Comment - Spirits - Pernod Ricard and Absolut: Five Years On
This weekend marked the fifth anniversary of Pernod Ricard's acquisition of Vin & Sprit and the Absolut vodka brand. A lot has changed since those heady days of 2008, so how does the race for - and purchase of - V&S look today? Chris Mercer takes a closer look.
Five years on from Pernod's deal for Absolut and the acquisition looks like it has been the right move for the Paris-based drinks giant. But, only just.
On 31 March 2008, news that Pernod Ricard would swallow Absolut owner Vin & Sprit for US$8.9bn ambushed analysts and jolted journalists. Diageo was never seriously in the running. But, almost right to the end, many expected Fortune Brands to bag Absolut for its Beam Global business. As distributor of the Swedish vodka brand in its largest market, the US, Beam had long made little secret of its desire to strengthen this relationship.
In hindsight, what most of us under-estimated was the extent to which Absolut had become a 'need-to-have' rather than a 'nice-to-have' for Pernod.
Still, questions were immediately raised over the lofty price tag, specifically, was it really worth it? Doubts were amplified by a sense of foreboding about the global economy, even if few foresaw the eventual collapse of Lehman Brothers later that same year.
In Pernod's favour, this was its best chance of securing a premium vodka brand with ready-made scale. The French group considered such an acquisition a pre-requisite of securing a place at the spirits industry's top table; following the Vin & Sprit purchase, Pernod started calling itself a 'co-leader' in global spirits. (In truth, Diageo remained slightly larger.)
There were limited alternatives at the time. Talks with SPI Group over the possibility of acquiring Stolichnaya - the distribution of which came under Pernod's wing at the time - never really got anywhere. This was not least because of the ongoing risk that Russia's government might someday win back control of a vodka that it still considered its own.
Stolichnaya also lacked Absolut's volumes, which stood at around 10.7m nine-litre-case sales annually.
As promised, Absolut turned Pernod into a vodka juggernaut overnight. It also gave the company a more meaningful presence in the world's most profitable spirits market, the US, which accounted for just under half of the brand's global volumes.
In 2011, Absolut was estimated to account for 75% of Pernod Ricard's vodka sales by value, according to a report published in January 2013 by analyst group Sanford Bernstein, citing IWSR figures.
Bernstein has further estimated that vodka comprises 15% of Pernod's annual net sales. Furthermore, in the fiscal year to the end of June 2012, the analyst group calculated that vodka made up between 18% and 20% of group earnings before interest and tax (EBIT).
Vodka is also growing in every region apart from Eastern Europe. Outside of its US stronghold, Absolut volumes continue to rise strongly off a low base in several countries, including mature markets such as France and new world markets like Brazil, China and, to a lesser extent, India.
That said, Pernod's early years with the brand have been challenging. In the US, macroeconomic issues curtailed the group's initial attempts to raise prices. Absolut's global volumes fell in the immediate years following acquisition, largely due to troubles in the US, as well as stronger competition in duty-free.
"We believe that Absolut in the premium category has been caught in the middle in the US in a three-way squeeze between super- and ultra-premium vodka, value-priced imported vodka and innovative flavoured vodka," said Bernstein in January.
It added that Absolut, globally, has underperformed since acquisition against average net sales growth for Pernod Ricard's 14 priority brands.
At group strategic level, Pernod's deal for Absolut has entailed five years of belt-tightening in the firm's finance department. It has been forced to offload various 'non-core' brands, the biggest deal being its sale of Wild Turkey Bourbon to Gruppo Campari for US$575m in 2009.
Pernod has also been forced to sit on the sidelines and watch others hit the M&A trail. Notably, it has seen arch-rival Diageo cement positions in several emerging markets, including India, Vietnam, Turkey, Brazil and China.
Pernod would no doubt point to the strength of its organic businesses in the likes of India, China and Brazil. Arguably, these positions, combined with heady times for Cognac, Scotch whisky and Jameson, have helped the firm cover teething problems on Absolut.
More recently, Absolut has shown greater signs of progress. Global Absolut volumes were 11.4m cases in Pernod's last fiscal year, up 3% on the previous year. For Pernod's latest first-half, to the end of December 2012, Absolut sales rose by 4% in value and 2% in volume versus the same period a year earlier.
The brand still looks sluggish in the US, although volumes did rise by 1% there in the 12 months to the end of June last year, and it is really beyond the US where Absolut's future growth must be found.
Innovation continues to roll. Pernod is thought to have kept brand spend relatively high, and has been throwing out special edition bottles with vigour. Absolut Unique, comprising 4m uniquely-designed bottles, is a neat idea that appeals to 21st Century consumers' individualistic tendencies.
Meanwhile, the launch of Absolut Amber, essentially an oak-aged vodka, is one of the most intriguing products to emerge from a large spirits company in the past few years.
Pernod is also back on an investment grade footing. It remains coy on large-scale acquisitions, but is without doubt much better equipped to compete in a fresh round of industry consolidation, perhaps involving Beam Inc?
Pernod's management is fond of describing Vin & Sprit as the right deal at the wrong time. It would be better termed as the right brand at the wrong time, at a heavy price.
It's been five years and there is still more work to do. But, after a rocky beginning, it looks like the group might have got away with it...just.
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