Pernod results mark global turning point

Pernod Ricard’s sales figures for the three months to the end of September confirmed what the markets were hoping was a trend of small but gradual improvement in the global trading environment.

Despite what it called “a difficult environment”, organic sales values beat most forecasts and returned to growth, rising by 2% compared with the same period last year. That prompted the French group to forecast that in the full year to the end of next June its profits from recurring operations would grow by between 1% and 3%, in the same bracket as last year when it achieved 2%.

That confirmed the signals from other recent results. With their latest figures both Diageo and Rémy Cointreau both said they expected improving sales patterns during the next few months, and City analysts now believe that in terms of organic sales growth the global trend should be gradually upward, albeit with potential hiccups. Pernod’s results gave a modest boost to share prices across the sector.

Its data also contained evidence of shifting trading patterns. The Asia Pacific region is now its largest, accounting for about 42% of its sales and 43% of its operating profit. This is also the region on which all major players have pinned considerable hopes for future profitability, so trends can have a leverage effect on both the bottom line and investor expectations.

The company highlighted an “improved trend” in China, despite the market remaining “in decline”. Shipments rose by 4% but because of trading down from ultra premium brands such as Martell Cordon Bleu to the VSOP Noblige, the mix meant that values fell by 9%. That echoed Diageo’s Asia Pacific sales slump of 7.4% in the same three months largely due to the turmoil in the Chinese market, notably for baijiu.

Observers think that further premiumisation In China will be difficult to achieve against the current background of enforced austerity and the associated trading down to mid-priced products. On the plus side, however, ever more Chinese are being drawn into the market for international brands, so volume growth will continue over the foreseeable future even if margins remain comparatively static.

In India, the French group’s sales soared by 21%, driven by demand for its top 14 priority brands and Indian whiskies. Pernod Ricard is the most established of the global groups on the Sub-Continent but the dynamics are changing rapidly, especially as Diageo now controls the biggest player in the market, United Spirits. And Diageo is already ramping up its drive to develop its international brands in the country it sees as providing 10% of its sales in the next few years by launching Smirnoff Ice as a direct challenger to Bacardi Breezer in the RTD sector.

In North America, globally the biggest market for spirits, Pernod Ricard’s sales echoed the trend of slightly slower growth (but growth nevertheless) driven by its whisky portfolio and a positive price mix. Overall net sales were 3% ahead, the same as Diageo’s this summer. Jameson added 16% in both volumes and value compared with the same three months last year, while Glenlivet’s volumes gained 5% and values 6%, emphasising the swing in the US toward “brown” spirits.
On the downside, in what Pernod called “the very difficult vodka category”, Absolut’ s volumes fell by 4%, while values shed 2%. That reflected the continuing battle between the big brands such as Absolut and Diageo’s Smirnoff and the ever-swelling numbers of “craft” offerings.

Europe remained mixed, with sales falling by 1%. France grew by 2% and Spain returned to growth for the first time since 2008. Despite the political turmoil in Ukraine, Pernod Ricard’s sales in Russia put on 8%.

Commentators believe that Africa will become the next focus for spirits groups. The enormous potential remains largely untapped as beer remains predominant. Diageo has sought to develop its spirits market on the back of a powerful presence in beer in states such as Nigeria, Kenya and Ethiopia. And there is evidence that the strategy is working. So while its beer sales in Nigeria fell by 9% in the year to June on the back of a turbulent economy, Diageo achieved double-digit growth in spirits, albeit from a comparatively small base.

Pernod Ricard has been setting up its own companies in a number of African states and intends to develop the network further. Its Africa and Middle East division grew sales by 22% July, August and September compared to the same three months in 2013 despite the Middle Eastern conflict and the outbreak of Ebola in West Africa, which hit travel retail.

Significantly Pernod Ricard’s top 14 brands, which account for 64% of its turnover, increased both their volumes and sales value by 2% in the latest quarter. That indicates that further premiumisation and price increases are proving difficult to achieve, notably in mature markets in Europe and in China. So while Martell’s volumes grew by 7%, values were 4% down reflecting the different sales mix. On the other hand, Jameson’s volumes grew by 8% and generated a 9% value uplift.
So the evidence points to at least stabilisation of the global market for international spirits brands despite the fluctuations in individual markets and categories. Volumes are growing again, but margins are proving difficult to increase, at least in the short term.

The key question for the spirits sector, City analysts say, is not whether there is a discernable uptrend in sales but how vigorous will it become and how much of the extra turnover will flow into profits.