Does Fever-Tree’s profit warning signal the death of gin?

Premium mixer company Fever-Tree saw its shares plummet -29% in mid-Jan 2020, after reporting that its UK sales had fallen by -1% in 2019 – a reflection of subdued trading over the Christmas period. Overall, however, the company reported a 9.7% increase in sales to GBP £260.5m for 2019.

Nevertheless, the markets reacted strongly to the news of a slowing UK market, especially as Fever-Tree currently derives around half of its sales (£132.6m) from the UK. Any souring of demand for premium mixers, or the gin market with which Fever-Tree is inextricably linked, would therefore be a source of concern.

“It shouldn’t be a source of panic though; the so-called gin renaissance, or ‘ginaissance’, looks set to continue, albeit at a slower growth rate in markets such as the UK,” notes Mark Meek, CEO at IWSR. “Gin was up 32.5% in the UK in 2018; no category can keep repeating that performance. However, Fever-Tree is facing an increasingly competitive market landscape within the mixer category. How the company builds out its global strategy will be paramount in determining its future long-term market success.”

Much of the gin category’s current growth in the UK is driven by flavoured gins. These are still contributing sizable volumes and helping to maintain consumer interest. Importantly, it is helping the category to broaden its appeal to females and millennials. “The danger is of flavour over-proliferation, particularly with less credible flavours: this happened in vodka a decade ago,” adds Humphrey Serjeantson, IWSR’s Research Director for Western Europe.

The much lauded ‘ginaissance’ gathered pace in 2018, posting the largest gain in global beverage alcohol consumption of any category: a rise of 8.3% globally versus 2017. By 2023, the gin category is expected to see a volume CAGR of 4.2% – this will largely be evident in emerging markets as well as in the UK.

Perhaps the most interesting development is that the gin boom is now extending into non-traditional gin markets, such as Japan, and emerging markets including Nigeria, Mexico, Brazil, South Africa and Russia. “As gin growth rates slow in markets such as the UK, Fever-Tree would do well to eye emerging gin markets, such as Brazil. Gin’s growth in Brazil has been supported by the entry of new brands, including local and craft products, alongside international premium brands and online-exclusive releases,” says Meek.

As gin’s potential continues to grow, especially in newer markets, the challenge for Fever-Tree will be to differentiate itself in an increasingly crowded tonic market. “Fever-Tree is still largely a tonic company and needs to diversify more quickly as it eyes global expansion,” notes Meek. The market for premium mixers is likely to grow in tandem with the premiumisation of the spirits market, and IWSR data points to a continuation of the long-running premiumisation trend in most markets. “While there is opportunity to steal market share, Fever-Tree will need to act swiftly. Many premium-positioned competitors are releasing increasingly unique flavours and investing in product innovation, crowding a marketplace that Fever-Tree once dominated,” adds Meek.

This is especially important as Fever-Tree continues its expansion into the US. While Fever-Tree did well in the US last year, posting 33% sales growth, there are key considerations it should factor into its long-term US strategy. According to IWSR research, the US gin market is forecast to be static over the next five years. Critical to Fever-Tree’s success is its ability to revitalise the image of the gin-and-tonic serve.

The mixer market in the US is vastly different from the UK’s. Drinks such as the gin and tonic as poured in the on-premise lack the same flair and finesse as in other key countries, as, to date, tonics have not been positioned as a premium product in the US. “The biggest challenge for Fever-Tree to ensure sustained, long-term success in the US will be to change the consumer perception of the gin and tonic. In order to succeed, Fever-Tree needs to ensure its US pricing strategy gives enough margin for the brand to invest in bartender education and brand activations. It also needs to establish strategic gin partnerships, especially as bar menus play a critical role in influencing the consumers’ drinks choices in the US on-premise. The Fever-Tree Tasting Wheel will help provide ammunition here,” advises Meek.

When planning for long-term success in the US, product innovation and diversification will be key. Fever-Tree reaped the rewards as the initial disruptor of the gin and tonic and mixer markets in the UK. However, to extend this success in the US for the long term, Fever-Tree will need to account for regional consumer and bartender preferences, especially in areas such as flavour profiles. Research in the IWSR’s US Bartender Strategic Study for example shows that, in terms of cocktails and long drinks, while savoury and spicy flavours do well in New York City, tropical flavours stand out in San Francisco, and in Austin, fruity, citrusy and floral flavours, amongst others, do well too. Diversification beyond gin and tonic should be targeted as well; for example, while gin is a category to watch in New York City, sherry and vermouth are on the rise in San Francisco – giving Fever-Tree an opportunity to adjust its product mix accordingly.

IWSR believes the gin boom is far from over. However, it is becoming increasingly nuanced as new markets tap into the trend as well. Fever-Tree has the opportunity to make its mark – and investment in product innovation, diversification and global expansion will help to ensure sustained, long-term success.