Recent entry into emerging, high-growth beverage categories…

In addition to ABC, the company’s portfolio consists of a broad range of ready-made cocktails, spirits and non-alcoholic beverages, as well as bitters. At the same time, IBG seeks to add new brands, as noted, and expand its product portfolio. With its focus on emerging beverage categories, IBG has entered some rapidly growing beverage niches over the past several quarters. For example, IBG has recently introduced Twisted Shaker in Australia, which represents its initial launch in the bottled cocktail market. Drummerboy, a new non-alcoholic spirit brand, represents the company’s entry into the growing non-alcoholic beverage market.

Non-alcohol and low-alcohol, or NoLo, beverages are becoming increasingly popular, as a growing number of consumers seek to manage their alcohol intake but still want to engage in social activities. According to the National Institutes of Health (NIH), the “popularity and consumer demand for low-alcohol and alcohol-free versions of beverages such as beer, wine, spirits, and cocktails has increased.” According to IBG, the global NoLo sector in key markets was valued at just under US$10 billion in 2021, up from US$7.8 billion in 2018.

Against this backdrop, the company is optimistic about the prospects for Drummerboy. Moreover, the company also believes that its vertically integrated operations – with manufacturing, distribution and sales capabilities focused largely on the direct-to-consumer (DTC) sales channel – can produce relatively high margins on product sales. For example, reflecting efficiencies derived through its in-house manufacturing capabilities, the company anticipates that Drummerboy can achieve high gross margins when products are sold through IBG’s proprietary Drummerboy website, www.drummerboy.com.

Overall, IBG’s DTC sales channel is comprised of a network of four proprietary e-commerce platforms: www.bevmart.com.au, www.bevmart.com, www.wiredforwine.com and www.drummerboy.com. Moreover, management notes that IBG’s e-commerce staff has extensive beverage industry experience, with team members having previously held positions at Endeavour Drinks Group, which is Australia’s largest online and brick-and-mortar liquor retail group, Treasury Wine Estates, one of Australia’s largest wine companies and Anheuser-Busch InBev. Consistent with its strategy to both expand distribution and focus on the DTC channel, the company has added online outlets over the past few years. Specifically, Innovation Beverage launched BevMart.com.au in Australia in May 2021 and in February 2022 introduced the platform in the U.S. as BevMart.com. IBG acquired U.S.-based www.wiredforwine.com in November 2021.

IBG is also optimistic about prospects for Twisted Shaker, which is a line of high-quality full-strength bottled cocktails. The company intends to introduce the Twisted Shaker line in the U.S. and is in the process of identifying distributors in the U.S., as well as in Australia. During the pandemic, reflecting the importance of in-home entertainment, the pre-batched cocktail, or ready-to-drink (RTD), cocktail market grew significantly and has remained popular, reflecting the convenience and cost of the product. According to industry trade publication BevSource, the “RTD cocktail industry is expanding as market demand rises.” Wine Business magazine notes that per a recent IWSR report, the overall RTD category is expected to grow by more than $11 billion over the next five years.” The magazine also notes that “RTD manufacturers are also responding to the renewed focus on health by creating unique botanical-based flavors…” IBG offers a Twisted Shaker cucumber gimlet and a raspberry and hibiscus cosmo, among other selections that are packaged in attractive glass bottles.

Growth Strategy

Global bitters markets: opportunity if IBG can gain share, which it believes relationships with leading market players can facilitate

IBG’s growth strategy is focused on expanding its product portfolio organically and through strategic M&A, as the company continues to invest in the development of new formulations and brands and also leverage strategic marketing initiatives to boost awareness of its brands. At the same time, consistent with recent growth initiatives, IBG intends to continue investing in expanding its footprint. The company’s near-term focus is on Australia and the U.S. markets, but Innovation Beverage plans to develop a global distribution network working with strategic distribution partners.

In fact, IBG is optimistic that it can grow its market share in multiple categories, as it leverages its relationships with existing distributors such as with Coca-Cola Europacific Partners (CCEP, see below) and forms agreements with new distributors. At the same time, the company expects to expand its production volume, as noted, by utilizing unused production capacity at the Australian manufacturing facility. The company also plans to boost its DTC capabilities through existing online marketplaces and by acquiring additional e-commerce sites.

The company’s near-term focus is on increasing its market share domestically and in the global market for bitters. According to IBG, the U.S. is the world’s leading bitters market by volume and continued expansion of the category is expected. IBG recently announced that through its U.S. distributor, Buettner Global Services, Australian Bitters will now be available throughout the U.S. through distribution with Sysco, a leader in the foodservice distribution industry. Sysco distributes food and beverage (F&B) products to restaurants, healthcare and educational facilities, lodging establishments, and others. Innovation Beverage also has a partnership with Coca-Cola Europacific Partners, as noted, to manufacture ABC bitters for exclusive distribution in Australia. CCEP is one of the world’s largest Coca-Cola bottlers. The company cites this partnership as a primary factor behind its ability to gain market share for ABC in a market that has long been dominated by an entrenched brand, Angostura.

In fact, the CCEP relationship is a key component of the company’s overall growth strategy beyond Australia. Innovation Beverage retains the distribution rights for ABC bitters outside of Australia and is in the process of discussing new distribution deals for multiple new markets. The company has indicated that discussions are at advanced stages for CCEP to increase the distribution of Australian Bitters to additional category extensions in the drinking bitters category beyond the cocktail bitters category. The primary distinction between drinking or digestive bitters and cocktail bitters is that cocktail bitters are generally used to flavor alcoholic drinks, while digestive bitters are usually consumed straight or over ice.

Moreover, discussions are also at final stages for CCEP to increase distribution of Australian Bitters in several European markets (see below) where Angostura Bitters is the leading brand. In fact, Angostura Bitters is the dominant bitters brand in the global bitters market. According to trade publication The Spirits Business, Angostura Bitters holds an estimated 90% market share in the worldwide cocktail bitters category. Angostura bitters are sold in more than 170 countries globally. Angostura Bitters generates an estimated roughly US$50 million in annual revenue from the bitters category.

As noted, ABC attained a roughly 20% share of the Australian bitters market in 2020. IBG believes that ABC has become the first Australian brand to successfully gain share from Angostura Bitters. The company attributes this primarily to its relationship with Coca-Cola Europacific Partners, as noted. CCEP is Australia’s largest beverage distributor, reaching 90+% of postcodes across Australia. IBG views its exclusive distribution agreement with CCEP for the distribution of Australian Bitters as a key competitive advantage. The company expects its agreement with CCEP to lead to further market share gains and revenue growth.

The company, citing data from IWSR¹, places the global bitters markets at wholesale revenue valued at billions. The market is expected to grow by nearly 4% by 2025. Angostura Bitters, as noted, is the largest brand in Australia and also has global distribution. Angostura generates about $600 million in annual sales. IBG also sells BitterTales for the premium bitters market and has the exclusive distribution rights to this brand in the U.S. market. BitterTales is produced in small batches using a proprietary mixture of 20 herbs and spices that are sourced seasonally for freshness. With two bitters brands – ABC and BitterTales Bitters – IBG believes it is positioned to gain share in both the value bitters and premium bitters niches.

The two top markets for cocktail bitters are the U.S., followed by Australia. The U.S. accounts for about 40% of the global bitters market by volume, according to IBG, and Australia accounts for about 13%. Through its distribution deal with CCEP, Australian Bitters is distributed to Australia’s two top retailers, Endeavour Group and Coles Liquor Group, among multiple other locations and IBG is in discussions with CCEP to extend domestic distribution to new venues and beyond the cocktail category. The company is also engaged in discussions with CCEP to expand distribution for ABC to the UK, Germany, Spain and France.

Revenue has grown, IBG believes it has capacity to scale its business

As IBG has expanded its product portfolio and distribution network, revenue has grown substantially, up 52% from a low base in 2018 when the company initially began selling its products, to more than US$4.5 million in 2022. However, in 2023 Innovation Beverage transitioned its strategy for the U.S. market, including its e-commerce strategy, and temporarily paused major paid media and media agency expenses, as mirrored in a 61% year-over-year decline in marketing expenses. Revenue from Australia grew 46% to US$2.9 million in 2023 compared to just under US$2.0 million the prior year, but U.S. revenue fell to $271,512 from $2.6 million in 2022. Total revenues for 2023 fell to US$3.1 million, representing a roughly 31% year-over-year decrease that primarily reflected lower U.S. sales as IBG paused promotional spending while it shifted its strategy. The company has resumed spending in 2024 and revenue has increased.

As promotional support has resumed, the company has recorded strong revenue growth thus far in 2024. In the first half period ended June 30, 2024, IBG generated an estimated US$1.6 to US$1.9 million in net revenues, which represents a roughly 26% year-over-year revenue advance compared to the same period of last year. The company also implemented an annual price increase beginning in January 2024.

Management Team

Innovation Beverage’s senior management team has extensive experience both within the beverage sector and in building brands. The chief executive officer, Dean Huge, joined Innovation Beverage in February of 2022. Prior to joining IBG, most recently he was CFO of Splash Beverage Group (NYSE:SBEV), where he oversaw the company’s finances from inception to a NYSE uplisting within five years and cumulative capital raises of $24 million. Overall, he has roughly 35-years of experience growing profitable operations and implementing successful turnarounds and has served as CEO, CFO, Director, and Treasurer at various public and private companies in industries including beverage, financial services, manufacturing, distribution, and SAAS.

IBG’s COO, Sahil Beri, uses a science-focused approach to developing new formulations (he holds a Master’s degree in pharmacy). He has about 10 years of operational experience in the beverage industry.

IBG’s CFO, Eric Yu, has more than 15 years of experience in accounting firms, management consulting, and commercial corporations within the food and beverage industry, including private and public companies listed on the Australian Stock Exchange.

The company recently added a new Chief Sales Officer who has extensive experience within the beverage industry. Genevieve Jodhan previously served as CEO of Angostura Holdings, which is the global leader in the bitters category, as noted. She has more than 28 years of experience in brand building, business development, new product development, and supply chain management in the beverage industry. The company is optimistic about her ability to contribute to its successfully executing its growth strategy.

Risks

Risks the company faces include, among others:

IBG’s manufacturing facility is based in Australia, as noted. If there are future supply chain and/or distribution disruptions, particularly reflecting the geopolitical environment, the company might not have sufficient product on hand to meet demand in external markets. However, management believes IBG maintains adequate inventory levels to deliver products on a timely basis.

The company’s relationships have been instrumental in its growth to-date. Any potential disruption in a key business relationship could interrupt the company’s ability to execute its growth strategy successfully, in our view.

Competition could increase for any of the products in the company’s portfolio. For instance, Angostura, the worldwide leader in the bitters market, has also entered the RTD category in Australia and markets bottled Lemon, Lime & Bitters under the label Angostura Chill.

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^{1. IWSR Global Cocktail Bitter Snapshot 2022}