Pernod Ricard, Diageo capitalise on emerging markets in Q1

Pernod Ricard, Diageo capitalise on emerging markets in Q1

Pernod Ricard looks to have taken a narrow lead over Diageo in the first quarter of the two rivals' fiscal year, but there is still a lot left to play for.

The economic storm clouds may still be looming, but neither Pernod nor Diageo appear particularly concerned at this stage. Emerging markets in Latin America, Africa, Asia and Eastern Europe (well, Russia) have continued to play the leading roles cast for them at the beginning of the year.

There is, then, not really a loser in the full sense of the word. That, however, is not going to spoil our fun. 

At first glance, Pernod has scored a first-quarter points victory over Diageo. Fuelled by Martell in Asia, Pernod found an extra gear in the three months to the end of September to increase organic net sales by 11%. Diageo, meanwhile, increased its own sales by 9% on the same basis.

According to analyst group Sanford Bernstein, Pernod's organic sales growth has pipped Diageo's in six out of the last seven quarters; the Johnnie Walker distiller's only victory coming in the third quarter of last year. 

That said, I'm sure Diageo would be quick to point out that it's what happens over the whole season that matters. In addition, organic sales momentum, on its own, does not necessarily yield higher dividends.

So, what might the future hold? On the one hand, we have yet to see any indication that Cognac sales growth is slowing significantly in Asia. It is a trend that should continue to benefit Pernod more than Diageo, despite the latter's 34% stake in Moet Hennessy.  

That said, Diageo has worked hard to reinvigorate its business, and its prospects arguably look a lot brighter now than in January. Turkey's Mey Icki, officially acquired in August, added GBP29m (US$45.5m) to Diageo's net sales in the first quarter of the current fiscal and its contribution will increase in subsequent quarters. The Smirnoff producer should also get a lift from its tie-up with Halico in Vietnam and indirect control of ShuiJingFang in China. Africa, meanwhile, continues to perform very well for Diageo, while Pernod lacks penetration there.

Both companies have exercised a degree of caution on profits guidance for their current fiscal years. Pernod, which has a reputation for undershooting, said that it expects organic operating profits growth of close to 6%, versus 8% last year. Diageo has not set specific guidance, beyond its prediction that, over the medium-term, organic net sales will rise by 6% annually and net profits before charges will increase in double digits. 

There is clearly some concern about the economic situation, even if, as yet, many consumers are sticking by premium spirits. Pernod's CEO, Pierre Pringuet, and his counterpart at Diageo, Paul Walsh, used their first-quarter statements to highlight the fragility in the global economy.

For now, though, there is not a huge amount to choose between Diageo and Pernod, with both making a good fist of capitalising on opportunities in emerging markets.

Longer-term, the battle in Asia looks set to take on greater prominence. In an interview published today, Diageo's Asia Pacific president, Gilbert Ghostine, told just-drinks: “I think the journey has just started in both China and Asia Pacific – the game is on."