Unless youâre Scottish or an avid fan of the FTSE 250, youâve probably never heard of Barrâs, but youâll have definitely heard of their biggest product: Irn-Bru!
Kinda like Mountain Dew: Braveheart Edition, Irn-Bru is considered Scotlandâs 2nd national drink after whisky. 
A gleeful mash-up of artificial flavours and industrial branding, Irn-Bru is an unlikely modern success. But itâs the lynchpin of one of the FTSEâs fastest growing stocks.
Barrâs have other drinks tooâŠ
In the same way that Vanilla Ice had other songs. Ha.
Seriously, Barrâs do have some other products, some of which are quite good:
- Tizer: old-school British citrus soda
- Rubicon: tropical juice drinks and flavoured waters
- Distribution for US energy drink Rockstar
- Barrs flavors: classic sodas (Cola, cherryade, ginger beer)
- Strathmore: bottled water
The vast majority of their sales are from carbonated beverages and Irn-Bru is the king of the bunch.
Barrâs have been around since 1875 and Irn-Bru since 1901. But despite over a century in business, recently theyâve been one of the FTSEâs top performing stocks, growing around 57% in the last 5 years.
So whatâs driven a hundred-year old soft drink business into growth stock territory?
First up, some numbers 
Here are some highlights from the latest financials:
- Revenue ÂŁ279m (+5.6% since 2018)
- Operating profit ÂŁ45m (+2.5% since 2018)
- Operating margin 16.4% (-0.66% since 2018)
- Return on capital 21% (+0.48% since 2018)
- The company carries around ÂŁ19m debt
In the 2014 numbers from the beginning of Barrâs 5 year run, profit was ÂŁ38m and revenue was ÂŁ254m.
Both profits and revenue are growing modestly. Margin and return on capital are both healthy, which is to be expected for a well-run soft drink business. Itâs sugar and water, people!
Theyâre not rocking absurd sales growth, but the share price is rising at a faster clip.
So whatâs the news behind the numbers?
Thirst for the Bru
For a long time, Irn-Bru has been a fairly niche drink. Only in Scotland, one of the only countries where Coca-Cola is 2nd best in sales, was Irn-Bru a major commercial force.
But thatâs changing. Irn-Bru have consistently increased their market share across the UK, in terms of volume (bottles bought) and value (amount spent). There are a few factors behind this: irreverent marketing, product diversification into diet versions and maybe even Scotlandâs millennial appeal as the progressive beacon of the UK.
Irn-Bru are iconic in Scotland and their branding has been famous for years.
BTW according to Yougov, fans of Irn-Bru also like Dizzee Rascal, Duncan Bannatyne and Notts County F.C.
Bannatyne sort of makes sense but Notts County?
Slimming down for the sugar tax
Barrâs also responded very well to recent UK regulation around sugar, specifically a new sugar tax. Rather than pay the tax, the company reformulated almost all their products to drop below 5g of sugar per 100ml.
This allowed almost all of Barrâs drinks to fall below the threshold for the tax, neatly dodging the need for a price rise to maintain their margins. So they can price their products exactly the same as more sugary rivals but take more profit on each can or bottle.
There was a backlash from fans of the old formula with some people stockpiling the old bottles. Nonetheless, sales grew after the switch.
Furthermore, 40% of their sales now register for the totally sugar-free versions.
The Fever Tree factor
This oneâs harder to judge.
Luxury tonic maker Fever Tree has been one of the UKâs fastest growing stocks in the last few years. Once Fever Tree had risen a lot, a fair number of analysts began to shine a light on Barrâs as an undiscovered alternative.
Itâs a bit strange that theyâve been linked together. Despite both being soda companies, Fever Treeâs premium mixer strategy is very different from Barrâs traditional soft drink market. And Fever Tree has a lot more space ahead as well as much bolder international ambitions.
We canât say for sure how much Barrâs share price success was encouraged by these comparisons, but Fever Tree certainly brought a lot of attention on the UK soft drink space.
Challenges
Brexit risk?
The vast majority of Barrâs market is in the UK, so any trade barriers shouldnât have a huge impact on sales. Soft drinks are unlikely to be a major casualty of a declining UK economy. That said, the company counts international growth as a recent success, so while their UK concentration might spare them a big drop if trade becomes more difficult, it could dampen a growth area.
Their biggest area of exposure would be in payment for or supply of raw materials (ingredients etc) from abroad. The company has undertaken hedging and built a materials surplus to reduce these risks.
A truly catastrophic Brexit could still pull the stock down as part of a general drop in the UK market. However, vs other UK businesses, it seems to face a relatively low direct impact from Brexit.
Supermarket consolidation
The Sainsbury-Asda merger was blocked but overall the trend is still towards consolidation. That could be bad news for brands on two fronts. Firstly, fewer big retailers means brands have less bargaining power on prices and retailers have more. That could push Irn-Bruâs margins down.
The second issue is product line reduction. Thereâs an ongoing trend for supermarkets to slash their product lines, in an effort to make shopping simpler and their stock management more efficient. This means stocking fewer brands, a situation in which more niche brands (like Irn-Bru) tend to lose out. Fewer retailers means even less brand diversity.
Could Barrâs be too bubbly?
It may be a cliche but itâs always worth remembering: even a high quality business wonât keep growing its share price if expectations run ahead of reality.
At a market cap of ÂŁ1B+ and a PE ratio of 30+ (6/6/19,Google Finance), Barrâs are certainly âcheaperâ in price-to-earnings terms than the hotly valued Fever Tree (around 50 at the same date).
But compared with other players in the UK drinks market (Britvic, Nichols), on the PE metric theyâre expensive. And itâs difficult to argue that they have a unique market opportunity or killer advantage to keep outperforming the sector. Itâs more of a general competence.
Note that they also have an operating margin of around 16-20%, so the product has less pricing power than a Fever Tree (c.30% operating margin).
Is there any sparkle left?
Itâs a very tempting prospect to imagine a century-old business with an idiosyncratic product that now has the dynamism and growth potential of a top-rank consumer brand. The real picture looks a bit more nuanced though.
Theyâre a quality business, but perhaps not an exceptional one. It does seem like at least some of their impressive share price growth has been driven by attention on the drinks sector, as well as their own admirable achievements.
However, theyâre still a very well-run, growing business in a high-margin space. Whether youâre a fan of the Bru or not, theyâre worth keeping an eye on.
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