30th April, 2017

Mother’s ruin has been made over — drink just keeps refreshing itself

I have been selling liquid refreshment to the public since I was 18, and have always been fascinated by the magic of drinks brands. What makes customers choose one vodka over another? It might be argued that taste or price are the main factors influencing buying decisions, but I suspect emotional rather than functional benefits sway drinkers more often than not. Certainly, I think there is no category of fast-moving consumer goods where the power of brands and marketing matters more.

An unfortunately named new book, That S*it Will Never Sell, describes the business of inventing drinks brands. It is written by David Gluckman, who claims to be the man who thought up Baileys Irish Cream, Smirnoff Black, Tanqueray Ten and various other spirits, soft drinks such as Aqua Libra and beer brands. He says it was the best job in the world, and did it as a freelancer for what is now Diageo for many years. Gluckman describes the importance of a compelling name, a brilliant design, a powerful story and the right sort of market research.

The global beverage industry is a very large one — worth $1.9 trillion in 2015 — so the prize for successful innovators is huge. Coca-Cola alone turns over $35bn, and has a brand valued at $75bn by experts. The company claims its name is the second most understood term in the world, behind “OK”. Like many early soft drinks, it was concocted by a pharmacist, a Dr John Pemberton, who understood flavourings and ran a soda fountain in his chemist’s shop in Atlanta. Sadly, he sold the formula for just $2,300 a year after introducing it.

An up-to-date, and indeed British, story of successful drink-brand invention is Fever-Tree tonic water. This mixer was introduced in 2005, using better-quality quinine and botanicals for flavouring. The business has boomed on the renaissance of gin as the spirit of choice, and the revival of G&T drinking. I know how popular it now is: in some of our Draft House pubs, gin outsells vodka by 10 to 1.

Fever-Tree went public in 2014, and since then the shares have risen more than 10-fold, capitalising the company at 16 times last year’s revenues and 65 times historic earnings. A racy valuation, to say the least, but a testament to how excited even serious investors can get about fashionable drinks brands.

The richest person in Austria is a Dietrich Mateschitz, owner of 49% of Red Bull, the category leader in energy drinks. He was marketing toothpaste when he came across Krating Daeng, the Thai soft drink that inspired Red Bull. The brand was initially built using viral marketing aimed at students, which promoted the drink’s stimulative powers. Subsequently there has been sponsorship of extreme sports such as mountain biking and skateboarding.

The private company that makes Red Bull has revenues of more than €6bn; I imagine its operating profit margins are at least 25%. Red Bull and Fever-Tree show that soft drinks can actually be more profitable and easier to make and sell than alcoholic ones.

In beer, the seismic change now disrupting the market is the rapid rise of craft brewers — small, artisan producers selling higher-margin, low-volume ales.

There are more than 1,500 such breweries in the UK, the highest number since the 1930s. We operate one in Brighton, Laine Brew Co, which produces beer in kegs, casks and bottles with groovy names such as Twisted Lips and Neon Angel.

The merger of the industrial brewers into an oligopoly has stimulated this boom in independent beer makers. Customers got bored with big, dull brands. In America the craft brewers have already seized a quarter of the market by value, while the bland mega-beer brands are in wholesale retreat.

The new-found inventiveness and entrepreneurialism of the sector is inspiring, and has been replicated in the explosion of craft distillers across Britain — many producing gin, the great English spirit. In a sense, the craft revolution is an anti-brand movement, rebelling against the boring global names pushed by multinationals.

Today there are in total more premises offering a much greater variety of beer, wines, spirits and soft drinks than ever before in Britain, including pubs, clubs and licensed restaurants and cafes. The power of display advertising to sell drinks brands has diminished, so suppliers must work with the on-trade (bars and restaurants) to market products, since the supermarkets cannot create beverage brands. Drink remains a fascinating and dynamic trade.