The Queen’s Club tennis tournament says much about Britons’ changed drinking habits. A decade ago, chilled lager was the tipple on offer at the annual Wimbledon warm-up, under a tie-up with Stella Artois — but lager is so passé. The tonic water maker Fever-Tree is the new title sponsor of Queen’s, after striking a three-year deal.
In little over a decade, Fever-Tree has gone from a start-up to one of the most highly valued companies on the AIM junior market. It was launched in 2005 by Charles Rolls, a former managing director of Plymouth Gin, and Tim Warrillow, an advertising and branding executive.
It won distribution deals with supermarkets including Tesco and Sainsbury’s, and in 2014 floated on the stock market at 134p a share.
Its growth since then has been meteoric, riding gin’s wave of popularity as millennials switch to premium spirits. Last year gin joined the official basket of goods used by the Office for National Statistics to calculate inflation. Gin sales rose 27% last year, leapfrogging vodka to 51m bottles.
In the UK, Fever-Tree now commands 39% of the mixers category by value, up from 10% two years ago. It has overtaken the former market leader, the Coca-Cola owned Schweppes.
Its business model is ultra lean. Fever-Tree pays others to do its manufacturing and distribution and employs just 60 staff. Also, it is expanding in the US, discussing tie-ups with spirits companies and dealing directly with distribution teams, rather than relying on an agent. That should give it a decent foothold in another market where premium spirits are in the ascendency.
Yet Fever-Tree’s share price growth is on another scale altogether. Rolls has been capitalising on its stellar performance, selling a 2.6% stake on Friday to raise £82.5m. That knocked 5% off the share price, though it still ended the week at £28.07, valuing the firm at £3.2bn.
That is a 1,994% increase on the float price, and makes Fever-Tree more valuable than market stalwarts such as bookmaker William Hill and the water utility Pennon.
All this for a company that posted £170.2m of revenues and £56.4m of profits last year. It trades on a price/earnings multiple of 58 times 2020’s projected earnings; at that level, it is detached from reality.
With revitalised competition in Schweppes, which is pouring money into a relaunch of its brand, Fever-Tree cannot bank on its UK growth continuing unchecked.
It has been a great ride, but the gin bubble will not last for ever. Avoid.