Fever Tree US vs UK Growth Opportunities

In Practise Weekly Analysis

Fever Tree

Why is this company interesting?

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.

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We’re always debating internally which company we should cover next. We have a coverage list of 350+ quality companies that we want to study, we just don’t know specifically in which order.

The potential duration of sustainable growth is a top variable we consider when making such a decision. Beyond the obvious benefits, the duration of growth is important because it gives us the best chance to compound our knowledge.

We want to build company-specific knowledge today that we can build on for decades. We also want to get to know founders and management teams that will still be playing their game in years to come. By spending time on companies with long durable growth opportunities, we give ourselves the best chance to compound company-specific knowledge. Years of watching how companies and managers behave can also help build conviction in future challenging times.

A quote from a recent interview with Gavin Baker of Atreides Management reminded us of this point:

“Everybody looks up to Warren Buffett, but almost no one does what he says he does. Warren Buffett has said he doesn't do due diligence. This was a statement about Precision Castparts which is one of his largest acquisitions ever. And everybody just ignored that comment, but it was a profound comment. And what he meant by it was that he didn't need to do due diligence. He had been reading every 10-K published by Precision Castparts for decades. He didn't sit down and do some 60-day deep dive. He didn't need to because he had been doing due diligence on Precision Castparts for decades”

In this regard, Fever Tree (FEVR) is similar to Precision Castparts; a company that we believe has the potential to grow for decades.

We recently held an In Practise Investor Dialogue with two Fever Tree shareholders to explore the investment thesis and the company’s growth opportunities.

When looking at the potential duration of FEVR’s growth, one investor asks the following question:

"I wonder, did they just enjoy a huge first mover advantage in the UK and, to a lesser extent, they’re enjoying it in other countries in Europe and the US? Or is there something else which will allow them, even if they come late to other markets, to actually capture those markets?"

FEVR has ~50% market share in the UK mixer category and the company is growing low-mid single digits per year. Thus, the FEVR investment thesis is based on growth outside of the UK.

So what could be the reason Fever Tree doesn’t grow in the US or Europe as it did in the UK?

Fever Tree, born in the UK, pioneered the premium mixer category which now accounts for 43% of the total mixer category by value. FEVR’s growth was predominantly driven by the growth in the gin category; the number of gin distilleries has doubled over the last 5 years and consumption is expected to increase to over 10m cases in 2023 which is nearly double the consumption in 2010. Some investors worry that FEVR is too reliant on the classic gin and tonic. However, this comment by the company’s co founder and CEO in the last earnings call shares a different perspective:

“We've got this fantastic position in the world of Gin & Tonic, where all the spirit partners wanted to push and promote our brand alongside theirs, but so are the spirit partners now in these other spirit categories that we're developing these products for. So the vodka category is big in the U.K., and the vodka categories looked on in great envy at the way gin has been able to premiumize. So they are keen to work with us to help develop that.” - CEO of Fever Tree, H1 2021 Earnings

The premiumisation of gin in the UK has been so successful that other spirit categories wish to follow the gin playbook. This suggests Fever Tree has a larger UK opportunity than the 3-4% revenue growth that analysts currently forecast. We believe the premiumisation of spirits is a global structural trend that will continue to penetrate all categories globally.

Although the UK may continue to grow mid-single digits, Americans consume ~450m litres of spirits per year, 10x the volume in the UK. This makes the US market crucial to Fever Tree’s growth. There are two key questions when comparing the US opportunity to the historical success in the UK:

  1. Can the US premium mixer category reach the UK’s level
  2. Can Fever Tree capture a similar market share in the US as in the UK

The US premium mixer category is only 10% today compared to 43% in the UK and 18% in Europe. This is partly because US spirits consumption habits are different to the UK. Firstly, Americans drink more darker spirits which have strong mixers dominated by Coca Cola and numerous ginger beer brands. Bars and restaurants also predominantly use the soda gun for mixers which are less prevalent in the UK.

This has led FEVR to launch products that are less focused on white spirits and more on mules, ginger ales, and spritzers. The success of FEVR’s ginger ale and the new grapefruit seltzer proves that Fever Tree is far more than just a tonic brand and is capable of driving the premiumisation of mixer categories outside of tonic. This was Charles Gibb, FEVR US CEO, in the last earnings call:

“Innovating and creating new exciting products is one of the cornerstones of the brand. So I thought it was worth taking you through our journey to create the Sparkling Pink Grapefruit, which we launched in March 2020 during the worst of the pandemic. It quickly became our most successful new product launch in the U.S., getting significant attention from retailers and consumers and now making a significant contribution to our sales growth. Sparkling Pink Grapefruit was crafted to pair with tequila for the perfect lower-calorie Paloma, leveraging the exceptional growth and premiumization of the spirit category. Just over a year after we first launched it, we're already driving over 20% of grapefruit category growth through the elevation of mixing occasions in both tequila and vodka.” - Charles Gibb, CEO of Fever Tree US, H1 21 Earnings
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