1. UK Beverage Market Landscape

The stockpiling and in-house consumption have increased due to the health crisis, and the sales have shifted to online channels. Different stakeholders in the food and beverage value chain were affected differently. While restaurants, foodservice distribution and premium brands observed negative impact, whereas value brands have observed a positive impact.

We have covered the beverage sector, given the current dynamics in the consumer staple industry. The key products that are included in the beverage sector are bottled water, beer, coffee, soft drinks, juice, tea, wine & spirits and dairy. The majority of the beverages are sold on-trade and off-trade. On-trade comprises the sale of products that are consumed out of the home like in pubs, restaurants and clubs, and off-trade markets consist of supermarkets, online sales and convenience stores.

According to the June edition of Market Research Future report, the market size of the global Non-Alcoholic Beverages Market is expected to reach USD 1,073.9 billion by the end of 2024, representing a growth rate of 4.61 per cent from 2019 to 2024. The demand for healthy drinks without altering the taste will propel the market growth in future.

The alcoholic beverage market is an attractive industry in terms of growth when compared with other consumer categories. By 2030, there are 550 million new consumers expected to enter the market. As per the report from Data Bridge Market Research, the market size for the global alcoholic beverages industry is projected to grow at CAGR (compounded annual growth rate) of 5.6% between 2018 to 2025. The industry was valued nearly USD 1,272.8 billion in 2018. Regarding the trends, it has been observed that consumers are switching to spirits from wine and beer, and thus, spirits now account for 53% of total alcoholic beverage market by volume.

The food and beverage industry of the UK is the biggest manufacturing sector. Approximately £230 billion is spent on the food and drink in the UK each year, as per the Food and Drink Federation. In 2019, the UK's food and drinks export were more than £23 billion, and it was £9.7 billion in H1 20.

We have segregated the beverage sector under non-alcoholic beverages and alcoholic beverages. As per the Statista data, the revenue of the non-alcoholic sector in the UK would be around £27.25 billion in 2020, which would be down by 5.4% year on year. The non-alcoholic beverages include bottled water, soft drinks and juices; the soft drink segment would alone generate revenue of ~£23.11 billion in 2020. The US non-alcoholic sector is expected to generate a revenue of £217.77 million in 2020, that would be the highest in the world.

The revenue of the alcoholic beverage would be around £46.48 billion in 2020, which would decline by around 13.5% year on year. The alcoholic beverage market is expected to grow at a CAGR of around 10.2% annually between 2020 and 2023. The alcoholic drinks include beer, spirits, wine, cider, perry and rice wine. The beer segment is expected to have revenue of £17.56 billion in 2020.

In August 2020, the UK Government introduced the “Eat Out to Help Out” scheme, which affected the prices of the food and non-alcoholic beverage. A 50% discount was provided on the outdoor dining under this scheme, following which the prices remained low. There has been a slight price rise in September 2020. The government introduced a temporary VAT reduction from 20% to 5% in the hospitality sector.

H1 2020 Food & Drinks Export from the UK

The total food and drinks exports from the UK fell by close to 13.8% year on year in H1 2020 to £9.7 billion from £11.3 billion a year ago. The exports of branded food and non-alcoholic drinks were down by 7.1% year on year. The total food and drinks exports to EU and non-EU stood at £5.9 billion and £3.8 billion, respectively. The exports to the EU declined by 14.5% and to non-EU were down by 12.6% in H1 20. Whiskey is the most exported product from the UK, and its export was valued around £1.5 billion in H1 20, which was down by 31.1% by value and 26.8% by volume in H1 20. The export of Gin and Wine was £252.0 million and £239.5 million, and it was down by 21.3% and 27%, respectively.

Taxes Imposed by the Government on the Beverage Sector

The UK has a beer duty, and the tax is paid on producing and selling the beer. The tax is calculated based on alcohol by volume (ABV) of the beer. The UK applies a duty of 54.2 pence per pint of 5% ABV beer. The duty on the beer is almost three times the EU average. The government also puts a sugar tax, and the drinks that contain more than 8 grammes of sugar per 100 ml the government will levy a tax equivalent to 24 pence per litre. The drinks containing 5-8 grammes of sugar per 100 ml will face a tax equivalent to 18 pence per litre.

Key Trends in the Beverage Industry

• Botanicals: These add fresh, delicate flavour combinations that level up any fizzy drink without leaning too heavily on sugary sweeteners for taste. Sweet and aromatic flavours are gaining popularity. These will be used in both alcoholic and non-alcoholic drinks. Exotic flavours that perceive sweetness will also gain demand.
• Clean Label Drink: These cater to a variety of alternative diets that help to cure stress and anxiety. Well-being drinks that help in enhancing physical and mental health would see encouraging demand.
• Dairy-free Alternative: Vegan lovers are moving to real milk made without animals. The nutritional content, taste and texture of the non-dairy product are the same as that of dairy from the animal.
• Direct to Consumer Offerings: The beverage sector has started delivery of drinks to the customers. We have seen a pick up in-home delivery of beverages to the consumers during the pandemic. Ready-to-drink drinks and low-calorie beverages were in huge demand.

Key Challenges to the Beverage Industry

• Decreased Sales in Hospitality Sector: The restaurants, pubs and hotels were closed during the lockdown, which impacted the sales of beverages. The rephased reopening of the restaurants has not led to a v-shaped recovery for the beverage sector.
• Higher Costs for the Ingredients: The cost of the raw materials and additives used in preparing the drinks is rising. We have also observed disruption in the supply chain. The margins of the finished products have been negatively impacted by the increase in the prices.
• Fewer New Products Launch: The companies have refrained from launching new products in the pipeline during the pandemic. The subdued demand in the current scenario has either made the companies to defer the launch of the product or cancelled it.

SWOT Analysis 

Benchmark Index Performance

In the last one year, the beverage sector has performed better than FTSE-100 and FTSE All-Share indices. The FTSE All-Share Beverage index generated (-16.61%) return, which was better than FTSE-100 (-20.85%) return and FTSE All-Share (-18.91%) return. However, the beverage sector index underperformed as compared to the FTSE AIM All-Share index that generated (+9.43%) return.

Fig 7: One Year Index Performance

Beverage Sector Outlook

In 2020 till 26 July 2020, the UK soft drink market grew by 0.2% in value and 0.6% in volume, as per IRI Marketplace data. The overall soft drink market has grown; however, the value of carbonated has gone up by 7.3%, whereas the value of stills declined by 7.8%. The closedown of the hospitality sector has impacted sales. The revenue in the take-home category grew as the trust in the brand was the key thing that has been noticed during the pandemic alongside value for money and ease of buying. The health crisis has impacted countries at different levels, and during this time the online channel sales have become a more prominent way of purchasing. It has supported the sales of both alcoholic and non-alcoholic beverages up to some extent.

There is an exceptional opportunity in the UK's non-alcoholic beverage industry as the UK also export's a large number of drinks. The whiskey, gin and wine are among the top ten exported products in the food and drinks category. However; in 2020, the alcohol exports have been hit, and as per the data released by Wine & Spirit Trade Association, the spirit exports from the UK fell by around 28% year on year between January 2020 and July 2020, and the total value was around £2.3 billion. In 2019, the total export value for spirits was around £3.2 billion during the same period.

The UK's beverage sector export is exposed to many hurdles such as re-emerging of tariffs, Brexit and the ongoing crisis of the coronavirus. As the macroeconomic situation stabilizes, the food and drinks industry is expected to show some resilience and growth. The UK's food and beverage manufacturing is growing, and by 2024 the industry will need 140,000 additional workforces to meet the expectations, as per the food and drink federation.

The sector is undergoing a shift as initiatives have been taken in developing the next generation of innovative beverages. Consumers continue to prioritize flavour over sweetness, beverages emphasizing bright and refreshing flavours are in the limelight. The beverage market would be propelled by increasing the young-adult demographic globally with high disposable income. Adjacently, consumers are increasingly adopting the plant-based drinks and drinks with low-sugar.

2. Investment Analysis and Stocks Under Discussion (CCH, BAG, NICL, FEVR)

After gaining insights into the beverage sector, we would look at the business model of four beverage players listed on the London Stock Exchange.

A. Coca Cola HBC AG (LON: CCH)

(Recommendation: Buy, Potential Upside: 24.17%, Market Capitalization: GBP 7.10 billion)

Coca-Cola HBC AG is in the consumer packaged goods business and a bottling partner of Coca Cola Company. The Company operates in 28 countries and has segregated the market as underdeveloped, developing and emerging markets. The Company offers a wide range of products such as juice, coffee, energy drinks and non-alcoholic beverages in these markets.

B. A.G. Barr PLC (LON: BAG)

(Recommendation: Speculative Buy, Potential Upside: 19.87%, Market Capitalization: GBP 552.86 million)

A.G. Barr PLC is a manufacturer and seller of aerated water and soft drinks. The Group's leading brands include Rockstar, Snapple, San Benedetto. The Group has also launched a cocktail mixer under Funkin brand. The Group is incorporated in the UK and listed on FTSE All-Share index.

C. Nichols PLC (LON: NICL)

(Recommendation: Speculative Buy, Potential Upside: 20.94%, Market Capitalization: GBP 372.90 million)

Nichols PLC is a UK based company that is in the business of soft drinks. The Company has its products both in still and carbonated category that is sold in around 85 countries. Some of the brands under the portfolio include, Vimto, Levi Roots, Feel Good and Starlush. Nichols is included in the FTSE AIM UK 50 index.

D. Fevertree Drinks PLC (LON: FEVR)

(Recommendation: Hold, Potential Upside: 6.55%, Market Capitalization: GBP 2.66 billion)

Fevertree Drinks is a UK based company that makes premium drink mixers. The products included in the portfolio are tonic water, ginger ale, lemonade, soda water and premium cola. The Company is included in the FTSE AIM UK 50 index.

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy" or "Speculative Buy" recommendation is also valid for the current price as covered in the report as on 28 October 2020.

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