Dominic Walsh examines the sparkling rise of mixers and tonics supplier, Fever Tree, which has seen its value rocket since it floated two years ago. He looks at some of the winners and losers of the Fever-Tree story and how the business has remained focussed on its core skills.

Charles Rolls and Tim Warrillow must be pinching themselves. Is it really only two years since they floated their Fever-Tree mixers business on AIM at 134p? Yet here they are – an astonishing six consecutive profit upgrades in a row later – with the shares positively fizzing along (at time of writing) at almost £11.

It’s not as if they can to claim to have known all along that this is what would happen. After all, why would they have cashed in £18m of shares at 635p, as they did in March this year, if they thought those same shares would be worth more than £30m barely nine months later?

Mind you, it’s not as if the duo, which also cashed in £25m of shares at the IPO in November 2014, will be struggling to make ends meet any time soon. Following the near 12% jump in the share price after the latest profit upgrade, the duo are still sitting on a combined 21.8% stake worth a staggering £272m!!! (Now there’s a first: the journalist who hates using a single exclamation mark deploying three in a row!)

So here we have a company worth £1.23bn – and it doesn’t even make anything! (The exclamation marks are coming thick and fast now!) Rather than investing millions in building big factories to produce their range of tonics and other mixers including Sicilian Lemonade and Madagascan Cola, the two men have wisely outsourced production to existing drink manufacturers who are experts at what they do, enabling Fever-Tree to focus all its energies and financial resources into what it does best: branding, marketing and distribution.

I recently had cause to speak to Matthew Showering, co-CEO of Somerset-based Brothers Drinks, the biggest of the two production companies employed by Fever-Tree in the UK, and I must confess I almost felt sorry for him given that his business makes and bottles one of the fastest-growing and financially successful soft drinks in the land, yet collects only a wafer thin margin on the contract to produce it. I say I ‘almost’ felt sorry for him. As far as it is possible to feel sorry for someone whose family company has a 2.7% stake in Fever-Tree worth almost £34m having collected a fair few bob from selling down its holding from 4.1% at the IPO.

Another person I very nearly feel sorry for is the manager at LDC, Fever-Tree’s private equity backer, responsible for the decision to cut its stake from 50% to 40% at the IPO, collecting £64m, before offloading the rest less than a year later, the final tranche for just over 300p per share. How sick must LDC feel at the thought that 50% of Fever-Tree is now worth a cool £615m!!!

I suppose the big question is how long Fever-Tree can carry on producing such staggering numbers. When a company has upgraded profit guidance to the market six times in a row, in most cases “materially”, what happens when it finally produces a trading update that contains the dread words “in line with market expectations”? The shares will surely plunge!!

My own view, for what it’s worth, is that the founding duo has a business that promises to deliver strong growth for some years to come. It’s probably the kiss of death, but it still feels like they’re only scratching the surface of the potential market – both in the UK and around the world – as its trading update showed.

While the UK is, in relative terms, its most developed market, it has only just signed up Asda as an outlet, while it has yet to secure full national coverage at most of the big supermarkets. It’s also still got plenty of room for expansion in the on-trade. Yet while the addition of new distribution is a core driver, the rate of sale is also accelerating as the audience for Fever-Tree tonics, in particular, expands hand-in-glove with the craft and premium gin movement. I suppose I am quite a good example of a customer. Having bought Fever-Tree tonic only occasionally for a couple of years, deeming it too pricey as my staple tonic, I eventually began to realise that, even at almost twice the price of Schweppes, it was worth paying the extra, especially now I’m spending a bit more on buying different gins. Now I won’t touch anything else but Fever-Tree.

As for geographic expansion, well, the sky’s the limit. There are odd posh-tonic rivals dotted around the place – there is even a posh-looking variant of Schweppes on the Continent – but none has anything like the marketing story and distribution muscle and as it uses its first-mover advantage to continue expanding, that muscle is only going to get more powerful. Also, by using existing manufacturers instead of building its own factories – it is about to sign up a third Continental partner to add to those in Germany and the Netherlands – it can move with lightning speed to seize the market opportunity.

One big potential market it is about to enter is China, where it expects to sign a distribution deal next year. While China’s long alcoholic drinks market is nowhere near as well developed as in the West, the growth of the middle classes and their thirst for western brands will surely provide a rich new seam for Fever-Tree to mine. While Warrillow was keen to play down the prospect of a boost to earnings in the short-term, insisting China was a long-term play, my suspicion is that, once it’s got a decent distribution network set up, the potential for upgrades could be seriously enhanced.

What’s more, tonics are not the only driver for growth. In America, demand for its ginger beer is being driven by the growth of the Moscow Mule (one of my own favourites). Its ginger beer and ginger ale are also enjoying increased demand as a mixer, for dark spirits in particular, and the company seems to be quietly excited by the potential of this market.

The other remarkable thing about the Fever-Tree boys is that, in spite of their huge business success and wealth, they remain remarkably unaffected and – in the words of Harry Enfield’s Tim Nice-But-Dim character – bloody nice blokes.

■ Dominic Walsh is a business reporter at The Times covering the leisure, tobacco and drinks industries

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