Founder Bought Out By Global Alcohol Giant, Diageo

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Seedlip, “the world’s first non-alcoholic spirit” has just been acquired (for an undisclosed sum) by global drinks corporation Diageo, owners of Smirnoff, Johnnie Walker, and Guinness. This their first non-alcoholic product in over 250 years.

The acquisition comes 5 years after Founder Dan Branson quit his job in marketing to follow his entrepreneurial instinct, experimenting with distillation and botanicals on his family farm. The clear signal from Diageo is that they now believe there is a big market opportunity in premium non-alcoholic drinks; that Seedlip is a “game changer” product innovation in FMCG.

Blue Ocean Innovation Success

Founder and teetotaller Dan Branson, 36, has broken through against the odds, by pioneering a new category of non-alcoholic drinks, for adults; ‘distilled non-alcoholic spirits’. The company has demonstrated extraordinary sales potential, and is sustaining a remarkable price point normally costing around $48 (£40) a liter. A non-alcoholic Seedlip cocktail in The Savoy will cost you £12 ($14.44). 

Ben’s first sale was 1,000 bottles to London department store Selfridges, which reportedly sold out within a week. By August 2018, 3-years-since-launch, the little-known and under-stated British start-up was producing 30,000 bottles per month, and is now distributing to 25 countries. Growth has been reported at 170% Y-O-Y by The Financial Times.

Benchmark Seedlip’s astonishing retail price against competitors, and it is easy to recognise this as a Blue Ocean innovation story, breaking all the rules to create white space. Let’s compare it with Bottle Green Elderflower Presse, another up-market soft-drink. Both require mixers. The elderflower is retailing at £4.30/litre, positioned as a cordial (just add water). Seedlip is almost 10X more expensive, positioned as a ‘spirit’, for ‘grown-ups’; served by 300 Michelin star restaurants, and very much aligned with premium gin, in its bottling, retail display, and recommended mixers. It is perhaps not surprising then, that the world’s largest spirit-maker acquired a majority stake in Seedlip at this exciting stage, following on from their earlier investment.

Innovation Timing – The Kairos Moment

Timing seems instrumental to the success of any breakthrough product innovation. Ancient Greek philosophers called this kairos – why now? It is very hard to imagine this succeeding 10 years ago. Ben has lucked out on timing. Indeed, Seedlip was Diageo’s first ever investment in non-alcoholic drinks, taking a minority stake in 2016, through Distill Ventures, which has helped with start-up costs, distribution and marketing. 

The investment broke Diageo’s 257-year-rule, of betting on alcoholic drinks exclusively. How times change. Perhaps they were encouraged by the meteoric rise of drinks brand Fever Tree, the British unicorn start-up that has similarly challenged incumbents, and subsequently IPOed on the London Stock Exchange. FeverTree’s share price has risen by more than 1,000% since flotation in 2014, to a market cap of $2.63 billion (£2.19 billion). Not a bad result for start-up innovators with the vision and passion to reinvent the market for tonic water.

Concurrently, there has been negative pressure to innovate, with UK alcohol consumption falling 26% between 2002 and 2012. Changing tastes have lead to some winners, with gin becoming a surprise hit; helping Fever Tree to no end. Booze is down, but gin is up. Macro-market forces are pressuring big alcohol companies to think differently; enough incentive to risk capital on this counter-intuitive start-up innovation, that many would have viewed as outlandish. Or mad. Diageo appear to have done very well from this gutsy seed investment however, getting a privileged view on the company from the early stages. It is theirs to play with now.

 

Product Positioning

Seedlip’s seductive product positioning has been its core genius. The 3 current products elegantly bridge the gap between a conventional soft drink, and ‘grown-up’ drinks like wine or whisky. It’s a kind-of-gin-without-the-gin option, appealing to people who like gin, but can’t drink because they are driving, or are in the growing ranks of the sober curious. 

You don’t even need to like gin to like Seedlip, although a taste for tonic water is essential. Don’t drink it on it’s own. No. The novelty makes for good ice-breaker-conversation at corporate events, no doubt, and it works well as a placebo for those experimenting with Dry January. For the growing number of tee-totallers, it’s a new way to drink at events, at bars or at home, and feel completely at ease about it. Classy, and sophisticated even. Definitely grown-up.

Alcohol Market Changes in 2019

A cynic would say that Diageo is using this brand as a stalking horse, to deflect the attention of regulators, politicians, and public health pressure groups. They might point to Seedlip’s tiny market share, or the percentage of sales against Diageo’s dozens of alcoholic products, or indeed, Diageo’s track record on acquisitions. At this stage, sales of Seedlip are tiny by comparison to any big brand liquor. The relative sums involved in the investment will be similarly small. Ignore all this.

Seedlip’s growth hypothesis is now about to be tested aggressively. Diageo clearly believe that this is the beginning of a new market category – foreseeing a significant market change. They are going to pursue this as a major growth opportunity. Craft drink sales are on the rise. There’s a measured and sustained increase in people actively seeking non-alcoholic drinks. Dry January has gone mainstream in awareness; 10% of alcohol drinkers planned for it in 2019 (4.2 million people in the UK).

There is evidence of a resilient trend for premium products with story value; demand for ‘everyday luxuries’. We have seen this trend across all kinds of consumer products in recent years, from memory-foam mattresses going mainstream, to $1,000 iPhones, to premium burger brands challenging McDonald’s on quality. 

Scotch single malt brands have positioned as premium for many years now, as has gin more recently. High margins make business sense, and ultimately pulling this off comes down to brand and distribution. Diageo has made handsome profits by doing this with spirits for generations, carefully acquiring products on the rise, and positioning their vast portfolio as premium; generally avoiding low-margin commodity plays. Now, they plan to do it again with non-alcoholic drinks that could otherwise threaten their market share. They are investing in disruption, to stay ahead.

How Much Does Seedlip Cost to Make?

Seedlip costs of production are a commercial secret. It is too soon to reverse-out an estimate from company accounts and reported sales figures. Diageo will find ways to keep it secret. We do know that the company reports a 6-week production process. While it does require distillation, this type of product doesn’t need to age in a barrel for 3 years (or 30), like whisky. Some herbs are required, and of course water.

Seedlip has another secret in its pricing that vastly inflates the profit margins. It’s premium price point of $48 a litre puts it on a par with high end gins and malt whiskys, the kinds of products that consumers are encouraged to compare it to. But alcoholic spirits face 61.1% tax through British alcohol duty and VAT. Avoiding the U.K’s alcohol tax means Seedlip nets an estimated £11.49 ($13.83) bonus margin per litre in its home market. The retailers will enjoy higher margins, for their share of this, which motivates them to sell it. At scale, Seedlip can afford to do crazy things with the brand. Perhaps they will sponsor three Formula1 racing teams at the same time?

Manufacturing and distribution is likely to cost less than the retail price of Bottle Green’s cordial. The most expensive element of the product is probably the bottle, which has been elegantly designed to distinguish the brand and signal ‘sophisticated adult drink’ without trying too hard. 

“Game Changing Drinks Product”

Having proven the value hypothesis, and distributed widely, they can now expect some fierce competition. The category will likely broaden too, welcoming new entrants like Nine Elms; a surprisingly sophisticated alternative to wine, which has similarly attracted the attention of top restaurateurs, retailers, and bars. Successes like this won’t go unnoticed at Coca-Cola, for example, who have recently acquired British-international coffee brand Costa for $5.1 billion. Diegeo will in turn have to invest heavily in this brand to sustain their competitive advantage, and to scale-up successfully. This is what they do. But it will require a lot more money.

John Kennedy, President Europe, Turkey and India at Diageo commented: “Seedlip is a game-changing brand in one of the most exciting categories in our industry. We’re thrilled to continue working with [Ben] to grow what we believe will be a global drinks giant of the future.”

The race for market dominance is now on. Will competitors rush to market now with well-funded copy-cat products? Whether Seedlip can maintain its pricing under pressure remains to be seen, but having an authentic start-up story and keeping the founder involved will help. 

This is a great British start-up success going global, and definitely one to watch. Bold moves and great timing have paid off for the founder. Seedlip is marketing genius. The product is genius. More than anything, the profit margins are genius. Dan Branson has out-foxed the market, seizing the moment, and broken new ground on premium pricing. Notably, The Founder maintains a substantial share in the business, giving him a free swing at future success following this sale. Presumably he’s not yet ready to retire in his mid-thirties, so let’s hope he comes back to market soon, with another exciting innovation that surprises, and delights. 

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