1. UK Beverages Sector Landscape

The Beverage industry is commonly distinguished between non-alcoholic and alcoholic drinks. The industry is relatively mature, which comprises of major companies and few smaller players. 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 experts, the market size for the global alcoholic beverages industry is projected to grow at CAGR of 5.6% between 2018 to 2025. The industry was valued nearly at 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. In the United Kingdom, the alcoholic beverage market is projected to reach US $54.9 billion in 2025, representing a CAGR of 3.1% from 2018 to 2025. Adjacently, 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 Non-alcoholic ready-to-drink industry was valued nearly EUR 69 billion, wherein Sparkling category represented around EUR 23 billion, and hydration beverage market represented EUR 20 billion in market size.

Key Trends in the Beverages Sector

• Online Shopping Pattern – The major change witnessed in 2020 was a shift in consumer shopping to online from the off-line channel. Manufacturers and Suppliers should improve their e-commerce channels to pursue the underlying opportunities.
• Zero Waste Policy – British have already banned plastic straws, and packaging would play a vital role in offering products. Increased usage of recyclable products and reduction of the plastic package can be seen to gain market share.
• Social Media Takeover – Social media platforms are significantly influencing the buying behaviour of consumers. For example, ingredients like Chia seeds were not commonly heard earlier; however, its common and desirable ingredient among foodies now. Therefore, digital platforms can be actively tapped for marketing campaigns.
• Health-Focused Drinks – Consumers are opting for healthier or low sugar choices for drinks. Drinks containing Kombucha, Kefir and Apple cider vinegar are getting great traction.

Risk Exposures to the Beverages Sector

• Change in Consumer Taste – As consumers are getting more aware and health conscious, their expectations have changed. On the other hand, pandemic witnessed panic buying, which calls for maintaining an appropriate level of inventory.
• Supply Chain Barriers – There are several macroeconomic uncertainties which have led to supply chain disruptions. It can significantly impact the operating cost and lead to even loss of market share if substantial inventory is not available. Also, frequent changes in production can cause excess inventory, lower margins and profits, higher operating costs, and increased product waste.
• Compliance Challenge – The sector is also governed by strict regulations regarding the safety and security of consumers, workers, and the environment. It requires constant scrutiny and modern technology platform, which can increase the liabilities.

Benchmark Index Performance

Based on the 1-Year performance, the FTSE All-Share Beverage index has generated approximately (-5.47%) return, and it has outperformed the FTSE 100 index (-9.45%) and FTSE All-Share index (-7.21%) but underperformed against the FTSE 250 index (-1.77%).

Fig 1: One Year Benchmark Index Performance

(Source: Refinitiv, Thomson Reuters, chart created by Kalkine Group)

SWOT Analysis

Beverages Sector Outlook

For Alcoholic Beverage market, heavy volume decline foreseen since cafes, pubs and restaurants were shut during the Covid-19 led lockdown. However, a gradual recovery is expected in 2021. On the other hand, software drinks market is projected to post stable growth until 2024 and companies continue to switch from sugary carbonates to drinks with natural flavours with healthier content. Despite the economic outlook of the Covid-19, large segments of the Beverage market have managed to balance losses since consumer shifted beverage spending to stocking groceries at home from restaurants. Moreover, consumers are demanding for healthier and natural products. The market would be propelled by increasing the young-adult demographic globally with high disposable income. Adjacently, consumers are increasingly adopting plant-based drinks and drinks with low-sugar.

2. Investment analysis and stocks under discussion (DGE, BAG, NICL, STCK)

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. Diageo Plc (LON: DGE)

(Recommendation: Buy, Potential Upside: 13.90%, Market Capitalization: GBP 70.45 billion)

Diageo is the leading alcohol beverage company and provides several categories of beer and spirits. The products are sold in 180 countries all around the globe. It is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 13.90% over the closing price of GBX 3,011.00 (as on 09 February 2021).

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

(Recommendation: Speculative Buy, Potential Upside: 22.34%, Market Capitalization: GBP 560.14 million)

A.G. Barr is the UK-based consumer goods Company, engaged in aerated water and soft drinks business. The diverse portfolio includes brands like IRN-BRU, Rubicon, Funkin and Strathmore. It is listed on the FTSE All-Share index.

                                                                                                                                                                                                                   Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 22.34% over the closing price of GBX 500.00 (as on 09 February 2021).

C. Nichols Plc (LON: NICL)

(Recommendation: Speculative Buy, Potential Upside: 18.61%, Market Capitalization: GBP 447.66 million)

Nichols is a well-known soft drinks company, operating under various brands like Vimto, Starlush, LEVI Roots and Sunkist . The Company provide its services across 85 countries. It is listed on the FTSE AIM UK 50 Index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 18.61% over the closing price of GBX 1,212.50 (as on 09 February 2021).

D. Stock Spirits Group Plc (LON: STCK)

(Recommendation: Hold, Potential Upside: 16.11%, Market Capitalization: GBP 582.10 million)

STCK is a leading branded spirits and liqueurs business, with its production facility present in Poland, the Czech Republic, Germany, and Italy. The Company export its products in more than 50 countries. It is listed on the FTSE All-Share index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of 16.11% over the closing price of GBX 291.00 (as on 09 February 2021).

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

*The "Buy/Speculative Buy" recommendation is also valid for the current price as covered in the report as on 10 February 2021.

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