Unless you’re Scottish or an avid fan of the FTSE 250, you’ve probably never heard of Barr’s, but you’ll have definitely heard of their biggest product: Irn-Bru!
Kinda like Mountain Dew: Braveheart Edition, Irn-Bru is considered Scotland’s 2nd national drink after whisky.
A gleeful mash-up of artificial flavours and industrial branding, Irn-Bru is an unlikely modern success. But it’s the lynchpin of one of the FTSE’s fastest growing stocks.
Barr’s have other drinks too…
In the same way that Vanilla Ice had other songs. Ha.
Seriously, Barr’s 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.
Barr’s have been around since 1875 and Irn-Bru since 1901. But despite over a century in business, recently they’ve been one of the FTSE’s top performing stocks, growing around 57% in the last 5 years.
So what’s 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 £279m (+5.6% since 2018)
- Operating profit £45m (+2.5% since 2018)
- Operating margin 16.4% (-0.66% since 2018)
- Return on capital 21% (+0.48% since 2018)
- The company carries around £19m debt
In the 2014 numbers from the beginning of Barr’s 5 year run, profit was £38m and revenue was £254m.
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. It’s sugar and water, people!
They’re not rocking absurd sales growth, but the share price is rising at a faster clip.
So what’s 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 that’s 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 Scotland’s 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
Barr’s 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 Barr’s 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.
The Fever Tree factor
This one’s harder to judge.
Luxury tonic maker Fever Tree has been one of the UK’s 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 Barr’s as an undiscovered alternative.
It’s a bit strange that they’ve been linked together. Despite both being soda companies, Fever Tree’s premium mixer strategy is very different from Barr’s traditional soft drink market. And Fever Tree has a lot more space ahead as well as much bolder international ambitions.
We can’t say for sure how much Barr’s share price success was encouraged by these comparisons, but Fever Tree certainly brought a lot of attention on the UK soft drink space.
The vast majority of Barr’s market is in the UK, so any trade barriers shouldn’t 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.
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-Bru’s margins down.
The second issue is product line reduction. There’s 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 Barr’s be too bubbly?
It may be a cliche but it’s always worth remembering: even a high quality business won’t keep growing its share price if expectations run ahead of reality.
At a market cap of £1B+ and a PE ratio of 30+ (6/6/19,Google Finance), Barr’s are certainly ‘cheaper’ 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 they’re expensive. And it’s difficult to argue that they have a unique market opportunity or killer advantage to keep outperforming the sector. It’s 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?
It’s 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.
They’re 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, they’re still a very well-run, growing business in a high-margin space. Whether you’re a fan of the Bru or not, they’re worth keeping an eye on.
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