What will be Pernod Ricard's priorities for the years ahead? - Analysis

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As part of just-drinks' deep-dive into the trends that have driven Pernod Ricard's performance over the past five years, news & insights editor Andy Morton considers the areas that will be important for the group in the coming years.

Pernod Ricards Absolut sales in the US have been under a great deal of pressure

Pernod Ricard's Absolut sales in the US have been under a great deal of pressure

Restart growth - The past five years have been good to Pernod Ricard. Sales at the end of fiscal-2018 were 13% higher than at the end of fiscal-2014. That growth, however, was front-loaded, and in the most recent 12 months, reported sales flatlined. The question, then, is whether this is a blip or symptomatic of a larger malaise. First-half sales for fiscal-2019, due to be released early next month, will give a clearer perspective, but the omens support Pernod. After all, underlying growth in the last fiscal year was a healthy 6%. The company itself has predicted a strong first-half, thanks to an early Chinese New Year, but expects more "moderate" growth after that.

Elliott awaits - One possible legacy of last year's blip is the entrance of Elliott Management, a heavyweight investor group that in December took a 2.5% stake in Pernod. The recent sluggish performance, as well as a weaker operating margin than rival Diageo, has given Elliott a platform from which to advocate for fiscal change at the French drinks group. So far, Elliott's attacks have failed to move Pernod. CEO Alex Ricard defended his financial record, adding that as a family-led company, Pernod has a long-term plan for value creation that might differ slightly to the more short-term goals of its peers.

Elliott might not be so easily brushed off. According to recent media reports, the group continues to meet with Pernod, and squeeze minor concessions out of the group. The next few years could see the company come under increasing pressure to trim fat and shape up in comparison to its more corporate spirits rivals. Board changes may also be enacted under duress.

An Absolut mess - What is undeniable is there are some areas in which Pernod Ricard is underperforming. One analyst may have described Elliott's criticism of the company's EUR6bn purchase of Absolut in 2008 as "old news". But, while most investors have long factored in vodka's US struggles, it doesn't mean Absolut is not dragging down Pernod's growth. In 2016, Absolut's global volumes dipped below the 11m-case mark and, although the two years since have seen annual growth for the brand of about 2%, that's all been down to non-US sales.

This is not entirely Pernod's fault - all vodka brands, other than Fifth Generation's Tito's Handmade vodka and a handful of others, are feeling the pinch in the US. In the coming months, however, Pernod will continue working to revive its vodka cash cow. After all, Absolut accounts for over a fifth of total sales from Pernod's big 13 brands.

Craft wobbles - The Our/Vodka project was never going to match the sales numbers of Absolut. Nor was it meant to - the city-based venture that started in Berlin in 2013 took its power from a small-batch scale and urban focus. Its future, however, was thrown into doubt recently when Pernod confirmed the closure of the second site to open, Our/Detroit. There are still four Our/Vodka distilleries operating in some of the world's biggest city's, including a new one in New York that opened last year. However, Pernod says it is "currently evaluating" the project's future.

Gin to the rescue in Europe? - While some export markets are proving tough for Pernod Ricard - South Korea being one example - the company has problems closer to home. Heavy supermarket discounting helped push sales in France for the past fiscal year down 4%. The decline is compounded by sluggish Eurozone growth. which has in part been a stimulus to the gilet jaune protests that have gripped the country. Indeed, thanks to its ongoing love affair with gin and the Beefeater brand, Pernod's best major EU performer has been the UK (which is not part of the Euro and is set to exit the EU this year). The fallout from Brexit may yet still affect the UK's outlook but, for now, the country is propping up Pernod's European record. If only the group could persuade the rest of Europe to drink as much gin as the Brits...

Small is beautiful - A mixed bag in major markets has seen Pernod look elsewhere for fresh growth. The company has identified 78 emerging markets as key targets, however their broad geographic spread - 21 of them are in Europe, 19 in central and South America and the rest in Asia/Rest of the World - will likely require hefty investment for uncertain gains. Nevertheless, Pernod's hard work is already paying off - emerging markets accounted for 40% of Pernod's sales in fiscal-2018, up from 38% in 2017.

China is back - The Martell Cognac brand is lighting a fire under Pernod's sales in the country as the dark days of anti-extravagance fade away. The group will now hope that China's Scotch revival is as strong as Cognac's. It is working hard to make this happen with marketing investments such as a new Chivas/NBA partnership targetting China's basketball-crazy younger males. Pernod's blended Scotch is well placed to capture demand from China's increasingly-affluent - and entertainment-hungry - youth.

Digital retail forefront - Pernod Ricard is often at the leading edge of digital innovation in alcohol, a focus helped by having a CEO with a keen technology interest. In June last year, Pernod held a Capital Markets investors conference in Shenzhen on the Hong Kong border. The event included a trip around the headquarters of Tencent, the owner of WeChat. Participants were left in no doubt of the message Pernod was sending - we are plugged into the digital retail revolution and want our brands to take full advantage. 

A wine retreat - While Pernod advances in one corner of its empire, elsewhere it beats a strategic retreat. The company has been offloading it wine assets over the past few years, trimming brands including Argentinean wines this month. Indeed, the wines it has left, it could be argued, are not so much part of the wine world as categories in their own right. Jacob's Creek transcends its roots as an Australian wine while Campjo Viejo, for some consumers, IS the Rioja category. Perrier-Jouët and Mumm are, like other prestige Champagne brands, similarly big enough to be marketed on their own merits. From this perspective, then, Pernod has already exited the wine category.

A different tack with non-alcohol - Diageo struck gold with Seedlip, the non-alcoholic spirit it pulled into its Distil Ventures incubator group in 2016. Here's a cool brand loved by leading bartenders that people seem happy to pay GBP25 a bottle for. Pernod has approached the non-alcoholic spirit category in a different way, throwing distribution behind the independent Ceder's Gin instead of buying a brand outright or developing its own. The company has still managed to keep the venture in-house, however - the husband and wife team behind Ceder's are both ex-Pernod employees. The UK is Ceder's immediate target, but with Pernod in the position of eminence grise, expansion can follow if targets are hit.

A drug of choice - Cannabis is a major talking point in beverages - but not for Pernod Ricard. Asked late last year for his views on the drug, Alex Ricard said he is adopting a wait-and-see approach, before commenting on how virtual reality was a better - and healthier - alternative to cannabis. Ricard may be on to something - about delaying a move into cannabis, not the virtual reality stuff. The category still has a lot of kinks to work out, a process that will only gain speed when Canada allows cannabis-infused beverages to go on sale later this year.

In doing so, Canada will become a test-bed for the rest of the world - and a template for the spirits industry on which to base its cannabis strategy.

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