The Chivas Effect

The joint acquisition of Seagram by Diageo and Pernod Ricard transformed the French company into a top league player and, with some TLC, Chivas Regal could become its major profit driver, says Joanne Hart

ON A BRISK May morning, a group of sober-suited City analysts took the early flight from London to Scotland.  Their destination was Pernod Ricard’s whisky operations in Speyside. The company’s most senior executives were on the trip, including Patrick Ricard, chairman, with Richard Burrows and Pierre Pringuet, joint managing directors.

They wanted to talk about Pernod Ricard’s growth potential and more particularly, that of Chivas Regal, its premium whisky brand.  Only days earlier, the company had reported a 10.6% increase in first-quarter sales to €713 million from wines and spirits.

The improvement was attributed primarily to organic growth of 16.8%, mitigated by adverse currency movements.  Within the sales mix, Chivas Regal and Pernod’s upmarket brandy, Martell, stood out as strong performers.

On the back of the figures, M. Ricard felt able to tell shareholders: "Compared with 2002, net profit from our Wine and Spirits business should experience double-digit growth at constant exchange rates."  The statement and the ambition contained within it show just how much Pernod Ricard has changed this millennium. 

Three years ago, the company was a decent-sized drinks operation with a strong local French flavour. Statistically, the group was the fifth largest wine and spirits business in the world.  To the cognoscenti, Pernod Ricard was a second-tier player.

Then, in December 2000, Patrick Ricard, the chairman announced that he and Diageo had agreed to buy Seagram in a combined deal worth US$8.15 billion. Diageo took the lion’s share of the business but Pernod Ricard still ended up with a 38% stake, for which it paid US$3.15 billion.

The deal transformed the French company, effectively doubling its size and introducing such brands as Chivas Regal, the Glenlivet and Martell to its portfolio.  The transaction may have been unveiled at the end of 2000 but it took a year to sign and a further year to arrange the division of the business between Pernod Ricard and Diageo.

Finally, on December 23, 2002, the two companies announced that they had integrated their respective parts of Seagram Spirits and Wine and pronounced the acquisition a great success. Three months later, Pernod published its 2002 figures, the first fully to incorporate the new brands. Sales from wines and spirits rose 78% to €3.4 billion and operating profits showed an improvement of 106% to €710m.

These were reasonable results but much of the growth simply reflected the company’s increased size. More importantly perhaps, was the operating profit margin, which rose to 20.8%, ahead of expectations.

At the May meeting in Speyside, Pernod Ricard said it had margins of 25% in its sights. Analysts were impressed by this target but they are not entirely convinced it is achievable in the short-term.

"It is within the company’s scope but it is dependent on several factors including sustained volume growth in key international priority brands and a consistent advertising and promotion spend strategy," says Ian Shackleton of US investment bank Credit Suisse First Boston.

Essentially, this means that Pernod Ricard is going to have to work hard to make its biggest brands fulfil their potential.  And the biggest of them all is Chivas Regal. "They are at the start of a really challenging time.

The focus of the past 18 months has been on integrating the Seagram brands.  Now they have to develop Chivas, which needs a lot of tender loving care," says Shackleton. 

Following the Seagram deal, Pernod Ricard is ranked as the number one spirits company in Europe, number two in Asia Pacific and Central and South America and number six in the US.  The company has within its stable such well-known names as Havana Club, Jacob’s Creek, Jameson and Larios as well as the Pernod and Ricard brands. 

Jacob’s Creek and Havana Club have a global element to them but Pernod Ricard is principally known for developing local brands, such as Clan Campbell whisky in France and Ramazzotti in Germany.

The reputation is perhaps due to the group’s philosophy of decentralised management, offering managers on the ground far more autonomy than other large drinks corporations. Chivas is different, however.  "It sells in over 100 markets and it is one of the few truly global brands.

It could be a real profit driver for them," says one analyst from a leading European stockbroker.  Currently, Chivas Regal accounts for around 15% of Pernod sales.  The challenge is to increase this percentage and particularly to improve sales in the US.

"Pernod’s North American sales currently account for around 4% of group sales.  That compares with 25% for Diageo, which is about double Pernod’s size," says Paul Rostas of banking giant JP Morgan.

Chivas Regal could and should help to reduce the gap between the two businesses’ success rate in the US.  Martell should also help, but it has been neglected even more than Chivas in recent years. "Chivas is in reasonable health. Martell is not.

It is in fairly serious decline," says one broker at a top UK firm in the City.  Pernod Ricard is more than aware of the two brands’ potential. It has already earmarked €40m to spend on advertising and promotion in 2003 and expects that to be a base level for future years.

A big new advertising campaign, "This is the Chivas life", kicks off in September and the plan is to do for Chivas what Diageo has already done for Johnnie Walker Black Label.  The company is also keen that Martell should participate in Cognac’s growing popularity in the US.

A marketing campaign was supposed to be launched in the States earlier this year but it was delayed in the wake of fierce anti-French sentiment before and during the war with Iraq. "Martell is not suitable for a global marketing campaign because it means different things in different regions, such as Asia and the US.

But it has really lost out to Rémy Martin and Hennessy," says Shackleton.  Pernod Ricard could benefit too from expanding its UK business. Britain currently accounts for just 4% of profits, according to Paul Rostas.

Even including Ireland, where the company is strong, the proportion of total profits is a relatively subdued 10%.  The French group, formed in 1975 from the merger of the two anis products, is well respected for being entrepreneurial and flet of foot.

Following the Seagram deal, for example, the company realised there was a gap in the US vodka market and launched Seagram vodka within a month, to run alongside Seagram gin.

The prime drivers of the business, Burrows and Pringuet enjoy investor support and most analysts believe the company is capable of making significant progress over the next couple of years.

In the longer term, many wonder if Pernod Ricard’s independence is sustainable. According to those close to him, Patrick Ricard would not countenance a takeover of the business, but he may contemplate a merger, as long as his company remained nominally on top.

For the time being, the group is managing alone but consolidation is on the lips of most  large players in this industry. Pernod Ricard may be forced to play the game or risk being left behind.