In the Spotlight - Diageo choking on Pernod Ricard's Cognac fumes?
Pernod Ricard's Martell helped the group to trounce Diageo in H1
Far be it from us to stoop so low as to pour fuel on the fiery rivalry between Diageo and Pernod Ricard. But, if we did, we might point out that most analysts are handing the French group a clear victory following the half-year results round.
Oh, go on then, we'll indulge you. For starters, Sanford Bernstein said in a note on Pernod today (18 February): "The underlying business model appears very robust and makes a favourable contrast to Diageo." Ouch.
Europe provided the most sharp contrast between the two groups, partly because of Diageo's stronger presence in the financial basket case also known as modern Greece. "Against Diageo's European organic EBIT decline of 9% in the same period, Pernod reported organic EBIT growth of 4%," said Evolution Securities.
Pernod Ricard reported a 2% rise in organic net sales in Europe for the six months to the end of December, while Diageo reported a 3% drop.
"Pernod's European operations are much more geared into Northern Europe with the stronger-performing French and German spirit markets," said Evolution. "In addition, Pernod's decentralised operating structure has shown itself in the past, well-placed to rapidly adapt to changing market conditions, while the group is also more geared into the faster-growing Central and Eastern European markets than Diageo."
Alongside Diageo's difficulties in Europe, its lack of a wholly-owned Coganc brand was another significant factor in the group lagging Pernod in the six months to the end of December. While Scotch whisky did Pernod proud in Asia, Martell Cognac led the line with a 32% increase in net sales. Chinese consumers lapped up the pricier expressions of the brand. In contrast, Diageo's sales actually fell in China in the fourth quarter, even though it, too, reported strong demand for whisky in Asia.
Of course, there are other differences in the two groups' portfolios. Pernod is more heavily involved in wine, while Diageo has Guinness and serious interests in Africa's developing beer market. It is Pernod's spirits, however, that have performed better than most of Diageo's in both companies' first half.
Some of the analyst comments above have bordered on suggesting that the result goes beyond current market trends. Bernstein talks about Pernod's robust underlying model, while Evolution suggests that Pernod's decentralised structure has given it an advantage. There is a legitimate concern, too, that Pernod is pulling away in the key emerging markets of China and India.
Is it, then, logical to suggest that there is something fundamentally wrong with Diageo's operating structure?
Most observers, I think, would not go that far, particularly based on six-month figures. Let's not forget that Diageo still managed to increase half-year net profits by 17% - compared to Pernod's 10% increase - and net sales rose by 2%. Both Pernod and Diageo saw their share prices drop following their results statements, indicating investor uncertainty among both companies' ranks.
Morningstar analyst Philip Gorham said of Diageo: "First half results were broadly very positive, and we expect our thesis that the firm's strength in premium categories should position it for solid long-term growth to play out over the next few months."
What's more, Pernod may have the floor for the time being, but Diageo is a wily operator with a CEO that has, by virtue of his ten years at the helm, learned the art of long distance running. In addition, the Johnnie Walker distiller has a bulging warchest at its disposal, while Pernod is still very much in debt-reduction mode.
If Diageo were to get its hands on Jim Beam Bourbon, say, several analysts believe this would make the group untouchable in the US, which is still the world's most profitable spirits market. At the same time, Diageo is actively seeking tie-ups in emerging markets and we have seen evidence of a softly-softly approach in China and Vietnam over the last year. Could Turkey be next?
There may have been carnival scenes in Paris this week, but Diageo's slowly-but-surely mantra is still likely to pay dividends.
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