Stock surplus scotches Pernod ambitions

With the euphoria of the Seagram deal over, a more realistic picture of Pernod's future has begun to emerge. Dave Broom assesses the new Scotch portfolio and the challenges it will present to the Campbell Distillers' management.

How do things look now that the dust has settled over the Seagram purchase? Diageo's intentions, never exactly a secret, are now crystal clear. It is expanding from its spirits and beer base into wines. And don't expect the purchasing to stop with the acquisition of the Seagram portfolio. A major Australian-based wine firm looks a tempting target for a company that intends to consolidate its world domination of the drinks industry.

As for Pernod-Ricard, the acquisition of the bulk of Seagram's spirits
business has hauled it up to 3rd place in the international league table to sit only a whisker behind Allied Domecq.

Most significantly, it shifts the company's make-up from eurocentric to global player. From a position where Europe accounted for 84% of its business, (38% came from France alone) Pernod can now expect 27% of its sales to come from the US (up from a trifling 9%) while Asia and South America will also come increasingly into the picture.

So what can we expect from this new look global player? Seagram's gin, while huge in the States, is unlikely to become an international player; Havana Club is growing rapidly, but from a small base; Martell's future is still looking shaky; Ricard is a specialist product and there's confusion over the Polmos vodka deal. If Pernod Ricard wants to make itself count as a international spirits firm, the main thrust has to come from whisky (30% of the new look portfolio) and that means getting Chivas Regal back on track.

The official line is that Chivas is "poised for growth", which is marketing double-speak for it needs a hell of a lot of work. The economic collapse in Asia hit prestige brands like Chivas hard, while its fortunes in the US have been on the slide for years. It's going to be a long haul for a brand which may be a recognisable icon but which has failed in recent years to turn this enviable quality into hard sales.

One consequence of this slow decline has been that Pernod hasn't just inherited Scotch brands and distilleries but a huge stock surplus. Seagram always ran its production operations on a stop:start basis, running plants at full tilt then suddenly slamming on the brakes when stocks began to rise. Those brakes were last slammed on during 1999 when the company cut production levels by between 40%-60% and closed its Glen Keith distillery.

Pernod Ricard is not alone. Highland had to slash production hard following the Edrington takeover and alignment with Grant's, while other firms have also eased back on output. These periods of surplus are inevitable in an industry which has to lay down stock today for potential sales in five, 10 or 15 years time. The fact that everyone else is in the same boat is no great comfort to Pernod Ricard however, as Seagram's overstock levels were widely believed to be the highest in the industry.

It's clear that Chivas needs serious levels of investment quickly to get the brand moving again and bring stocks back into some semblance of balance. That pally alliance with Diageo has been forgotten and Johnnie Walker Black Label is now the main target.

But Chivas's revival will take money and the industry is wondering how many of the nine ex-Seagram distilleries Pernod Ricard will be willing (or able) to hold onto. Glenlivet is safe, so are Strathisla, Longmorn and Glen Grant, but what about Benriach, Allt-a-Bhainne, Braeval, Caperdonich and Glen Keith? The hard fact of the matter is that Pernod Ricard now has 11 working distilleries in Speyside at a time when the industry is in surplus.

The positive aspect of the takeover is that Pernod is experienced in handling premium whisky brands - Jameson, Wild Turkey and Aberlour have all performed strongly in a difficult period for the category. The new malt portfolio has powerful players in The Glenlivet, Glen Grant and huge potential with Longmorn and Strathisla, though quite what will happen with the buoyant Aberlour will be interesting to watch. However the bottom line is that malts, no matter how fast they're growing, will not reduce the stock levels dramatically - that responsibility falls to Chivas Regal.