Premium soft drinks hitting fever pitch

After five years of flat volumes, the soft drinks sector is fizzing again.

Consumers are becoming more health conscious and governments are pressurising the industry to cut sugar levels, and this is leading to growth within existing segments such as plain still water as well as a wider range of healthier products, and more specifically ‘functional’ drinks like sports ranges and benefit waters.  The other big factor is premiumisation – a trend we’ve been tracking in other areas of consumer goods for some time, and is particularly significant in food and drinks, whether that’s organic snacks or craft beer.  Shoppers are looking for higher quality, better ingredients, and a more authentic provenance, and a number of small, agile new entrants to the market are providing it.

Fever-Tree is the obvious example, with its range of sophisticated mixers and flavoured tonic waters – and a share price that’s grown eight-fold since its IPO in November 2014. But there are others exploiting the same trend, including Fentimans, Belvoir Fruit Farms, and Frobishers, which acquired Five Valleys Cordials earlier this year. Taken together, these innovative new operators are disrupting the traditional dynamics of the soft drinks market, and posing a significant challenge to the mainstream brands. The retailers are certainly welcoming the new ranges, since they offer much healthier margins, which means the major brands risk being squeezed for shelf and chiller space by these new premium-priced competitors.

So how are they responding?

Some are playing the premiumisation game themselves: now that many of the gin makers are recommending Fever-Tree to accompany their brands, Coca Cola European Partners is actively seeking to reposition Schweppes at the higher end. Britvic, by contrast, has set up its own entrepreneurial incubator to develop new and innovative products. They talk now about ‘zero proof’ drinks, designed to appeal to the increasing number of consumers looking for something interesting to drink that isn’t alcoholic, both at home and when they’re out. The first new products to be launched include Thomas & Evans No. 1, a combination of botanicals and fruit juices, and the London Essence Company range of mixers.

Another obvious option for the bigger drinks companies is to buy up these smaller players and give their brands the platform, the distribution, and the investment they need to take them to the next stage. We’re already advising on some potential transactions like this, building on our extensive experience in this segment. But it’s challenging, because most of the businesses that could be targets are still a long way from being national, never mind international. They tend to be privately or family owned, with a good regional presence, but fairly rudimentary distribution in the big grocery chains. In other words, the product and the branding have been hugely successful, but the commercial and operational side could be optimised, but have huge potential

What does this mean?

This – clearly – is classic Private Equity territory. There’s a real opportunity for the PE houses to help these businesses professionalise, drive down costs, and start to export. Fever-Tree is unusual in that it already exports 65% of its output, but most of the rest are not as yet making significant sales overseas, and doing this is difficult without exactly the right operating model, the money to fund it, and the skills to manage it. There’s a bigger potential prize too, for a buyer that could consolidate several of these businesses, achieving synergies and substantial economies of scale by maximising distribution channels, procurement processes, and manufacturing capacity.

 

There is also the in-store benefit of it being easier to gain visibility in store space if you have multiple, perhaps complimentary brands (e.g cordial and sparkling water), which could help drive retailer basket size.

These new brands are undeniably where the action is in soft drinks right now: where the growth is, where the innovation is, and where the energy is. It remains to be seen if this turns out to be a threat or an opportunity for the rest of the segment. Right now, it looks like the latter.

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Gordon Spiers

Senior Manager, Delivering Deal Value, PwC United Kingdom

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