Glass half full: 5 companies driving growth in the UK beverage sector

The UK food and drink sector has kept its post-Covid momentum into 2024 as 81% of businesses polled by BDO Global last year felt positive about the sector, up from 69% in 2022. Having endured Brexit, Covid-19, and supply chain issues, the industry is poised for continued growth as headwinds to the UK economy ease in 2024. Indeed, headline inflation is normalising while wages are still rising, and the BoE is expected to keep rates steady with potential easing in Q4 as the economy heads for modest growth this year.

Consequently, the "net confidence score" among respondents to the Food and Drink Federation's State of the Industry Report hit 6% in Q3 2023, entering positive territory for the first time since the Q2 2021. Meanwhile the "outlook confidence score" in Q4 2023 was 16%, suggesting businesses were more optimistic and expecting stability. 41% said they would increase their capex over the next year while 41% said they would maintain levels and only 18% expected spending to fall.

The industry picked up significant momentum in the late 2010s, which has accelerated after the abovementioned hurdles subsided. Oghma Partners' research measured £312.4m invested in 304 companies over 583 investment rounds from 2012 to 2017, while from 2018 to 2022 funding increased to £1.8bn - a 6x jump in value compared to the previous 5-year period. Today, the industry is the largest manufacturing sector of the UK economy, worth £121bn annually.

In this report, we are focusing specifically on the drink portion of the sector. While it follows the same general trend as the wider sector, drinks are a less essential commodity, and as such relate to the fortunes of the leisure industry which we explored in an earlier sector report. Therefore, the drink sub-sector follows Britain's return to leisurely activities that began with the post-Covid recovery and now continues with the normalisation of inflation, real wage growth, and easing of the cost of living crisis.

In addition to macroeconomic factors, Oghma points to trends such as rising interest in craft spirits, the growth of consumer-tailored online shopping, and diversification of products with healthy and vegan options as drivers for the beverage sector. "Over the last decade, the alcoholic beverage sector has seen almost 3x as much volume of investment compared to any other sector, as well as the highest total value of deals" Oghma found.

In this context, we present 5 innovative companies from the UK beverage sector that have made notable headlines recently. We recommend investors interested in the wider sector follow these companies as UK consumer spending gains momentum in 2024.

Chapel Down

Chapel Down (CDGP) Follow | CDGP is England's largest winemaker, sourcing from 1,023 acres of vineyards in Southeast England and hosting 60,000 annual visitors at its brand home in Tenterden, Kent. The company listed on AIM in December 2023 to accelerate already impressive growth and attract a wider pool of investors, adding to its existing AQSE listing.

In November, Chapel Down reported a record 2023 harvest, with tonnage 86% higher than 2022 and 75% higher than the previous record posted in 2018, underpinning its plan to double the size of the business by 2026 to £28m. The company sold 1.4 million bottles of wine in 2022, generating revenue from off-trade, on-trade, export, and direct to consumer e-commerce and retail sales.

In its most recent interim results, Chapel Down reported strong sales momentum, with H1 net sales revenue growth of 21% to £8.4m across all trade channels. Gross profit margin increased to 55%, driven by a shift to traditional-method sparkling wine and higher selling prices. Operating profit grew 27% to £685k, pre-tax profit increased 26% to £618k, and EBITDA grew 36% to £1.2m on the back of higher prices, improved gross margin, and disciplined overhead management. Brand awareness increased materially in H1 to 37%, from 29% in FY22, and penetration was up to 14% from 11% last year. Net cash on June 30th was £1.1m.

Current trading is in line with management expectations and the outlook for FY23 is positive. Forecast is for continued double digit net sales revenue growth and sustained margins for the full year.

Chapel Down is poised to benefit from the growth of the English wine market, which has seen exceptional progress in recent years. Approximately 11 million bottles of English wine were sold in 2022, of which 7.5 million were sparkling, representing 30% year-on-year growth. In the UK, 10,000 acres of land are planted under vines according to Wine GB, more than doubling in 8 years and quadrupling since 2000.

Naked Wines

Naked Wines (WINE) Follow | WINE is a UK-based online wine retailer launched in 2008. The company connects wine drinkers with independent winemakers from around the world. In return for their support, the customers get better prices than traditional retail. The customers commit to a fixed prepayment each month, which goes towards their next purchase. Naked Wines then funds the production costs for the winemakers, generating savings that are passed onto the customers. In the last fiscal year, Naked Wines served 792,000 customers in the US, UK, and Australia, making it a leading player in the rapidly growing direct-to-consumer wine market.

While the company recorded a revenue decrease in 1H24, its December 2023 balance sheet showed a steady trend toward sustained cash generation and profitability, with inventory optimisation expected to deliver £40-50m of cash inflow over the next 18 months, a strengthened cash position of £7m from £3m in the previous half, and £53m of available liquidity. The interim results further showed repeat customers performing well with higher revenue per customer in all markets, lower rates of cancellation, and customer attrition hitting an all-time low of 33%. The company is also rolling out testing at scale of a revised new customer recruitment model after successful initial results.

WINE appears on track to restore profitable growth, and having reiterated FY24 guidance, it is an attractive buy at the moment, with broker Jefferies' maintaining a target price of 95p. Shares doubled late last year and have been consolidating since then, potentially setting up for another rally.

Distil

Distil (DIS) Follow | DIS is the owner of premium brands RedLeg Spiced Rum, Blackwoods Gin and Vodka, TRØVE Botanical Vodka, and Blavod Black Vodka. Shares of the AIM-listed spirits producer are up 92% since early December, setting up for a rebound after a period of consolidation last year as the company's 2022 business remodel begins to bear fruit.

Most recently, Distil shares jumped 16.6% on sharply higher revenues and gross profit in Q3. The company reported a 39% increase in revenues to £571k compared to last year's £411k, with cumulative revenues for the the 9 months to 31 December up 38% to £1.2m. Gross profit increased 23% to £272k from last year's £222k, with cumulative gross profit up 26% year-on-year for for the last 3 quarters. Additionally, volumes increased by 10% helped by a 48% increase in advertising and promotional spend to £198k amid the launch of the new RedLeg Limited Edition product. RedLeg sold out pre-Christmas amid a 261% spike in online revenues.

The company's orderbook continues to build momentum with key account wins in Q3 and a fundraise that secured enough working capital to support Distil's growth plans through the end of March 2025. Distil is set for continued growth and contract wins after recording double-digit growth in H1 and so far in H2, with Q3 performance demonstrating that consumers did not shy away from non-essential spend during the holiday season. With the global alcohol market projected to continue growing at +2% annually from 2022-27 by IWSR, DIS is well-positioned to build on its momentum in both UK on-trade and its export markets for the remainder of the year and beyond.

Virgin Wines

Virgin Wines (VINO) Follow | VINO is one of the UK's largest wine retailers. The company's stock is up 28% in the past 6 months, setting up for a rally on the back of encouraging FY23 results. Virgin Wines made it through a challenging year for consumer spending relatively unscathed, with revenues not harshly impacted by macroeconomic headwinds and in line with expectations.

For FY23, the company reported group revenues of £59m in line with expectations, down from £69.2m a year ago. However, revenues were impacted by previously reported one-off exceptional events, including Virgin Wines' implementation of a new warehouse management system (WMS) in H1. Revenues from the WineBank scheme were £35.3m, slightly below last year's £38.5m. It should be noted that full-year revenues were also impacted by logistical issues, mostly related to the new WMS.

Gross margins were down slightly to 29.6%, reflecting inflationary pressures, however direct-to-consumer product margins remained high at 40.5%, broadly unchanged from last year. The company recorded 173k active customers at period-end, with a record 133k WineBank members. The latter deposited £8m, almost double the level of FY19. Overall, customers on subscription schemes contributed 87% of direct-to-consumer sales, up from 82% last year.

Moreover, Virgin Wines recorded a 12% increase in year-on-year sales achieved in Q1 2024, suggesting strong momentum into FY24 as conversion and cancellation rates continued to improve. Sales through core repeat channels and commercial sales were also ahead year-on-year by 15.5% and 8% respectively post-period end. A number of strategic initiatives to be implemented in Q2/Q3 2024 should see new products and services introduced, further helping growth.

Overall, Virgin Wines showed resilience in FY23 as it continued to grow its WineBank membership and develop customer acquisition channels through a growing list of partnerships, including WH Smith Travel, Saga, Go Outdoors and OnTheMarket. The company finished the year with a healthy balance sheet, remaining debt free with £5.5m in cash and much reduced levels of stock. As inflationary pressures on freight and class begin to ease, Virgin Wines expects double-digit sales growth in FY24 with EBITDA margin of c. 4-5%.

Gusbourne

Building on aforementioned momentum in the UK wine industry, sparkling wine producer Gusbourne (GUS) Follow | GUS delivered solid performance in 1H23. The company saw wine sales increase 24% to £2.3m, driven by robust growth in both direct-to-consumer and UK Trade sales channels.

Gusbourne's gross margin improved by 840bps to 68.3%, reflecting improved price and sales mix dynamics, in line with the group's premium positioning and product strategy, as well as in H1 a decreased mix in of international sales that are at a lower margin. Adjusted EBITDA loss improved, narrowing to £0.58m compared to £0.70m in H1 2022. The group's net debt increased to £15.2m from £10.3m in H1 2022, primarily due to higher investments in inventory and capital expenditure in land acquired in August 2022. New products continued to perform well, such as the still Rose and 2014 vintage Fifty One Degrees North, selling out ahead of plan.

The strong results combined with a good harvest in 2023, a healthy inventory, and production from new vineyards, underpin expectations for continued revenue growth and margin improvement in 2H and beyond. Gusbourne expects to deliver another year of strong growth across all distribution channels, with accelerated sales in 2H and full-year revenue growth forecast at c. 20% as well as continued narrowing of the adjusted EBITDA loss.