Ricard remains cautious over spirits growth

Alexandre Ricard, Pernod Ricard’s new chairman and chief executive, believes it is too soon to say that the global recession in spirits is a thing of the past.

Alexandre Ricard warned that it was premature to begin speaking of a spirits upturn (Photo: Pernod Ricard)

Speaking in Paris to the drinks business, he said: “We were flat last year and this year we will grow by about 2%, but it would be injudicious to talk of an upturn.”

At a presentation before a gala party for 1,500 people at the Pompidou Centre to celebrate the merger of the two eponymous groups 40 years ago, the world’s second largest premium spirits producer reiterated its guidance that organic net sales growth would be about 2% ahead of the 2014/15 figure. In the medium term, however, it is targeting a return to the industry’s growth pattern of a 5% per year increase.

The company said it would move closer to its eventual ambition of global leadership by focusing in the immediate future on growth in the US and China as well as further expanding its Indian and African markets.

Market improvements

In that context, said Gilles Bogaert, the managing director of finance, the Chinese market was approaching stability following the austerity drive instituted by Beijing two years ago. Net sales growth in the nine months to the end of March was about 3% lower but the trend was now turning positive and Pernod Ricard expects annual net sales growth “in the high single digits” in the next few years.

Similarly, while growth in the largest market, the US, has shrunk by 1% so far this year, Pernod Ricard is predicting growth of mid single-digits over the medium term.

Encouragingly, Ricard said that the crisis-hit Russian market had all but stabilised and that the Spanish market had begun to grow, albeit slowly, for the first time since the global financial crisis hit in 2008.

Although market conditions remain difficult, the French group is determined to improve its pricing and product mix at the same time as controlling costs. It has virtually completed the programme instituted 18 months ago that has generated €280 million (£203m) of cost savings and seen 900 people leave the company.

The strength of the Dollar against the Euro means that Pernod Ricard has a windfall of about €80m (£58m) this year, with about the same to come next year, providing the Euro does not strengthen. Part of that will be used to boost advertising and promotional spending, especially in the US, and will take the ratio of A&P spending to about 19% of sales.

Acquisitions

A further plank of targeted profits growth is acquisition. Both Ricard and Bogaert stressed that the company wishes to retain the “investment grade” rating for its stock, which means they can be held by many American financial institutions. However, because the net debt to earnings and interest ratio has fallen to 3.6, they say they can easily afford to spend more than a billion Euros on the right target.

That would preclude a mega deal, but could easily cover several bolt-on purchases similar to the $100m (£65m) acquisitions last year of Kenwood wineries in Sonoma and the ultra-premium Avion Tequila, which is already selling more than 100,000 cases a year.

Dropping very strong hints that the next acquisitions would come in the US, both Ricard and Bogaert said that any such deals would have to fit a “white space of opportunity” in the portfolio, at the same time as adding value to the company’s activities.