Weekly Update: Fever Tree Gross Margins, SAP, Watsco, & WINE

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Content Published Last Week

  1. IP Analysis: Fever Tree: Gross Margin Outlook
  2. Investor Dialogue: Watsco
  3. Fever Tree: UK History and Gross Margin Outlook
  4. SAP HANA, Google Cloud, & Long-Run Hyperscaler Competition
  5. Naked Wines: Australia Market Performance

Fever Tree Gross Margin Outlook

Over the last 6 months, Fever Tree has revised guidance twice: FY22 gross margins are now expected to be down 900bps year-on-year.

We interviewed a former Director at FEVR and published our analysis of FEVR’s gross margin drivers and outlook for the next 2-3 years. We've shared snippets of our analysis below.

FEVR is seeing its lowest gross margins in history yet its brand seems to be as strong as ever: it has 45% UK market share and a 7x higher sell through rate than other premium mixers. In the US, total points of distribution increased 33% yoy and August was a record month by number of cases sold.

If the brand is firing, what needs to happen for margins to recover?

The two drivers of FEVR’s gross margin are inventory costs (glass, packaging, ingredients) and logistics and warehousing.

Between 2016-19, inventory costs as a % of sales averaged ~40%. Logistics and warehousing in COGS averaged ~7% of sales.

In FY22, inventory costs are estimated to be 49% and logistics 17% of sales.

Moreover, 60% of the logistics and non-inventory COGS is driven by the inefficiencies in the US supply chain. FEVR is currently shipping products from the UK to the US because it has struggled moving production onshore. With higher sea freight and US intra-logistic costs, this has led non-inventory costs to be 37% of sales in the US.

With these numbers, we can back out the US unit economics from the group:

Source: IP EsimatesSource: IP Esimates

FEVR's biggest market opportunity is heavily loss making.

But this is temporary.

FEVR believes they will have 80% of US production onshore by Q4. We believe solving the US logistics problem alone can improve gross margins ~500bps.

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