Premiumisation gets its groove back

Twelve months ago the picture for premium priced drinks looked bleak. Distributors in prime markets were destocking and consumers were trading down to commodity brands, with the inevitable effect on margins and profitability.

Today, although there remains extreme caution about the future pattern of consumer spending, the backdrop is much less pessimistic.

Pernod Ricard cheered investors late yesterday with news that it had upgraded its predictions of like-for-like organic growth in the year to the end of June.

It has increased its forecast of profit from recurring operations from 3% previously to between 3% and 4%, despite having increased its advertising and promotional spending as planned.

In the past 12 months organic sales grew by 2%, driven by the group’s top 14 brands, but significantly like-for-like sales rose 9% in the second half, aided by weak comparative figures last year and “a gradual recovery in consumer spending in mature markets” – Europe and North America.

Notably, growth in the three months to the end of June was 3%, driven by the top 14, which put on 6% in organic terms. At Pernod Ricard, premiumisation is back in gear.

The French group will announce its financial figures in early September, but the sales growth plus previously announced improvements in debt reduction augur well for shareholders.

Indeed, in the past month Pernod Ricard has further reduced debt by more than €50 million by selling its shares in Marqués de Arienzo for €28m to Marques de Riscal, and Ambrosio Velasco for €33.1m to Diego Zamora. Those Spanish interests were sold as part of the planned disposal of non-core holdings.

The encouraging trading statement from Pernod Ricard came in the same week as research findings showing that luxury retailers in Britain are in comparatively upbeat mood.

Walpole, an organisation representing the British luxury, including whisky houses, launched its first “UK luxury benchmark”, which indicated a surprising strength of consumer demand, even in 2009 despite the dire predictions.

While 50% of respondents expected their sales to fall last year, 38% recorded increases, with much of the demand being powered by Asian consumers.

This year some 90% expect sales to rise, with a third of them predicting growth in excess of 10%, admittedly from a weak base.

The underlying message is that luxury retailers did not do as badly as they feared in 2009 and that this year they are in modestly buoyant mood.

That said, much depends on visitors to Britain, especially Americans, because more than a quarter of the British luxury industry generates over 25% of its sales to tourists in the UK.

For almost 70% of luxury brands, overseas sales account for only one third of revenues. It’s a narrow base, which emphasises the value of a global premiumisation approach as demonstrated by Pernod Ricard’s latest figures.

Finance on Friday, 23.07.2010