Will Pernod Ricard’s growth predictions come true?
When he presented half year results last week, Alexandre Ricard was keen to say that Pernod Ricard expects organic sales growth to turn positive in the full year which ends in June.
He predicted that progress in the second half would “more than offset” the 3.9% decline in the first six months of the company’s financial year. The trend is upwards. If travel retail is excluded, organic sales in the six months to December rose 1% compared with 2019, the most recent half year unaffected by coronavirus.
But travel retail slumped by 57% in the half year to Christmas, hence the 2.4% first half decline in organic profits.
Strong performances in its key US and China markets helped the French group to eclipse analysts’ first-half profit and sales forecasts, but Ricard declined to put a number on the projected outcome by June.
“The sanitary situation is far from stabilised. There are lockdowns in some countries. We still have no clear view on the Chinese New Year and vaccines are taking time,” he said.
In the first half the group increased or maintained market share in several of its largest markets, a position Ricard intends to improve through “accelerating our digital transformation while dynamically managing resources.”
Diageo, LVMH and, Remy Cointreau have all echoed much the same theme in past weeks – that they have been agile and flexible in the face of the pandemic; that they are mining data and capitalising on e-commerce routes to market as the global on-trade suffers; that they see their particular portfolio strengths as paving the way for gains in key markets as 2021 unfolds.
Given the decimation of markets and profitability in first six months of last year, it will not be difficult for everyone to beat last year’s numbers, even with travel retail remaining on its knees.
But Ricard knows that he faces a battle royal in what he calls “must win” domestic markets, crucially the US, China and India. As the three largest all global producers are targeting them. And none offers a smooth ride to renewed profitability.
Take North America, the largest and most profitable market for spirits. In the six months to December Pernod Ricard achieved 5% sales growth in the US. But in exactly the same period Diageo achieved 12.3% growth (including Canada). True the geographies are different, but it is not unreasonable to suggest that Diageo outperformed Pernod Ricard
That is significant because 39% of Diageo’s profits come from North America while the US accounts for 28% of Pernod Ricard’s, a proportion the French group is keen to increase.
Yet in the second half of last year Diageo increased its market share of the beverage alcohol market in the US, with spirits sales up 15%. The UK group now accounts for 6% by value of annual sales to American consumers, but only 2% of the volumes.
Diageo’s chief executive Ivan Menezes made no secret recently that he is determined to improve those figures as he targets further volumes through across-the-board growth in all categories. “There is a long way to go,” he said.
Meanwhile Brown-Forman and Constellation Brands are just as determined to improve their shares of their home market, especially through American whiskies and bourbons, which have been trending higher during lockdown. Both American groups surprised analysts with their robust performance in the run up to Christmas and the New Year.
At present Pernod Ricard is over-exposed to the US on-trade which represents 25% of its sales compared with an industry average of 20%. That will be a drag on progress while lockdowns persist, but as a higher margin sector, it could benefit the French group when a more regular pattern returns to the on-trade.
As the second largest Scotch producer through Chivas Brothers, Pernod Ricard challenges Diageo hard in the USA and has set itself the long-term target of making Ballentine’s the world’s leading premium scotch. At the lower end of the spectrum Chivas Regal is keenly priced as an entry level product for US consumers and Ricard says the brand is doing “very well”. But Diageo is the market leader with the Johnnie Walker range, where its scotch sales were 11% up pre-Christmas.
In the past six months, Diageo’s Tequila sales in the US increased by 80% with Don Julio growing 56% and Casamigos by 139% with both gaining spirits market and Tequila category share. This has been the fastest growing US sector during the Covid-19 lockdowns.
Ricard prefers to refer to the “agave sector” (including mezcal) but even so he knows his Avion and Altos brands are late challengers to the market and hints that he would like to augment this part of his portfolio through bolt-on acquisitions.
Pernod Ricard hopes the tariff war with the US might end comparatively soon. The Biden team has said it will not consider lifting the 25% penalties imposed by President Trump for six months at least. But Jean-Christophe Coutures, the head of Pernod Ricard’s Chivas Bros Scotch whisky arm, says he finds that mildly encouraging because there was no hope that a re-elected Trump would do so and at least talks are going on in the background.
A lifting of US tariffs would benefit Pernod Ricard especially because Martell Cognac is its biggest brand and leads the category in the US.
Martell is also leading Pernod Ricard’s assault on China, its second largest market. In the most recent half year its overall sales jumped by an impressive 13%. In Chivas the French group has the best selling scotch but the imported spirits market in China is dominated by Cognac, where Remy Cointreau leads the way through its Remy Martin range.
China is Pernod Ricard’s largest market for e-commerce sales, and Ricard expects it to continue to profit through this route to market.
While travel restrictions remain, the Chinese are increasingly using the internet for gifting; when they are eased Pernod Ricard is poised to take advantage of a resurging travel retail market, a sector in which it is overweight in Asia.
India is problematic for all the global spirits producers. While the demographics point to huge increases in the next few years in the number of consumers entering the alcohol-consuming age groups and having the growing spending power to afford international brands, government duty actions are a cloud on the horizon, as are the continuing uncertainties about prohibition in some individual states.
Locally produced spirits still dominate the market, with Diageo in the box seat through control of United Spirits. But Pernod Ricard is the leading importer of brands, and as the drive to premiumisation continues it has higher visibility than its competitors. That is a key reason why Diageo has been rationalising its India-produced range to move consumers up market towards higher margin global brands.
So in his three “must win” markets, Ricard faces competitors set on protecting and augmenting their own positions. But he is confident and determined.
Avis, the No 2 car hire group, for long said “We Try Harder”. That is the strategy Pernod Ricard is following.