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Tonic Boom - can Fever-Tree keep up with competition? Analysis

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Fever-Tree’s pre-close trading statement will no doubt be cause for a gin & tonic or two among shareholders: sales in the first half of 2015 will be about GBP24m (US$37m), 61% ahead of the prior year period. But the threat of competition looms as other premium mixer producers up their game.

Fever-Tree sources its quinine from the cinchona tree

Fever-Tree sources its quinine from the cinchona tree

In numbers terms, analysts are upbeat about the company’s success, but they also have their eyes open to potential competition.

Investec has maintained its buy status and analyst Nicola Mallard said in a note: "Fever-Tree’s H1 update continues to show very strong revenue growth... although potentially benefiting to some degree from importers’ inventory build ahead of the summer."

According to Mallard, Fever-Tree enjoyed good performances in all key regions - the UK, US and Europe - and both on- and off-trade performances have played their part.

Over at Shore Capital, analyst Phil Carroll retains a sell recommendation and he says that although the brand has filled a gap, there is risk from competition.

"We see Fever-Tree as taking advantage of a gap in the market and to be fair, it has executed its strategy extremely well so far, but we continue to see risk from competition and the rising cost of market spend in due course," he says.

Overall, Fever-Tree’s success highlights to potential competitors the "available growing profit pool" in premium mixers, adds Carroll.

"Therefore, we advise investors to take profits and retain our sell recommendation."

And potential competitors are abound. Fever-Tree’s unique selling point, when it started, was its attention to detail: it sources its quinine for its tonic from the ‘fever tree’ - the cinchona tree, found in the Congo, among other places. Prior to its launch in 2005, Fever-Tree’s founders undertook 15 months of research and shunned artificial preservatives and flavourings.

Back then, the premium mixers category was a desert, ripe for quenching and Fever-Tree managed to provide the right mixer for emerging premium gins and vodkas.

Fast forward ten years and just like the exponential rise in the number of gin launches, premium tonics have started barking up the right tree - the cinchona tree.

New Zealand’s East Imperial, which has arrived in the UK following success across Asia, also sources quinine from the cinchona tree and claims to use a recipe dating back to 1903. These kinds of brand stories aren’t reserved for the spirits world.

Then there’s 1724 - a tonic made with quinine from cinchona trees 1,724 metres above sea level, on the Inca Trail in Peru. Meanwhile, Bermondsey tonic, from London, is actually brown to really hammer home the point that quinine comes from the bark of a tree.

And as Scotland continues to roll out gins (think Caorunn, The Botanist, Daffy’s, NB, Rock Rose, Darnley’s View, Edinburgh - and giants such as Gordon’s and Tanqueray - to name a few), it now also has a tonic. In April, Summerhouse Drinks, which launched off the back of a crowd-funding campaign, took Walter Gregor tonic to market. It’s named after a Victorian minister who served the local parish where it’s made, and yes, it features cinchona bark.

Fever-Tree may’ve opened the dam but the once-dry world of premium mixers - especially in tonic terms - is becoming very wet indeed. Still, there’s some time before saturation.


Sectors: Soft drinks

Companies: Tanqueray

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