{audio:0:00:01} A pleasure to have you with us, Scott. Can you take us back to the moment when you first started distributing Fever-Tree at Southern Glazer’s? Maybe you can share a bit of context to the agreement and set up that you have with the brand?

{audio:0:00:23} I started representing Fever-Tree in 2016 and that coincided with the time that Southern and Glazer’s merged and also the time that we did the new agreement with Fever-Tree. Basically, it was July 2016 and that when I picked up my first experience with Fever-Tree, right at the outset of our company’s merger and the injection of Fever-Tree into our relationship.

{audio:0:01:01} This is an on-prem distribution agreement, between Southern and Fever-Tree?

{audio:0:01:08} On-premise is a big driver, but we also represent the brand in the off-premise, as well. Not exclusively, in the off-premise, but we represent it in any of the off-premise accounts, where we sell the brand and that we also sell spirits.

{audio:0:01:30} When these distribution agreements are signed, is there any exclusivity with the brand? What are the responsibilities and terms that Southern has with a brand like Fever-Tree?

{audio:0:01:49} Because of the dynamics of the US market, every state is a little bit different, with regard to how spirits are sold. But as far as the Fever-Tree brand is concerned, we do have the exclusivity in the on-premise arena, for any licensed accounts for spirits. Typically, in the majority of states, we have that same agreement if, in the off-premise, those accounts are licensed for spirits, then we have that exclusivity. It does change a little bit as you get into these larger, national chains, such as things like Walmart, Kroger, large grocery channels. At some point in time, those chains determine that they want to buy direct from the supplier, on a non-alcoholic product. In that kind of situation, the business would migrate from Southern Glazer’s to a direct relationship between that chain and Fever-Tree.

{audio:0:03:00} But you wouldn’t take another mixer, in your portfolio, now you have Fever-Tree? Are you bound by exclusivity to take another premium mixer?

{audio:0:03:12} Prior to taking on Fever-Tree, we really didn’t have any kind of consistency across our markets of the brands that we represented. It was a locally-driven decision that people would pick up different mixers that made sense for their particular market. We were not required to divest any of the mixers but from a corporate direction our priority, particularly in the premium mixer category, is exclusively on Fever-Tree. When my boss, when our company, are asking what’s going on, we have specific goals that we’re tasked with, for Fever-Tree and that’s not the case with other brands that we don’t a national alignment with.

{audio:0:04:08} We don’t look for additional brands, because we feel that Fever-Tree is the right fit for us and the right category for us. We’re not entertaining looking at, as an example, to take on distribution of Q.

{audio:0:04:28} How do you look at Fever-Tree, as a part of your portfolio, with the spirits that you have?

{audio:0:04:35} Fever-Tree is a complementary item to our core business. Our core business is the distribution of wine and spirits. Obviously, Fever-Tree is a non-alcoholic item that is consumed, almost exclusively, with spirits, in a cocktail. It’s tremendous, very profitable; it’s an add-on for us. It’s something that helps with our teams and our sales consultants, calling on accounts, to develop drink menus with high-quality products. The beauty of Fever-Tree is that it aligns with all of our spirit brands. Regardless of whether we’re pitching an account on Tito’s Vodka or we’re pitching an account on Tanqueray gin or an account on Absolut vodka, we can align Fever-Tree with any of our supplier partners, in the spirits world.

{audio:0:05:36} Would you say it increases the amount of spirits that you sell?

{audio:0:05:46} For us, it helps us, as far as building a more important relationship with the customer, because we have the spirit business with them. If we represent Tito’s and that customer wants Tito’s, they have to get Tito’s from us. But if we’re able to provide them with an answer for a high-quality mixer product that their consumers are going to love, then that just makes us more important for their overall business. It does provide an opportunity where we can use Fever-Tree. If they’ve got a core list of drinks, where they have 10 drinks on that menu, and maybe six of those drinks use our spirit brands and the other four are with our competition, but we can still secure Fever-Tree in those cocktails, with our competitive brands. That does give us an opportunity, as we continue to build that relationship that maybe we can knock off a couple of those competitive brands, with brands of our own.

{audio:0:06:58} Can we just walk through the process of distributing a product, like Fever-Tree, with the other spirits that you have, in your portfolio, to on-prem accounts. If you could talk about different approaches that you have to restaurants and bars or whether you group them as the same and then what that strategy would be?

{audio:0:07:23} First and foremost is to educate and train our sales force on the Fever-Tree portfolio, so that they know everything about the product. How the product is made, the attributes of the product, the taste of the product, so that they are very knowledgeable about Fever-Tree. They already have the knowledge on the spirit brands, and we continue to upgrade that knowledge, as well. But it’s critical for them to understand the Fever-Tree portfolio. Once we have that knowledge and they’re calling on the gatekeepers, the buyers, in the on-premise accounts, they’re working to develop cocktails and utilizing the Fever-Tree products, along with our spirit brands.

{audio:0:08:16} Particularly in the on-premise world, despite the fact that you do have national chains, you have a high percentage of independent accounts. It’s a sales tactic for each individual account, where you’re having to make this presentation, show the features and benefits of using Fever-Tree and then to drive that customer to be a Fever-Tree commit. You get a commitment from them and utilize that portfolio. It’s all done at the account level, with our sales consultants driving that distribution.

{audio:0:09:00} So your sales guys will know the drinks that that account would normally have on the menu and then the sales guys would come in and say, right, you can use Fever-Tree in this manner or this part of the portfolio here and there, in this drink and then upsell Fever-Tree to the account?

{audio:0:09:16} Correct. As an example, what you’re doing is, you’re trying to find the target you need, at first. Initially, for us, with Fever-Tree, we were targeting exclusively the premium end of the on-premise accounts. Because, certainly, the price of the product is considerably higher than Schweppes, as an example, which is predominantly used. In this day and age, with the newer consumers coming into the market, they are a lot more concerned with the overall drink experience and not just the quantity of drinks or how cheap the drink is and how many they can buy. They’re going to drink a little bit less, but they tend to drink better.

{audio:0:10:04} When I grew up, you were ordering a gin and tonic or a vodka and tonic and you’d utilize the well brand. Now, people are requesting their favorite brand, whether it be Absolut or Grey Goose or Tito’s, along with the tonic. With this premiumization of spirits, it really didn’t follow in the mixer category. Now we’re finally seeing that people are looking for a higher-quality mixer, something that is perceived as very natural and high quality, in taste. That’s an opportunity to upsell to the customer, so rather than selling the well drink, for a cocktail, they can sell a premium drink, off their cocktail menu. Obviously, the cost of the ingredients is higher, but the financial return for that customer is higher, as well, because the price of the drink that they are selling is significantly higher.

{audio:0:11:08} Are you seeing changes in the consumer behavior, then, of the US drinkers, in terms of actually demanding a specific premium mixer?

{audio:0:11:24} It was not driven by the consumer; it was driven by the gatekeeper. You’ve got the bartenders and the mixologists that are continually looking and trying to craft the best drinks they can, for their customers. It was really driven by those individuals, looking for better products, that would make their drink taste better. We could go in and help them create drinks, with Fever-Tree and with our spirit brands and it was a product that tasted better than what they were using for their mainstream, whether they were using a gun or just out of the bottle. We’re looking at just trying to upsell the whole experience and the taste and profile.

{audio:0:12:14} It was really driven by the gatekeepers, but the other side of that is that the consumer is more open to spending at a higher rate, per drink. They were already used to drinking a higher rate on their vodka, their whisky, or whatever they were drinking, but if you could show them that they were going to have a better tasting drink, that’s what they were looking for.

{audio:0:12:48} What, exactly, is the pitch to the bartender or the account? As you said, you get a better tasting drink but it’s also more expensive. How do you see the bartender has that trade-off or makes that decision, between spending more but valuing the better experience and the drink?

{audio:0:13:09} As an example, in the US, if a well cocktail was selling in the account for $4 and say they were making $0.75, in penny profit. If you could take that and sell a cocktail that they sold for $8, their percentage margin might be less than it was on the low-end drink, but their penny profit would be considerably higher. So instead of making $0.75 on a drink, they were making $1.50 on a drink. But in order for them to do that, they have to make sure that that cocktail tastes better than the $4 cocktail. The reality is that, particularly with something like vodka, where the definition of vodka is that it’s odorless, colorless and tasteless, if you you’re drinking a well vodka with Schweppes, it tastes this way and if you drink Grey Goose with Schweppes, it’s not going to taste much different, because the taste that you’re going to get is the tonic. By using a better tonic, you acquire a better taste on the overall drink.

{audio:0:14:39} It’s a little different with whiskies and things like that, because there is certainly more flavor in those products. But it’s the same general gist. If the product is a better-tasting product, it’s going to make a better-tasting drink.

{audio:0:14:56} Are you seeing more mass market or less premium accounts, now opening up to Fever-Tree, especially as they are reducing their prices now?

{audio:0:15:11} Yes. It’s like anything, when you start out with a premium brand, you’re going to target that upper end of your accounts. As the brand becomes more recognizable, and more accepted by the consumers, then you can begin to drop down. When you’re talking about accounts like a shot in a bar, the quarter in a blue-collar area that is using a gun, there’s always going to be a place for those type of customers using a gun, in the US, because they are not selling premium spirits. There’s not going to be a need for them to increase the base price of their drink, by just adding a higher-priced tonic or ginger or club soda.

{audio:0:16:02} But if the customer is selling premium spirit brands, there is an opportunity then, for Fever-Tree.

{audio:0:16:12} How does the co-merchandising work with Fever-Tree? Is it specifically with the spirit brands that you carry or is it also with Southern Glazer’s?

{audio:0:16:23} For the co-merchandising, there are a lot of things through our relationship, where we can introduce the Fever-Tree people to the large spirit suppliers. Fever-Tree has done a tremendous job of aligning with a number of our large spirits-player partners, such as Beam Suntory, Pernod Ricard, Bacardi and Patrón. They’re doing some national programs and being involved in the point of sale. A lot of the co-merchandising works, more so in the off-premise sector, where you’ll have a package that sells a bottle of Grey Goose and a bottle of Fever-Tree club soda, or Tanqueray and Fever-Tree tonic, where you can do co-merchandising packing.

{audio:0:17:22} But in on-premise, when you’re talking about printing on the menus and getting the Fever-Tree logo on the drinks and when you have that tie-in relationship, with somebody like a Beam Suntory or a Bacardi, that’s just an additional sales source for Fever-Tree. When there are people that are also working with the national account buyers and things like that, they’re not only pitching their spirit brands, but they’re pitching Fever-Tree, because of the co-merchandising relationship that they have.

{audio:0:18:02} How important do you think the relationship that Fever-Tree has with the spirit brands is, to the brand itself?

{audio:0:18:15} I think it’s very important. I think the beauty of it is, is that they don’t have to be locked into one customer. They can work across all categories and all suppliers. They have some national relationships but we also work local promotions that we do, with a supplier that may be strong in one particular area of the country, but not something that they have a national relationship with. Since the brand is consumed, predominantly, with spirits, I think it’s very helpful to have that relationship with these spirit brands.

{audio:0:18:59} You mentioned, earlier, that you have targets or KPIs that you hit, as a corporation, for brands you have. How does that work, across your portfolio?

{audio:0:19:12} We have a number of suppliers that we represent, across the country. We have a set number of companies, what we call our national alignments, with Southern Glazer’s. If you’re in a national alignment with Southern Glazer’s, then you’re prioritized in our business. You’re prioritized in the goals, the number of programs that will run and things like that. As an example, if you’re just a mixer company that we have in four states, you’re not going to get anywhere the attention that Fever-Tree does, where it’s with us in 26 states.

{audio:0:20:03} It’s the same way with our spirit suppliers and our wine suppliers. The bigger the footprint that they carry with our company, the higher priority they will be, in our company.

{audio:0:20:18} How do you incentivize your staff to push Fever-Tree correctly or pitch to them correctly? How does that work in a practical sense?

{audio:0:20:45} Our general compensation package for our sales people, is a combination of a base salary and then compensation is based on KPIs and that’s a mixture of the different supplier brands that we represent, in the marketplace. They’ll have a KPI against the Fever-Tree, they’ll have a KPI against Bacardi and so on and so forth. We also have compensation that is driven as an individual incentive program, on a particular supplier. Maybe we’re going to focus on points of distribution, so we’ll have specific goals by sales consultant, for these points of distributions. If they achieve their goals, then they’ll have an additional financial reward.

{audio:0:21:45} I assume the margin on spirits and wines is much higher than mixers. As you said, Fever-Tree is an add-on or complementary product to the core portfolio that you push?

{audio:0:21:59} Yes. The margins on Fever-Tree are above our average mixer for spirits and for wine. But obviously, the dollar per case, the penny profit is lower, because a case of Fever-Tree costs significantly less than a case of Jack Daniels. But the margin percentage fits into what we’re looking for, as a company. It’s a profitable brand, at the end of the day, for us, to add on to the rest of our business.

{audio:0:22:39} How does stocking and destocking work, in the on-prem channel? I’m a bartender and I want to take a gamble on a couple of the drinks and I want to take some stock on Fever-Tree. How much do I buy, or what’s the typical inventory flow you have, with the account?

{audio:0:22:58} The majority of the on-prem, you don’t really have those stocking and destocking situations. That is largely driven by off-premise. The majority of restaurants and bars, they just don’t have the storage facility to buy large quantities. They’re going to have delivery times, depending on the volume and the customer, weekly or maybe multiple times were week. So I would say, on average, in the on-premise, they’re not carrying more than one week’s volume on their Fever-Tree. That’s pretty much the same way for spirits and wine.

{audio:0:23:42} If there’s an opportunity for a quantity buy and they can get a better deal by buying a quantity, if they do have the ability to store the product, then they’ll take advantage of those. Then you get larger-scale customers, like stadia, casinos, convention arenas and, certainly, that’s where you’ll have the opportunity where they will take advantage and buy on a quantity discount, because they do have that storage. Overall, in general, you don’t have the stocking and destocking issues that you have on the off-premise accounts.

{audio:0:24:21} If an account takes a new brand, like Fever-Tree, would they have to displace a different brand or do they use multiple distributors? How do they approach stocking, in that sense?

{audio:0:24:37} Typically, what we try to do is, we pitch Fever-Tree to an account and for them to displace the brand. It doesn’t make sense for them to have Fever-Tree tonic in this drink and Schweppes in this drink and Q in this drink. They want to make life easy for them. In the UK, it’s a little bit different because of how drinks are served there. The 200ml bottle is sat next to you and you, basically, mix the drink yourself. In the States, that drink is mixed by the bartender, so there is a high percentage of usage of the 500ml bottle, for Fever-Tree, in the on-premise sector, here. It’s a little easier for the bartender to pour out of that bottle than to continually open a 200ml one.

{audio:0:25:36} Yes; it’s a better price. They’ve come out with the cans now and that’s focused heavily on the on-premise, as well. It’s a little bit smaller; 150ml on the can. It just gives other options for different types of on-premise accounts that they can use. If it’s a high-volume place, then they can use the cans and they don’t have to worry about breakage with the glass and things like that and they can move through that, rather quickly.

{audio:0:26:17} So Fever-Tree, typically, actually displaces brands, rather than enters accounts alongside other brands, like Schweppes or other competing mixers?

{audio:0:26:30} Yes; in the on-premise arena, that is the case. Depending on the volume metrics and the type of the bar, there might be a situation where, if the bar does a lot of well type drinks, then maybe they still have a gun for club soda and for tonic. But then, for their call-drinks, they use a Fever-Tree. That’s an opportunity. But if, as an example, the customer is just pouring tonic, they’re using one tonic for everything.

{audio:0:27:13} What we really used, in Fever-Tree, to crack the code in the on-premise arena here, the driver was ginger beer. The mules had started to rival the margheritas, as the most popular drink and the beauty of the mule is that it’s migrated from just being a Moscow mule, to now you have a Mexican mule, with tequila, you have a Kentucky mule, with bourbon, you have an Irish mule, with Irish whisky. That was a big part of our success with Fever-Tree, because there wasn’t really an established brand in the ginger beer category, in the US. We were initially able to use that, where the percentage of the overall Fever-Tree business, in the on-premise, was heavily skewed to ginger beer. That gave us the opportunity to convince the gatekeeper and to get the exposure to the customers, on the quality of the product. That’s allowed us to come back behind that and to capture the club soda business and the tonic business.

{audio:0:28:29} I assume the ginger beer and the mule market is much bigger than the tonic business, in the US, potentially, given the growth in cocktails?

{audio:0:28:40} From what I’ve read about the UK, the (premium) category that Fever-Tree plays in, is estimated to be about 40% of the category. In the US, the category that Fever-Tree is in, in less than 5% of the category. In the long run, every bar, every restaurant in America has a tonic, has a club soda, so that’s where there’s more opportunity and upside for growth. But it’s just that, because of the popularity of the mule and the ginger beer being a great product and that drink, typically, is more of a premium drink, not just a well drink. So we’ve been able to capture than business and help grow the recognition of the Fever-Tree brand.

{audio:0:29:43} As you said, today, just under 5% of the mixer market is premium mixers, whereas in the UK, it’s much higher, Europe is much higher. I assume that’s because of the gun and the way the gin and tonic is served. You believe we’re going to see a shift, in the US, towards similar penetration of premium mixers, to what we have in Europe and the UK, because of the gatekeepers taking a more premium mixers and consumers paying up for better drinks?

{audio:0:30:23} I think there’s potential for a lot of growth. I’m not sure if we’ll ever get to 40% here, like the UK is. But considering that we’re under 5%, even if we went to 10%, that doubles the business. If you go to 15%, it triples the business. We’re seeing that across all industries, in the US, where people are really cognizant about the quality of the products that they’re paying for and they’re willing to pay more in a bunch of different categories. I think that’s going to continue on, in this category. I’m not willing to commit that it’s going to be a 40% in five years. I think it’s going to continue to grow.

{audio:0:31:12} What are Schweppes doing about Fever-Tree entering the US?

{audio:0:31:16} It’s kind of a Catch-22. All the business that Fever-Tree has been taking has not just been Schweppes. Across the US, Schweppes is a national player but, in every marketplace, there’s the local tonic and club soda and mixer, from a particular geographic area. Some of the business that we’re capturing is from those guys. I just don’t see that, at this point, they seem overly worried, because it is only 5% of the business, despite the fact that it’s growing. We just haven’t seen any kind of change in how they go to market. Maybe, behind the scenes, they’re looking at if they should be producing a premium product where they can come in and take a segment of that business or if they’re talking with national chains, to create premium level private labels, for them. I’m not aware of any of that.

{audio:0:32:29} From what’s going on at the street level, we really haven’t seen any change in how they are going to market.

{audio:0:32:37} How has Fever-Tree been able to take share from such a large player, with distribution, arguably with a bigger brand? What has it been that’s made that possible?

{audio:0:33:00} At the end of the day, it’s the change in the customer taste and what they’re asking for, from their customers. I’d love to say that it’s all us, but the reality of it is, it’s a tremendous product and the gatekeepers and mixologists and the bartenders are very fond of it and love to use it in their cocktails. But at the end of the day, it’s because the consumer is willing to pay more, for a better cocktail. That’s like in a lot of other industries, the same thing is happening. We feel it’s an affordable luxury for people. Maybe someone can’t afford to go out and buy a Mercedes-Benz, but they can go and buy a cocktail with a high-end alcohol and a great mixer, in Fever-Tree. Ultimately, I think it’s the changing tastes of the customer.

{audio:0:34:08} Let’s say that Schweppes, Dr Pepper or Coca-Cola, they change their go-to-market to more premium products and they really start to challenge Fever-Tree head on, how do you think that could impact Fever-Tree’s growth and positioning?

{audio:0:34:30} I’m not going to discount companies like that, like Dr Pepper, that are big companies. The one big advantage that Fever-Tree has, particularly in the on-premise arena – in the US, that’s where spirit brands are built, is in the on-premise so we think it will be the same for Fever-Tree – is that Fever-Tree is working, hand in hand, with all the spirit brands. If you’re the Dr Pepper distributor, you’re the guy that’s delivering Dr Pepper and the other sodas that they have. You have no connection to the spirits. A lot of times, in these restaurants and bars and things like that, the person that buys the alcohol, is not the same as the person that buys the soda or the restaurant supplies, depending on where someone like Schweppes is coming from. They could be coming from Sysco, which sells meats and supplies and all kinds of things like that.

{audio:0:35:36} They don’t have that connection with the spirit brand. They don’t have people that are really aware of how to create and craft a cocktail, like our sales consultants are. I think that’s a big advantage that Fever-Tree has. Particularly in the on-premise arena, I’m not overly concerned if, using their traditional channels, they try to go after us. I think it would be a more competitive situation if, instead of being Southern Glazer’s, if another new premium brand went to RNDC, as a national alignment, which is our biggest competitor, but they’re still considerably smaller than Southern Glazer’s.

{audio:0:36:27} I think that would be a tougher competitive battle than it would be with the current distribution model.

{audio:0:36:37} You actually think that it’s more of a risk for Fever-Tree that a similar premium mixer goes to a Southern Glazer’s competitor, to target the on-prem channel, rather than Schweppes?

{audio:0:36:51} Particularly because of Sysco’s understanding of how the brand is sold, in this arena. The bottom line is, if Schweppes is coming through a soda distributor or it’s coming through a Sysco, which is restaurant supply, it’s just one small piece in a number of things. So from a percentage of what that Schweppes is going to be, to the total invoice, it’s going to be small. They’re not out working hard. They’re not taking the time to go into the bar and work with the bartender and mixologist, to create cocktails. They’re just taking an order. Unless they dynamically change the model of how they go to business in these accounts, it doesn’t concern me.

{audio:0:37:50} Is it Coca-Cola that distributes part of Schweppes, for Dr Pepper, or is it both of them?

{audio:0:37:59} It’s really different. There’s no exclusivity, so you’ve got a lot of different food brokers and things like that, that are also distributing it. There’s no big incentive for people to try to develop business, because somebody else could come in behind you, like a food broker, who are working on a much smaller margin. If you were a soda distributor and you had the business, the food broker might come in and undercut your price, to take your business away from you. It drives the margin out of it and drives the incentive for somebody to push it.

{audio:0:38:49} The distribution of those larger brands then, especially in this arena, like you said, it’s quite dispersed or fragmented and they’re not clearly pitching the Schweppes brand, to the account?

{audio:0:39:11} Correct. For our company’s business, prior to making the alignment with Fever-Tree, that’s how it was for us. In Missouri and St Louis, we’d be pushing one brand, but in Dallas, Texas, they’d be pushing another brand and in California, they’d be pushing yet another brand, because there was no consistency. Now, that’s the only brand that we’re gold on, in this category. So we are held accountable to making certain sales goals and things like that and it’s a company-wide focus, for the brand. When you have that and you have that consistency, you’re going to have the better opportunity to build a brand, long term.

{audio:0:40:14} I assume, from Schweppes’ point of view, or Dr Pepper’s point of view, they have various different distributors, in different regions, distributing the brand to different on-prem accounts and that distributor might be using, as you said, food brokers or whatever it may be, in that region, which becomes very difficult to really understand how the product is getting pitched. And also, I imagine, on what the margin on the product or the price of the product is?

{audio:0:40:47} Yes; there are different channels. The soda distributor will work on one; something like a food broker, a Sysco, they really don’t have the number of sales consultants in the field and it’s much lower margin. They’re trying to get as many things as possible ordered to that customer, so it’s just one of many things, with a Schweppes or another brand that they’re doing. When they’re working on that kind of low margin, there’s no incentive for them to spend an inordinate amount of time trying to create cocktails. They want to hit the easy button and say, hey, if you need a tonic water, I’ve got a tonic water for you and it’s X price. They’re only selling on price.

{audio:0:41:48} If you just walk through the higher competitive risk that you mentioned, of a competing premium mixer brand, partnering with a similar distributor or competitor to Southern Glazer’s, for that new brand to displace Fever-Tree, it’s going to be pretty difficult for that to happen, because the bartender or the gatekeeper is going to have to really love that brand, to displace Fever-Tree and also use that distributor and not Southern.

{audio:0:42:23} Right; there’s going to have to be a reason for them. If they’ve had success with Fever-Tree and the customers like it, then you’re going to have to have something that’s got the same great taste, it’s got the same type or support or better support, maybe it has a little bit of a better price on it. Plus, you’re going to have to provide the same level of service, as a distributor, as we do. I’ll take that battle, any day, when we’ve got a battle against our competitors. Maybe they will win, sometimes, but I think we’ve shown that, historically, we’ll win out, the majority of the time.

{audio:0:43:14} What’s been your view on the changing price? I think, they said, Fever-Tree has had a 14% to 15% reduction in price, in the US and different formats that they’ve rolled out. How have you seen the impact, so far? Obviously, it’s pretty early days, but what’s your view on that?

{audio:0:43:30} The pricing really, in the on-premise arena, the frontline pricing didn’t change there. We stayed where we were, but it gave the ability to offer deeper quantity deals, for scalable accounts. It also gave to ability to work for large, national, on-premise hotels and chains, to be more competitive in what those customers were looking for. More importantly, I think, in the retail, when we saw the analysis that Fever-Tree provided, it basically showed that while Fever-Tree was priced as a premium product in the UK, the gap between Schweppes and Fever-Tree in the US, was more like from mainstream to luxury pricing. It was a much larger gap than it was in the UK.

{audio:0:44:51} Certainly, they’re taking some of their margin out but, at the same time, they’re also in the process of moving production, for the US, into the US. That lowers their overall cost of goods, because they’ll be producing it here and not have to ship everything from overseas. When you balance that out, at the end of the day, for them, it’s a little bit of a wash. But I think it’s going to give us a better gap. We’re still going to be the most expensive product, in the off-premise world, but instead of a $2 gap over an item like Q, we’ll only be $1 higher, on the four-pack. I think that’s going to give them the opportunity to go in with this new pricing, the quantity discounting, to secure more distribution in the large, national grocery chains, as well as the on-premise.

{audio:0:45:51} What about Schweppes competing with Fever-Tree, in the off-premise channel?

{audio:0:45:58} They’re already there. They’re everywhere that Fever-Tree wants to be. From a distribution standpoint, that’s where they’re starting to fly. But it’s a different product. Every grocery channel, if you just go to any section in the store, you go to the soup section, there’s the mainstream soups, at this price. But then there’s the premium soups, much higher quality, less salt, things like that, and they’re going to be at a higher price. I think what it’s shown now, particularly from the on-premise world, is that the consumer is willing to pay extra, so it bodes well for the retailer to start expanding. The retailer is not going to replace Schweppes in the account, but they’re going to increase the space they have devoted. Rather than only carrying mainstream and low-end mixers, they’re going to add these premium mixers.

{audio:0:47:11} Do the larger brands, such as Dr Pepper or Coca-Cola, if they’re distributing, do they not have a say in the shelf space, in that channel?

{audio:0:47:24} In a word, no. They don’t control what that chain can sell. They can control what they sell. The chains are going to make the decision, based on what’s available. The bottom line is, the grocer will decide to sell it, if it meets the consumer awareness and demand, if it’s profitable for them. Once it’s in distribution, if the pull for the consumer is strong, versus the category, it will stay in the account.

{audio:0:48:00} You mentioned that the pricing in the on-prem hasn’t changed that much. Obviously, the gap between Fever-Tree and the next competitor is reduced, but you’re thinking more about the quantity deals and offering deeper discounts to the bigger, on-prem accounts, for example? In the off channel, is that where we’re going to see most of the price discount, straight on the shelf?

{audio:0:48:30} Yes; it runs between a 10% to 14% reduction in price, to the trade. In the past, as an example, on the four-packs, where we were retailing at an everyday retail of $6.99, with a feature of $5.99, we’re going to move to an everyday of $5.99, with a feature of $4.99. Then on the 500ml, we went from an everyday of $3.49 to an everyday of $2.99, and we had a feature at $2.99, which will now go to a feature of $2.49. At the end of the day, it’s not a huge price reduction, but it just gets us a little more in line, so that the gap is not so huge. I think it has the opportunity to continue to promote the trade up, from the customers drinking Schweppes, in the mainstream.

{audio:0:49:44} Do you think it’s enough of a price cut?

{audio:0:49:47} I think it is, right now. Obviously, the pandemic really altered a lot but one of the things that surprised me was, as strong and as much business is driven by the on-premise and how it was really driving new distribution in the off-premise, I was concerned about what this pandemic was going to do, to Fever-Tree. Despite the fact that, since mid-March, through now, we’ve lost about 90% of our business, in the on-premise arena, we’ve really accelerated the growth in the off-premise business, for Fever-Tree. Frankly, I wasn’t sure that that would happen, because I wasn’t sure that it was well enough established yet, with the customer base, to really drive that. But what I’m seeing is, those customers that were used to drinking it, in their local restaurant or bar establishment, are searching it out when they’re buying. Spirits has gone to nothing, in on-premise, but the business has grown dramatically, in the off-premise, so it’s allowed our overall spirit business to kind of keep pace with the growth that we had, prior to the pandemic.

{audio:0:51:20} Similarly, with Fever-Tree, our overall growth rate has not declined, during the pandemic.

{audio:0:51:33} So the off-premise is picking up the slack from 90% of the clients in on-prem and giving you that same growth rate?

{audio:0:51:43} It’s just a shift in where the business is done. I think it bodes well that Fever-Tree is that strong, in the off-premise and when you look at what’s going on with that, there’s still a ton of distribution opportunities in the off-premise arena.

{audio:0:52:10} What else are you seeing, during these crazy times, in terms of the growth rate in off-prem and any opening ups we’re seeing, in on-prem, today?

{audio:0:52:23} What’s going to happen is, it’s going to accelerate everybody in the off-premise getting into the technology world, to enable their consumers to order the products online, and have the delivery take place. There’s a company, like Drizly, which is primarily focused on delivering alcohol and so working with independent liquor stores, as well, and grocery stores working on their delivery models. Because of what’s going on, in the new normal, people are looking for, hey, how can I get what I want, without having to out and, potentially, expose myself? That’s one aspect that’s really driving additional adoption in the technology arena, for a lot of these accounts.

{audio:0:53:34} What do you think is the biggest risk, off-premise, to brands like Fever-Tree?

{audio:0:53:43} I think the biggest risk, for Fever-Tree, eventually Fever-Tree is going to get the size and the volume, in the off-premise segment, that that’s when the national grocery chains start looking at, we need to have our own private label, in this category. The good thing about it is, that’s not going to happen right away, because they’re going to wait until it gets a lot bigger. But eventually, just like it’s happened in every other category, that’s going to happen and I think that’s, probably, the biggest risk to them, in the future.

{audio:0:54:31} What about online? You mentioned Drizly and online offerings of spirits and alcohol and drinks. What’s your view on how this pandemic and the online/offline mix could fundamentally change, post-Covid, in terms of the distribution of products? Both from the distributor and customer side. I’ve seen some of the numbers from wine growth online and alcohol, more broadly and it seems that the demand from the customer is there, online, everywhere. Arguably, that’s fundamentally changed consumer behavior. But what about the distribution structure of the US? Are you seeing any potential risks or changes in that? It might be easier to distribute online, direct to consumer, with both spirits and mixers?

{audio:0:55:41} We try to position our business and grow our business and we’re really invested in marketing on the online side of the business, so that our customers can order from us, online. We have a very robust system that we’re rolling out and continuing to add onto. We know we’ve got to be very efficient at what we do, so that we can compete with potential changes in the laws and the structures, in the industry. Right now, in order for our business to change, it takes legislative activity on a state level. It’s not something that can be mandated federally, because at this point, every state has the rights to its own alcohol laws.

{audio:0:56:39} In some ways, that provides a protection for us, because states are probably not going to be willing to give up that luxury and give that to the federal government, so it protects us, somewhat. We understand that we have to make sure that we’re providing the efficiency, to get the product to our customers and work with our customers, to be able to get online products to their customers. We’ll continue to evolve on that. Initially, in the short term, I don’t see anything that is going to drastically change the system of distribution in the US. But who knows, in 10 or 15 years, well after I’m retired, there could certainly be some changes.

{audio:0:57:43} Scott, it’s been a pleasure, as always. Thank you very much for your time.

Fever Tree: US Distribution

Southern Glazer's strategy of pitching Fever Tree to on-premise accounts

How bartenders view Fever Tree and buy mixers

Advantage of Southern Glazer's versus Schweppes distribution

Fever Tree's structure of co-merchandising with spirits brands and Southern Glazer's

How the change in pricing of Fever Tree could impact volume

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 Distribution

Current Executive Vice President at Southern Glazer's Wine & Spirits

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

Why is this interview interesting?

Fever Tree

Why is this company interesting?

Executive Bio

Scott Westerman

Current Executive Vice President at Southern Glazer's Wine & Spirits

Interview Transcript

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Audio

Fever Tree: US Distribution(May 28, 2020)

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