Over the last decade, two structural trends have been shaping the global spirits industry:
- Spirits winning market share from wine and beer
- Premium segments winning share in all categories
From 2014-19, the global spirits volume CAGR was 1% compared to 0.2% for wine and negative 0.4% for beer. After 3-4% price increases per year, the total spirits market value grows ~5% per year but the premium and super-premium segments are growing 11% and 8% respectively. From 2010-20, the US premium category has grown from 19% to 27% of total volume. We could still be in the early innings of the spirits premiumisation trend.
The premiumisation of spirits has gone hand in hand with the premiumisation of mixers. Over the last 3 years, the premium mixer category has grown 31% and 15% per year in the US and UK respectively. However, the big difference is the penetration level: in the US, the premium category is only 10% of total mixer value versus over 40% in the UK. This growth opportunity is what interested us about Fever Tree; if the premiumisation trend continues, there is a potential multi-decade growth opportunity ahead.
We interviewed a Former VP of Sales at Q-Mixers, Fever Tree’s largest premium competitor, to discuss how the brands competed in the US on-premise channel.
Although both Q and Fever Tree serve the premium mixer segment, there is one fundamental difference between the two companies: Q was built in the off-premise channel whereas Fever Tree was built on-premise. This is important because the go-to-market distribution channel shapes the DNA of a consumer brand. Q’s founder got his first break when he sold a pallet of mixers directly to Whole Foods and built a direct sales team to serve the large grocery chains and independents across the US. From the start, Q’s product was optimised for the retail channel:
"Going to that channel first was more about creating a package and a size that made sense for retail first. In on-premise, the outer package is less important and, in retail, it was about single-serving size to the individual consumer who was making their own cocktail at home...In a retail environment, your product is your sales person. There is nothing else in the store, selling your brand. Your package has to deliver on its messaging, the story and convenience. It’s critically important in retail to make sure you have got your package, your pricing and your messaging on your bottle or your outer package right. It’s very hard to go to off-premise first and then to on-premise." - Former VP of Sales, Q-Mixers
On the other hand, Fever Tree was built with bartenders in the on-premise channel. The company has a national agreement with Southern Glazers, the largest spirits distributor in the US, and partners with large spirit companies such as Diageo and Pernod Ricard. Fever Tree has focused on winning the hearts of mixologists to provide the best drinking experience in clubs and bars globally.
The difference in the go-to-market strategies defines the brand DNA of each company; Q-Mixers is a retail-driven beverage brand optimised to stick out on the shelf and Fever Tree was built in partnership with spirits companies to create the ‘perfect gin and tonic’.
Both companies are competing in the off and on-premise channels today. So which company has a long-term advantage: Fever Tree going from on-premise to off-premise, or Q-Mixers going from off-premise to on-premise?
Historically, the large spirits companies have all followed the same go-to-market strategy: build a brand on-prem, sell volume off-prem. The relationship between the two channels reminds us of this quote from an interview we hosted last year:
"On-premise is the necessary evil and is the hardest to crack. It is the most expensive channel to get involved with. Very few brands have been successful without on-premise. At one point in time, every supplier would say we need to get “liquor down throats”. How do you do that? You have to be on the bartenders' suggestion list, on the drinks menu or in the well and people have to run across you in a bar. " - Former VP at William Grant & Sons
Fever Tree has built brand equity like a spirits company. In the on-premise channel, the bartender holds the keys to consumer adoption but distributors hold the keys to bartender adoption. The bigger and more powerful the distributor, the greater adoption of your product. Q-Mixer’s VP of Sales realised this when competing with Fever and Southern Glazers:
"Southern would just walk in and make a big spirit deal with Moët Hennessy and say, by the way, Fever-Tree is part of it, so we just can’t get in. Mixers was the last piece of the puzzle when you made huge contract deals or big partnership deals with branding. If you weren’t part of that proposal, there was no way to break in...They have a fairly strong portfolio and they have got a lot of leverage. Southern has been at this game a long time and they’ve always been very strong in on-premise; they have been very heavy investors in on-premise. There is that expression, the power of the portfolio; it has a lot of weight." - Former VP of Sales, Q-Mixers
Southern Glazers has the largest and best portfolio of spirit brands in the US; high end hotels and restaurants need direct accounts with Southern’s to add the best champagne and whiskeys to their menus. The distributors then sell mixers as an add-on that is bundled with the spirits package for bars and restaurants. The more attractive the distributors’ spirits portfolio, the greater the mixer adoption. This leads to real first-mover advantages for Fever Tree in the on-premise channel:
"One of our biggest challenges was probably being late to market. Fever-Tree was already there, entrenched. A perfect example would be someone like an MGM Grand that owns all the casinos in Vegas. They get cocktails, they get service, they get premium; Fever-Tree was already there and their route to market was very strong. They could bundle up an entire spirit deal for a hotel group and say that the first fill of all the club soda is gratis because of Fever-Tree. It is hard to turn those things down as it’s part of the bigger picture...changing a mixer in an on-prem account is, typically, one of the last things that a buyer looks for. It’s like changing your fork and your cutlery. It’s not a priority; it’s not an issue. It’s easier to change a spirit or a menu item." - Former VP of Sales, Q-Mixers
Not only is Fever Tree piggybacking off the growth in Southern’s premium spirit portfolio, it’s partnering and co-marketing in TV ads directly alongside brands like Jim Beam and Grey Goose. Fever Tree’s DNA is deeply integrated with the world’s best spirit brands. However, although Fever Tree seems entrenched in the on-premise channel, this is only half the battle; the majority of absolute dollar profitability is off-premise and this is Q’s home turf. In 2020, Fever Tree reduced US prices by 20%. After the distributor takes a 30% gross margin, it’s likely only 50-60% of the price cut actually flows through to the end customer. Management claimed the reduction was because the product was priced closer to super-premium than premium. We believe the original price point in the US was over 5x the price of Schweppes whereas in the UK it’s closer to 3x. On the other hand, others believe off-premise competition pressured Fever to drop prices:
"What really hurt them is that Kroger is the biggest grocery chain in the United States and Kroger divided the country in half. Half their accounts have Fever-Tree and half have Q Mixers. We did very well in the stores that we were in; we were selling more sell-through per week, in unit sales, compared to Fever-Tree and Kroger put Q Mixers in all the accounts. We jumped into their space because of our success in the other half of the market and it hurt them. Just in California alone, in four years, we went from selling roughly 10,000 cases to 225,000 cases and most of that came from Fever-Tree. They saw that people were certainly eating their lunch and price is the quickest thing to drop and people want a deal." - Former VP of Sales, Q-Mixers
Fever’s off-premise strategy relates back to the core DNA of the company. Charles Rolls, Fever’s cofounder, is a former gin distiller and the current US CEO is the Former CEO of Belvedere, LVMH’s leading vodka brand. Premium spirits are at the heart of Fever’s philosophy. Driving consumer awareness and discovery is the biggest challenge for any new consumer brand and the company is relying on on-premise exposure and experimentation to translate into off-premise growth. However, the challenges in retail are different to the on-premise channel.