Premium drinks manufacturer Fevertree Drinks (LSE: FEVR) suffered an almighty share price crash this week after a disappointing trading update featuring multiple downgrades to its financial metrics.
Sparkling formula
From 2014 to 2018, Fevertree’s meteoric rise was exciting, impressive and glamorous. The attraction of a sparkling gin and tonic in deliciously tempting flavours had consumers tripping over themselves to taste its selection of unique and tantalising flavours.
Its big selling point in the early days was its ability to give an air of sophistication and glamour to gin, a formerly unfashionable drink. Making the clever argument that if three-quarters of your drink is the mixer, it suggested you’d want to choose wisely.
Its spectacular rise to success came as Fevertree was new in town and offering something unique.
Unfortunately, the unique edge wasn’t to last as competitors swiftly cottoned on. Pretty quickly, supermarkets and big brands such as Schweppes were offering their own alternatives to the Fevertree range.
Now there are signs that demand for gin has peaked, but it’s not likely to fall out of favour completely with consumers, so I don’t think the demand for gin is actually dead.
It’s all in the flavour
But a more worrying trend for Fevertree is that consumers are now turning to the influx of flavoured gins available. If the gin is already flavoured, then Fevertree’s offerings are no longer giving a unique twist to the drink.
There are so many gins available nowadays, I don’t know where to begin choosing one. The bottles and labelling are as attractive as perfume bottles and the choice of flavours astounding.
The recent trading update wasn’t all doom and gloom. Growth is still happening, particularly in Europe (up 16%) and the US, where sales rose by a strong 33%. Total 2019 revenue is expected to grow by 10% year-on-year, but this is a far cry from the 40% growth seen in 2018.
I think the main reason for the Fevertree share price plunge was its poor UK results. UK sales fell by 1% and as they account for half of overall sales, that’s bad news.
With Brexit still to unfold, there are some issues for the firm to face. For a start, the UK may be facing a period of further belt-tightening, which I think means consumers might be less inclined to purchase premium mixers for their drinks. While Fevertree has an edge in being the premium offering for drink mixers today, I’m not sure this is enough to keep it growing in this environment.
And it manufactures and bottles in the UK, sourcing ingredients from abroad. It has previously indicated that Brexit may force it to move its manufacturing overseas.
I think there are still enough positives in the trading update to keep hope alive. As such, I’d continue to hold the shares if I was an owner.
But it has a price-to-earnings ratio of 28 and a dividend yield close to 1%. These are not overly enticing metrics and until they iron Brexit out, I wouldn’t be rushing to buy.
