Advertising investment key to beating the downturn

The ability of big companies such as Diageo and Pernod Ricard to continue to invest substantially in their marketing operations throughout the recession was key to their achievements over the past year, according to a leading industry analyst.

Jonny Forsyth, senior drinks analyst at Mintel International, believes that the recent financial results announcements from the industry’s biggest names served to highlight the benefits of continued investment in marketing during a downturn.

Half-year statements from both Pernod Ricard and Diageo reported lower-than-expected drops in sales and net profits.

Pernod posted a like-for-like sales decline of 3% and a profits drop of 2%, while Diageo saw sales dip 2% and operating profits by 6% against the corresponding period last year.

Forsyth told the drinks business: “Diageo and Pernod Ricard have continued to spend heavily on advertising – something which smaller companies do not have the resources to do – and that partly explains why they have managed to avoid huge drops in organic sales/profit.”

He also believes that the strength of the two company’s leading brands helped keep sales above those of their smaller competitors, particularly in the UK, even though consumers may not be making purchases as often as before.

“Research I have seen shows that British consumers actually trust more established brands more in the recession and become even more loyal to them,” said Forsyth.

“However, they do not have enough money in their pockets to buy them with the same regularity as before – at the moment.”

With European markets still struggling to find their feet again after the economic difficulties of the previous couple of years, Forsyth feels the move by Pernod Ricard to make its mark in the booming Asian market has left it in an even better position than Diageo, the world’s biggest drinks company, moving forward into the second half of the year.

“I would say that Pernod Ricard look in good shape because they have so far more effectively infiltrated the key Asian market, something which should safeguard them from over-reliance on the struggling European market,” he said.

“Diageo’s portfolio of premium spirits means they have huge potential to do well in Asia but have so far under-performed in this market.”

Ashley Everett Rountree, managing director for Europe at M&A advisors CW Downer & Co agrees that Pernod’s strength in Asia has put it in a preferable situation to Diageo.

“Diageo is a great company and very well run,” he said. “In their results presentation, while I was very impressed by the cash management, I was disappointed by the profit performance.

“By contrast, Pernod Ricard appears to have done better. While top-line sales are off by a similar order of magnitude to Diageo’s, profits on a constant exchange basis were actually up by 6%.

“Pernod has benefited from its exposure to emerging markets, but has also reaped rewards from a strong commitment to maintaining prices.”

For a full analysis of the biggest drinks firms’ recent financial results, see the March edition of the drinks business.

Alan Lodge, 17.03.2010