Could dwindling demand for spirits spell trouble for posh mixer brands like Fever-Tree?

Diageo’s interim results last week were yet another sign storm clouds are darkening over the spirits category and will unlikely just blow away.

Guinness’s success aside, sales of pretty much all of Diageo’s flagship brands (Smirnoff, Johnnie Walker, Gordon’s) were in decline, as consumers globally reined in their booze purchases in the face of wider cost of living pressures.

And while that’s undoubtedly bad news for Diageo boss Debra Crew, it’s also likely to be weighing on the mind of Tim Warrilow, chief executive of posh mixer brand Fever-Tree, as well as senior executives at smaller competitors like Fentimans, Franklin & Sons and Britvic-owned London Essence Co.

Fever-Tree is one of the major British fmcg success stories of the past two decades. Its slogan – “if three-quarters of your drink is the mixer, mix with the best” – tapped into the growing demand for premium spirits, and helped establish it as the mixer of choice for G&T lovers and cocktail connoisseurs around the globe. 

After going public in 2014, demand for Fever-Tree’s shares skyrocketed by almost as much as its drinks, peaking in 2018 at more than 70 times forecasted earnings.

Are shoppers trading down in spirits?

Fever-Tree’s revenues have continued to climb, despite a difficult pandemic, and last year topped £360m. Its drinks are now sold in more than 80 countries around the world.

But when shoppers stop buying spirits, it’s sensible to suggest they’ll stop buying the drinks they mix them with.

The company’s last trading update indicates the beginning of the impact from slowing spirits sales. Sales of Fever-Tree’s drinks fell slightly (by 1%) in the UK, while revenue growth was “impacted by subdued consumer sentiment in several markets, most notably in Germany”, Fever-Tree noted.

Conversely, Fever-Tree continues to make gains in the US, growing sales by 22% to £117m. However, even spirits-mad Americans have not been immune to recent belt-tightening.

Data from wholesale trends tracker SipSource shows spirits ‘depletions’ were down by 3.8% in the 12 months to August 2023. What’s more, premiumisation appears to be on the wane, with sales of spirits with an rsp of $100 or more down by 15%. Falling sales of tequila – the big growth driver in US spirits in recent years – at Diageo are also a cause for concern. 

How is Fever-Tree likely to respond? The brand will – for now – remain relatively unperturbed while its own revenues and market share continue to climb. Fever-Tree director of communications Oliver Winters said the brand had ended the year with its “highest-ever” market share in the UK, adding sales had “rebounded strongly after a very wet summer”.

Will shoppers keep swallowing price rises?

It is, however, keeping an eye on its bottom line, noting in last week’s update it had doubled underlying earnings (EBITDA) in the second half of the year by making “significant progress in driving operational efficiencies and offsetting material inflationary cost pressures”. In plain speak, that’s cutting costs and raising prices.

The extent to which consumers will swallow these rises, however, remains uncertain. If shoppers are already wincing at the thought of spending £30 on their favourite gin, it’s possible they’ll think twice about paying £5 for an eight-pack of Fever-Tree Indian Tonic Water. Particularly when they can pick up an own-label alternative for less than 20% of the price.

Another option, and one Fever-Tree is already exploring, is product diversification. The brand branched out beyond its traditional tonic offering in 2020 by launching a range of sodas aimed at luring more health-conscious consumers. It’s also branched out into cocktails, debuting a line of pre-mixes in Margarita, Mojito and Espresso Martini flavours.

These innovations are smart because they’re incremental to Fever-Tree’s offer, and don’t necessarily rely on consumers continuing to sip on spirits. Non-mixer products now account for 25% of UK sales for Fever-Tree, which – given the growing number of moderating and teetotal gen Z consumers – sets the business up well for the future.

Will it be enough? Perhaps. But any further downtrading in spirits has the potential to leave mixer brands like Fever-Tree all shaken up.