with, it can drastically affect the experience the consumer has in the bar situation, if they're using an inferior mix. Often when I'm trying to sell in a cocktail program, I try guide the mixer choice to affect that profile, but you can't always do that, as many people drink whiskey/bourbon neat. Tequila and other white spirits are the most mixed, such as vodka, gin and white rum.

{audio:0:37:07} Fever-Tree's sparkling grapefruit was their most rapidly adopted new launch ever, and they'll cite the innovation behind it but I know Q beat them to market, but either way I find it interesting that Schweppes don't have that. Palomas seems natural but how much more opportunity is there to expand for the premium mixer companies?

{audio:0:37:43} I was quite shocked when I saw Fever-Tree late to market; when they finally did, they were sold out all the time. People love a grapefruit and most people don't carry it in their account, so it provided a stable solution for the Paloma. Fever-Tree will help a market where two mixer brands are trying to promote the Paloma. The Margarita is still the number one US cocktail, but a Paloma is far more refreshing, has less grams of sugar and is more palatable. Many people get acid indigestion after too many Margaritas because of the lime and salt. It has become seasonal whereas a Margarita is a year-round cocktail, even though it does best in the summer and spring. There's a lot of room for Palomas and I see them on cocktail menus all the time, not only in warm climate states.

{audio:0:38:50} I like the grapefruit quite a bit to be honest; it's interesting.

{audio:0:38:56} Seeing many flavored ginger beers coming out is interesting. I know Q launched their hibiscus and several ones, so I think they see the ginger beer as a great line extension. Fever-Tree took tonic water as their lead extension and have multiple types of tonic water, whereas for the longest time Q only had tonic water, then quickly added an elderflower tonic water which has a very small market share. People either like it or they don't; it's an alienator but I think it's beautiful and refreshing. The gin space has gotten very aromatic, so the last thing you want to do is bring on a mixer which is fighting for the aromatics with the gin.

{audio:0:39:56} Fever-Tree were born in the UK where tonic is the main thing.

{audio:0:40:05} People drink tonic water for all sorts of reasons, even arthritis.

{audio:0:40:12} Because you get natural quinine instead of the chemical stuff.

{audio:0:40:14} Yes, it's medicinal and I know Jordan has an incredible real quinine source which is important because of the health benefits.

{audio:0:40:26} That's one of the things that piqued my interest in the space when I went to visit my mom for the first time during Covid. She can't drink alcohol and had a fridge full of Fever-Tree and drank it for the quinine. I was like, do you know what quinine is?

{audio:0:40:43} Yes, it's for the healthful.

{audio:0:40:44} Is there room for premium mixers to take more share in the carbonated soda space? Most ginger ale is drunk outside of alcohol companionship; is there a legitimate chance with the focus on natural lower calorie, that these companies can increase their penetration?

{audio:0:41:15} 100% and you're speaking to the US market, so remember Canada is a smaller market base but Rye & Ginger is their top selling cocktail, whereas ginger ale is not such a big product down here. Ginger ale is huge and Jordan spent a ton of effort and time getting the combination of his ginger ale right. It's one of the hardest mixers to make because there are so many components including rose oil and lime. When you get a ginger ale right, it's like the holy grail. Young Millennials are drinking 50% less alcohol than my generation, which is scary for a person who is in the alcohol business. They are doing this because of the health benefits. The explosion of cannabis has given people a different way to sedate themselves. Alcohol brings you down and relaxes you, and so does cannabis, and you're seeing an explosion in the non-alcoholic categories, like the Three Spirits of the world, Rituals and Lyre's, who try to provide an uplifting relaxation experience and not a sedative one that brings you down. 

{audio:0:42:49} Agave spirits have an uplifting sedative effect so it's a different type of high you get from spirits, but it's really concerning that this younger generation are looking for more healthy beverages because they may use cannabis as a way to relax, but still like the ritual of holding a drink while they're out socializing with people. People are bored of drinking sparkling or flavored sparkling water and want something else. That is why the kombucha craze has gone crazy. Kombucha cocktails are fantastic, especially with agave spirits, but people are looking at that alternative space; healthful beverage with healthful benefits and low grams of sugar. 

{audio:0:43:29} I noticed that Q launched several brands with high grams of sugar, which is a shame. I don't know why they're doing that and think it's a disservice to the brand DNA. We were always promoting very low-calorie content and very low grams of sugar, which appealed to many people, but they have gone a different direction. The entire team who started with me are no longer there, so it's obviously part of the new marketing team or the brand DNA team. I think using mixers as an everyday drink, or people putting tinctures and shrubs into cocktails now, and tonic and club soda are great bases. I'm Canadian and we don't drink soda like Americans do. I'm shocked when I sit down and people drink soda for breakfast, lunch and as a snack. The only bubbly water I have in my house is Q Mixers; we don't drink soda as a family at all. Bubbly mixers will always be a part of US culture and people's drink space.

{audio:0:44:57} It's interesting to think it could be a much bigger opportunity than meets the eye if they truly capture that. I went to a lunch event where they had little bottles of Coca Cola and Fever-Tree ginger ale and I was shocked because I didn't expect to see it in that context. The company is rather coy about their potential to broaden beyond alcohol companionship.

{audio:0:45:22} When on-premise starts opening up, people will choose their spaces based on that. People have been home doing their own thing and want to be entertained and have great service and cocktails. Because people are making cocktails at home, based on what they think is great, when they go to great bars and restaurants that have a proper service – which we used to call Perfect Pour or Spectacular Serve, where you would have your prepared cocktail and they top it up with club soda to make it dramatic and create that theater effect – you will see a lot more of that and consumers will demand a better cocktail experience.

{audio:0:46:06} For how many years could the premium mixer space continue to grow?

{audio:0:46:19} That's a bit of crystal balling, isn't it? The aperture is currently small but it has so much more opportunity. Before I left, I started to open up my B and C markets, and there were so many accounts that no one was speaking to in these smaller states who were creating great cocktail programs. Switching from a gun to a bottled mixer, or people who use Schweppes that don't have a gun, they are paying pennies per ounce and now you want to charge them 30 cents an ounce for a better mixer. That is a conversation no one wants to have. It is laborious and the decision-making cycle could be as long as six months to a year. 

{audio:0:47:30} When you're selling a spirit, they simply add another whiskey or vodka in their back bar. People only bring in one club soda, one ginger beer and one tonic, so the decision-making cycle is longer. There are so many markets who are only catching up to the coastal states who are so much more advanced with their cocktail program. Hawaii was one of my territories and I visited beautiful five star resorts whose average room rate was between $500 and $1,000, but they were serving Schweppes on the gun. In those places, people don't care if the drink costs $20. They want a great drink, so why wouldn't you put that effort into your cocktail program as opposed to the type of towels you choose around the pool or the chef you have on board. 

{audio:0:48:31} There are so many similarities and it was completely untapped. Hawaii was one of my smallest markets and it should have been the opposite. Eventually, with the influx of Asian culture, the Japanese whiskey and Toki's Highball, they love Q Mixers. I used to send pallets up to Seattle to the Suntory team for their events because they refused to use Fever-Tree club soda and loved the Himalayan salt in ours. Today Toki is on tap and they have perfected a highly carbonated tap service in their Toki Highball program. I'm sure Q lost a lot of business with that partnership. There are tons of markets who aren't nearly as sophisticated as California and New York. Night clubs haven't embraced it. The whole bottle service, when people start going back and doing bottle service, having bottled mixers as opposed to on tap liter tonic and club soda. 

{audio:0:49:29} You spend $500 on a bottle of vodka and you give them a dollars’ worth of club soda; why not give them $4 worth to make a more impactful beautiful cocktail? You're providing that theater and have a bottle service hostess pouring you an ounce of vodka with a beautiful little bottle of club soda. People will have a better experience and it's all about image. There are so many bottle service clubs who aren't at that level yet, and that is driving a ton of volume which is completely missed. If I was back in that space, I would put a lot of effort into the night club space.

{audio:0:50:05} There's an opportunity to re-engage because I think is approaching things from first principles now that the world is coming back and maybe the gun looks a little grosser post-Covid than it did before.

{audio:0:50:17} Especially when people start looking at what's inside. We had a great campaign which was like, have you looked inside your gun? I haven't sold beer in years but it's critically important for fresh beer to have constantly cleaned beer lines to have that great experience of fresh, especially wheated beer, but soda guns are never cleaned; it's pretty disgusting.

{audio:0:50:51} Fever-Tree reported earnings this morning saying they took considerable share from Q over the Covid period. They said that in stores where they have the same listing and the same number of SKUs, they're getting a 60% to 90% greater sell through. Why has Q lost share to Fever-Tree and what is driving market share there?

{audio:0:51:29} The grocery team that Q had was terrific but they eliminated/replaced them and our alcohol business is all about relationships. Fever-Tree has a bigger sense of urgency and a bigger footprint on shelf. Southern is an incredible dominator in the space of chains and our channel on/off versus RNDC, and Q aligns with RNDC and Breakthrough, who have a fragmented distributor network, whereas Fever-Tree aligned with Southern, who has the largest continuous distributor network. 

{audio:0:52:30} The way Southern runs their business is that the more states you have, the more power, programming, support and push through you get. It may sound silly, but there is some weight to that and Southern can make or break a brand. They have strong relationships and remember there is one buyer for AVP or Kroger, and if there's a really strong relationship, they will simply leverage that. They have Beam Suntory, Pernod Ricard, Bacardi, Diageo and Moët Hennessy, all these big brand spirit portfolios and will force things in telling Mr Grocery Chain Buyer he will get all this support for all these different things but Fever-Tree comes with that package and have done a tremendous job leveraging that.

{audio:0:53:29} Southern only got the pieces in place to push this strategy right before Covid, so we started seeing that as time passed and things have normalized slightly.

{audio:0:53:44} A couple fun things that Fever-Tree did which I thought were really great. They had a pop-up Fever-Tree bar in Bryant Park and did some whimsical things like that. They have leaned into their British heritage and Charles Gibb is very actively involved on LinkedIn, doing interviews. They have an incredible PR team, whereas Q never had a strong PR team. Jordan is very talented but he's also disruptive when he's in front of buyers and has a sense of place. Buyers are old school and have been in that role for a long time, and sometimes we have to make a choice. Are you going to lead with Fever-Tree or Q; pick one or the other. 

{audio:0:54:42} Fever-Tree have gained a lot of share, knowing that the four years I was there, we ate Fever-Tree's breakfast and it got noticed. Charles was given a mission to come in and gain market share. He ramped up a ton of staff and they've always had far more staff than Q ever did. We wanted to invest more in on-premise and Amy and I and Yuron were the three musketeers running the campaign programming and they brought in some chained grocery people and cleaned the grocery team out. They brought in a guy from a water company who leaned into grocery too much and they thought they had built enough momentum on-premise, but you have to constantly feed that beast. Fever-Tree will not step down and they obviously have a lot of investment and strong leadership. Q has to give them a run for their money but the packaging and their ingredients are very different. They both have the same trade approach, which is feed the trade community and get those bartenders on board in supporting your brand. They have to continue feeding that because out of sight is out of mind.

{audio:0:56:28} I was surprised how much this has to go through some of the traditional liquor channels, more so than the supermarket ones in many ways.

{audio:0:56:37} That's one thing that they did very differently. The chain grocery team go through a broker system called UNFI. They are organic brokers because the margins are much lower, whereas Fever-Tree went the traditional distributor route. So if you want to get to grocery, Southern will sell to Safeway bundled with spirits, whereas the only chain that was in the Q side of the business was traditional liquor chains due to the nature of the business. AVP, Safeway and Costco all went through brokers, so there was no leveraging of spirit portfolios, so very different routes to market on the grocery chain side, which played into what happened during Covid.

{audio:0:58:34} Do you think Fever-Tree will be able to get similar gross margins in the US as they currently do in the UK, which is 50%? Is that realistic here?

{audio:0:58:50} It depends on their contract with Southern who demand a fairly healthy margin. It's 30/30 which is common knowledge, so you give them your FOB and they take 30 and the retailer takes 30. Q went the broker model which demands anywhere from 10% to 15%, as opposed to 30, so they had a little bit higher margin there, but at the same time, retailers are still asking for their 30% to 33% at the shelf. The other piece to it is the RNDC network. We tried to convince them to work on dollar margins, but they still demanded a high dollar margin, and that's because Fever-Tree chose to work with Southern so they will not have as wide a margin opportunity as Q did because of the route to market broker versus liquor distributor. 

{audio:1:00:02} Q also went against some of the leadership decisions Ted made, was that they put a lot of money in on-premise national accounts. They went to Darden and Buffalo Wild Wings and to their DTCs, the distribution centers and ship direct, which you can do as opposed to going through a broker and/or distributor. There is no way Southern would allow that. They won't be able to make those deeper margin breaks Q did by going that route. Darden is the largest national account with multiple banners under their umbrella, and they ship directly to their DTC, then Darden ships to their different franchise locations.

{audio:1:00:52} Fever-Tree is doing some direct ship to large accounts like Total Wines.

{audio:1:00:59} They go through a distributor; they do not go direct.

{audio:1:01:02} Will set me up with the head of procurement from Total who I spoke to on Monday.

{audio:1:01:09} Are they going direct as opposed to through Southern?

{audio:1:01:11} They're going direct to Total, and I was very surprised by that too; does that tell you something about their clout?

{audio:1:01:24} I'm thinking about this too because I'm a rectifier and can ship direct to accounts in California, if Southern isn't performing for me. I have no problem making an agreement with an account to ship direct because Southern has become such a monolith, maybe that's not the right word. I'm making some assumptions here but Fever-Tree probably went to the leadership team at Southern and said, we want you to work on 10 points versus 30 to get the Total Wine business. They probably replied with, how about a mixed margin of 20 or 25, and then they can go straight to Total and say I'll sell it at this, but I want all your stores and an end cap. They save that huge chunk, 10% right off the bat by going direct to Total, so that's news to me and good for them. I have to look to see if they got the spirit direct or they have different tags for brands that go direct to Total.

{audio:1:02:35} Is there a way I could see that spirit direct?

{audio:1:02:40} Yes, when you go into a Total Wine store or search online, they'll say spirit direct or source direct, and that will tell you whether they're going direct or not. Costco is another opportunity I'm thinking about too. Costco is easy because they buy big and work on small margins of 8% to 10%. They will take direct all day long and you can make some decent margins. Southern has to start thinking about this now. I was out last night with the head of pricing up here in Northern California, and even with friendships, I can barely get down to 25 points. They are always looking at ways to grab more margin, yet they bill you back for everything. Mean split cases is a cost center for them and they are grabbing money all along the way.

{audio:1:03:36} Any parting thoughts on the general conversation? Anything I should be thinking about and looking at as I keep analyzing this space?

{audio:1:03:50} You have to look at the new competitor sets out there including celebrity brands like Betty Buzz and a bunch of others. It sounds like you're on the investment side which is interesting because I've been looking into how I can get onto some boards and help people. I am at the sunset of my career now and there's a lot of information out there so it's about trying to weed through it all. Thank God for IRI, though there are many states who don't report, so you have to get the information directly from the brand. 

{audio:1:04:47} Jordan and Ben have turned down many offers already, and have great investors, one in the grocery space and a French company, but they're looking for the right fit and exit strategy. You obviously have a lot of interest in the Fever-Tree space and they are doing a great job. They need to package refresh like nobody's business, especially differentiate on the on-premise side. Charles is smart and he knows what he's doing, so he'll figure it out.

{audio:1:05:44} Thank you so much, I appreciated your time and enjoyed talking.

Fever Tree US Competition

Fever Tree

Fever Tree is a founder-led beverage business that sells premium mixers such as tonics, ginger ale, and club soda. 

Over the last decade, two tailwinds have fuelled FEVR's ~50% revenue CAGR: premiumisation and spirits winning share from beer and wine. The company defined the UK premium mixer category which accounted for 43% of all mixers in H121. In the US, the premium segment is only 10% but is growing at ~3x the total mixer market. 

In 2018, the company launched a national distribution agreement with Southern Glazers, the largest spirits distributor in the US. Fever Tree focused on building the brand equity with premium spirits companies in the on-premise channel and has the longest and deepest relationships with companies like Diageo and Pernod. 

Fever Tree is a beverage company that operates closer to a premium spirits business with 30%+ ROE, deep distribution agreements and high brand equity in both channels that provide high barriers to entry for competitors.  

Fever Tree US Competition

Former VP at Q-Mixers

inpractise.com/articles/fever-tree-us-competition

Fever Tree

Why is this company interesting?

Executive Bio

Former VP at Q-Mixers

Interview Transcript

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