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Feb 9, 2020

Drink-makers must toast the alcohol-free spirit of the age

written by Lisa Eason

Every venture capitalist knows that investing is often a slave to fashion. Popular themes come and go: one year it’s the internet of things, the next it’s blockchain or autonomous driving.

Right now it seems that healthy soft drinks for adults are the idea of the moment. I’ve had three business plans for such offerings in the past month alone. My suspicion is that they are all partly inspired by the spectacular success of Fever-Tree Drinks. This producer of premium mixers was launched in 2004 by Charles Rolls and Tim Warrillow, and its market value peaked at more than £3bn in 2018.

Fever-Tree is an incredible organic growth story: its tonic water has ridden the boom in gin consumption around the world. It enjoys profit margins of more than 30% and has made its founders rich while pushing the market leader, Schweppes, into second place.

The paradox is that Fever-Tree is generally an accompaniment to alcohol, yet overall alcohol consumption is declining in some countries. In the UK it has fallen roughly 20% over the past 15 years — and millennials are probably drinking a third less than previous cohorts of that age. Moreover, about 30% of adults in this country say they never drink. Many cite health concerns as the explanation for their changing habits; for others, there are cultural reasons for abstinence. Coffee is displacing alcohol in lots of social settings. For plenty of people, sober nights out are now the norm.

Belatedly, the licensed trade is reacting to these changing behaviours. Low and no-alcohol drinks are flooding the market — beers, wines, ciders, even spirits. Dry January is more popular every year. Pubs, bars, nightclubs and restaurants are all having to supply an improved range of soft drinks.

I have encouraged all my operating partners who sell alcohol to embrace these trends. Thanks to the lack of excise duty, non-alcoholic beverages can be more profitable than booze for the on-trade, but the quality and choice needs to be better. For a long time, the hospitality industry cared only about patrons who drank alcohol, and saw non-drinkers as second-class citizens. That era is over. The 21st-century generation of soft-drink ventures is an element of this phenomenon.

Overall spending on alcohol isn’t necessarily falling as rapidly as consumption because some drinkers are opting for more expensive products, such as craft beers or spirits. Also, customers are more willing to pay for what they perceive to be “premium” beverages. Beer is in an overall slump, possibly because consumers see it as more calorific than distilled liquor. The rise of consumers avoiding gluten has also affected beer sales.

Traditional sweetened, carbonated soft drinks are also facing multiple threats. Single-use plastic packaging is seen as bad for the environment. Low and no-calorie variants now account for almost two-thirds of all sales. Manufacturers have been hit with the soft drinks industry levy of up to 24p a litre. Consumers increasingly want natural flavours rather than artificial ingredients, and ethical producers with a brand story that resonates. All of this creates opportunities for newcomers in what is a significant market, worth more than £16bn in 2018 — while even mature industry giants, such as Britvic, can still show 14% ebitda margins on revenues.

Niche products such as sports and energy drinks, flavoured water and plant-based drinks are all growing rapidly. As ever, the key to expanding businesses in this type of category is to develop distribution. While the supermarkets offer suppliers huge volume potential, they demand tough terms. By contrast, the food service market — cafes, restaurants, pubs and so forth — is much more fragmented.

This is where the opportunity lies for entrepreneurs. Giant players such as Coca-Cola and Nestlé are generally not built to innovate and invent new brands. That creates a gap for independent start-ups to exploit.

The extraordinary achievements of brands such as Red Bull show the potential prize awaiting winners in the sector. In a more modest way, the steady growth of companies such as Belvoir Fruit Farms, famous for its elderflower pressé, and Fentimans, renowned for its ginger beer, demonstrate the diversity and buoyancy of the marketplace.

More and more drinkers are seeking to avoid hangovers, but still want to enjoy exotic and authentic-tasting beverages. I’m sure entrepreneurs will quench that thirst.