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After AG Barr’s profit warning is it time to can the Irn Bru maker?

After an earlier profit warning that sparked worries that the fizzy drinks group has lost it sparkle, analysts look at how deep-rooted the problems are

ag barr
AG Barr is about much more than just the iconic orange tipple

Soft drinks maker AG Barr PLC (LON:BAG) surprised the market with its earlier warning about very soft first-half trading, but has the Scottish company lost its fizz?

There were several issues bottled up at the heart of the profit decline, as the FTSE 250 group struggled with the hangover from an “unprecedented year for soft drinks” last year as a heatwave combined with a CO2 shortage and after-shocks from the soft drinks sugar tax.

READ: AG Barr issues profit warning

More than £250mln was drained from Barr’s market value on Tuesday as it warned that lower sales in the first half are unlikely to be fully fixed in the second half and so profits for the full year will be down 20%. 

Barr’s said that last year's price cuts as part of a short-term focus on volume had successfully boosted sales growth, but the switch back to higher prices in 2019 had resulted in lower sales than expected. 

Furthermore this was exacerbated by the worse weather this summer in Scotland and northern England, as well as the brand-specific issues with its Rockstar energy drink and the Rubicon fruit juice ranges.

“Relying on the Scottish weather for sales is not much of a strategy,” snarked analyst Neil Wilson at Markets.com, a Scotsman who admits he has not “dabbled in a swally” of Irn Bru since he was in short breeks.

Market concerns

With the shares down a whopping 28% on the day, Wilson perhaps spoke for the wider market when he said the profit warnings had raised several issues with the company.

“It looks like it’s been softer consumer environment, but not that soft,” he said, adding that blaming weather patterns “seems like a weak excuse”, that there is “something not right” with Rockstar and Rubicon.

Consumer trends are also shifting away from sugary products, drinks analysts at Mintel noted, with the industry being driven by a three-way trend towards “health, naturalness and premiumisation”.

“There's a big fight happening in premium soft drinks, with Coke and PepsiCo duking it out with their zero sugar colas, backed with a huge marketing budgets, and also edgier, more adult-oriented, healthier beverages,” said Mintel’s Alex Beckett.

“It's easy to get stuck in the middle-ground crossfire between these two.”

Indeed UK data from Mintel shows that Irn Bru lags well behind the various sub-brands of Coca-Cola and Pepsi, as well as Fanta, nestling between Schweppes and Dr Pepper.

Niche brands and innovation

However, in Scotland alone, Irn Bru is uniquely strong and is one of the few soft drinks brands in the world to outsell Coke.

This speaks to AG Barr’s strategy of focusing on niche markets and innovation.

Rockstar, which is made under licence from a US-based partner, has been one of the most innovative brands in the energy drinks market in recent year but has in the past nine months been hit by new competition and tougher pricing. 

Barr will have hopes three new products that are being launched at the end of the summer will help it grab market share back, though the launch is perhaps later than the company would have liked. 

The Cumbernauld-based group has also looked to innovate with its Rubicon brand in response to the soft drinks levy, with the introduction of a more expensive sugary drink, a standard product just below the sugar tax limit and a no-added sugar drink. 

Barr’s believes this is the right approach for this brand and has improved the recipe, which will take effect in the second half of the year. 

Other group innovation is paying off, with the Funkin cocktail mixer business “goes from strength to strength”, while the lower-sugar versions of Irn Blu are also selling well despite the reversion to normal pricing.

Mintel’s Beckett hails the company’s presence in fast-growing categories: “Its Rubicon Spring flavoured water has been a bright spot and Le Joli sparkling water ticks all the right boxes. 

“Soft drink innovation is rapidly diversifying and it's a case of who can react fastest. Maybe Barr has the agility and imagination to compete beyond the budget fixture.”

Can profits bubble back up?

While innovative when it comes to its products, the group has been conservative when it comes to its finances and this is the first profit warning under chief executive Roger White, who has been in charge since the early 2000s. 

He told reporters: “I’m not having another one if there’s anything I can do about it.”

White stressed that the company is firmly focused on driving increasing sales value, as it always has, rather than the one-off volume focus of last year.

Analyst Alex Smith at ‘house’ broker Shore Capital has a glowing report for his client, characterising Barr's as a “fine company, with an excellent portfolio of brands, world-class manufacturing facilities [and] a strong balance sheet”. 

He acknowledged that recent trading periods have imposed “a much tougher financial outcome than management and we anticipated”, leading to the lower guidance.

While the market has marked down the group's shares due to the disappointing update, Smith emphasises that Barr is “a cautious and straightforward group, that we believe will do the right things and deliver on its potential”. 

Nicola Mallard at Investec also believes in Barr’s trimming her full year profit before tax to £36mln from £46.6mln, meaning earnings per share come down to 25.6p from 33.2p, which she believes is a ‘worse case’ number. 

With the group’s “strong plan” for the second half, including plans to look at removing some costs, she expects to see growth resume in the 2021 financial year and beyond, but does not pencil in any forecast anywhere near the 2019-level PBT of £45.2mln. 

Quick facts: AG Barr

Price: 564 GBX

Market: LSE
Market Cap: £633.38 m

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