Pernod Ricard eyes acquisitions in China

Pernod Ricard is prepared to consider potential niche acquisitions to bolster its business in China and widen the appeal of its portfolio in what is now its second largest market, accounting for about 9% of its global sales.

The country’s crackdown on extravagance and changing tastes among young consumers have proved problematic for Pernod Ricard. Sales of Scotch, which are about 20% of its market there, fell by “double digits” in the financial year to the end of June fell. Overall, the French group’s sales to China were 9% lower than in the previous year.

That was the main reason why global sales volume of its flagship Chivas Regal whisky range fell by 5% in the year while values were 4% lower.

Gilles Bogaert, Pernod Ricard’s managing director of finance and operations, says the group’s medium term ambition in China is “to keep holding market share in Scotch and Cognac”. However he is confident that the actions its Chivas Bros distilling subsidiary is taking will bring medium term benefits.

“The mix [i.e a shift to higher margin whiskies] will improve and volumes will improve”, he said. “It is a good sign that the market for baiju [China’s favourite spirit] is recovering and that prices are increasing,” he said. “But I’m glad we did not buy a brand three or four years ago”.

However, he went on to hint that Pernod Ricard could consider buying a baiju brand to reinforce its position as the leading importer of spirits to China as demand increases.

Such a move would broaden its portfolio and consequently its overall appeal brand appeal.

“It need not be baiju, it could be bulk wine, for instance,” he said. “We are always open to a niche purchase that fits our portfolio.” Equally, Pernod Ricard is willing to sell non-core brands.

In that regard he pointed to the purchase last year of Monkey 47 gin and the sale of Paddy Irish whiskey, which was seen as surplus to requirements in a global market where Jameson continues to storm ahead. In the US alone Jameson is approaching sales of 3m cases which M. Bogaert believes could rise to 5m.

Laurent Lacassagne, Chivas Bros’ chairman and CEO, said that one of the problems was that “we are the Scotch market in China”. Chivas has more than 60% market share and he “would welcome more competition” in the sector to extend and deepen its appeal.

While companies such as LVMH and Remy Cointreau have reported better results from China, much of their improvement has been due to Cognac sales.

“Cognac is much more resilient in China, it is a longer established category [than scotch],” says M. Bogaert.

“Martell [Pernod Ricard’s cognac] gained an extra 1% in a stable China market last year”. But because of trading down sales values fell.

Nevertheless, Pernod Ricard will pursue its policy of premiumisation in the longer term. For now, however, “it is still too early to consider price increases as we are higher than our competitors. The mix will improve as will the volumes.”