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Fever-Tree Drinks: A Premiumization Story

The company has the right management and business model in the right space, but needs to widen its economic moat

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Apr 22, 2020
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UK-based Fever-Tree Drinks (

LSE:FEVR, Financial) develops and supplies premium mixer drinks, including tonics, ginger ale, ginger beer, bitter lemon, lemonades, spring soda water and premium cola. The brand started in 2005 with the mission to "combine the highest quality naturally sourced ingredients with expert manufacturing techniques to produce an unrivaled drinks experience." The company's co-founders Charles Rolls and Tim Warrillow were both working in the drinks industry and were struck by the fact that consumers were paying up for quality spirits but were left with no premium option when it came to the mixer.

Fast forward to today, and these two British entrepreneurs still manage the business as CEO and Deputy Chairman, with an approximately 12% combined equity ownership. Fever-Tree has been publicly-traded for fewer than six years, but the stock has already been a multi-bagger compared to the IPO price for quite a while, even after the recent slump in share price since late 2018. Business fundamentals have been robust, with annual revenue increasing by seven-fold and return on assets steadily improving to above 30% over the last five years (see below).


Fever-Tree employs an asset-light, outsourced business model, with a focus on operational flexibility, scalability and low capital expenditure requirements. According to the chart below, the business beats both Coca-Cola (

KO, Financial) and Keurig Dr. Pepper (KDP, Financial) but underperforms Monster Beverage (MNST, Financial) in terms of operating margin.


In a typical year, Fever-Tree would only need to spend less than 1% of its sales as capital expenditures on sustaining operations and expansion, compared with 2% at Monster Beverage, 3% at Keurig Dr. Pepper and almost 5% at Coca-Cola.

In the capitalist world, superior growth and return inevitably attract competition, so will Fever-Tree's business remain strong? Well, we think that the prospects looks good, at least for the short run, as the brand leads the premium mixer category in many parts of the world. Furthermore, Fever-Tree is the only high-end player with scale in some markets, such as continental Europe. While the moderation of growth in the domestic market (representing over 50% of sales) has to continue, overseas expansion should see a sizable runway, and the momentum of it is looking great.

Over the longer term, we think that competitive risk and unpredictable shifts in consumer taste could be something worth worrying about. Before investing, investors may want to wait to make sure that Fever-Tree is not a "fad" product. Also, the lack of longevity can mean a narrow brand-based moat (if any moat) to guard the high-return business in the beverage space (think those century-old brands like Vimto and Jack Daniel's).

The company distributes 20%-25% of its annual earnings to shareholders and reinvests the remaining to widen its economic moat and fuel long-term growth (e.g. regional expansion, line extension). Investors may want to keep close eyes on the return on investment, especially related to gaining consumer mindshare.

We notice that Smithson (an investment trust managed by Fundsmith) and Lindsell Train established a position in Fever-Tree last year and earlier this year, respectively. Both index-beating asset managers adopt a high-concentration approach to portfolio construction, and therefore any new position can be quite the endorsement.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Monster Beverage.

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