Pernod Ricard – achieving growth through premiumisation

Pernod Ricard is a global manufacturer of spirits and wine, operating in more than 85 affiliates and 101 production sites. Through both organic growth and timely acquisitions, the company has become the second largest spirits and wine company in the world and the largest in the premium spirits category.

This success has been apparent in its financial results: the stock price has rebounded from its financial crisis low point of 39.59 in March 2009 to 104.10 as of December 2015, an 18% CAGR over the period.

Pernod Ricard’s success can be attributed to the successful alignment of its business model and operational model, and a willingness to adapt those as the market for spirits and wine evolves.

Business model

Pernod Ricard business model aims to deliver growth by focusing on two major areas. First, it seeks to maintain its position as the number one premium spirits brand, generating higher value per unit sold than its closest competitor, Diageo. Second, it aims to build on its strong position in emerging market and rising demand for premium brands to drive revenue growth. Through these, Pernod Ricard seeks to build on its strong position in the market in the hope of one day, becoming the number one spirits and wine company in the world.

Operational model

Pernod Ricard seeks to deliver on its business model through five key operational levers.

A focus on core and local brands

Pernod Ricard is heavily dependent on its core brands for the majority of its revenue. Indeed, c. 77% of its marketing budget in 2013 went to its key brands. Recognizing the importance of its strategic brands, Pernod Ricard decided to split those into 14 spirits and champagne brands:

• Two Global Icons: Chivas Regal and Absolut
• Seven Strategic Premium Brands: Ricard, Ballantine’s, Jameson, Havana Club, Beefeater, Malibu and Kahlúa
• Five strategic prestige brands: Martell, Glenlivet, Royal Salute as well as champagnes Mumm and Perrier-Jouët

Pernod Ricard has furthermore sought to strengthen its presence in emerging markets through eighteen key local brands. These low margin/high volume brands have provided Pernod Ricard with volume sales but more importantly, with a strong distribution platform through which to market its premium brands.

A decentralized corporate structure

Pernod Ricard operates through a decentralized structure as it seeks to provide more flexibility to managers to adapt to the demands of local markets. The company is organized both by brand owners and by distribution networks.

Brand owners are based in the brands’ country of origin and are in charge of developing and implementing, with distribution networks, the strategy for the brands
 in their portfolio. They are accountable for the overall profitability of their brands. These are divided into six groups: (1) the Absolut company, Chivas Brothers, Martell Mumm Perrier-Jouet, Irish Distillers, Premium Wine Brands and Havana Club International.

Distribution companies are responsible for implementing the group’s strategy/key policies and developing the business/deliver profit in their local market. These are divided into five groups: Americas, Asia, Europe, Ricard SA and Pernod SA.

A strong focus on premiumisation

Pernod Ricard is focused on differentiating itself from Diageo, its main competitor, by doubling down on the premium spirits market. It hopes to achieve this in two ways: innovation and popular marketing campaigns. For example, Pernod Ricard has recently sought to take advantage of the lack of availability of 12 year and above old scotch whisky by emphasizing the age on their own Chivas Regal bottles. The company has also sought to benefit from rising affluence in Asia, targeting more particularly high net worth individuals both in China and India.

Acquisition of premium brands and strong balance sheet

Pernod Ricard expanded significantly prior to the financial crisis, acquiring key businesses to improve its portfolio of premium brands. In 2001, it acquired Seagram, owner notably of the Chivas brand. In 2005, it acquired Allied Domecq and in 2008 V&S which brought the Absolut Brand within its portfolio. Unfortunately, while these acquisitions significantly strengthened the company’s spirits portfolio, it also resulted in a significant growth of its debt burden.

Since 2008, Pernod Ricard has worked hard to deleverage its balance sheet, decreasing its net debt to EBITDA ratio from 6.2 in 2008 to 3.9 in 2012 and enabling the company to regain its investment grade status. The company is now well positioned to make new strategic acquisitions, having already acquired cognac Produce Le Maine au Bois in 2013.

In-house production

Pernod Ricard produces all of spirits and wine itself. As of 2013, the company had 96 production sites, including distilleries, storage and bottling plants. This has allowed it to keep a strong oversight over both the quality of its product and better plan its inventory.

Sources:

• Pernod Ricard “A value creative business model”, Deutsche Bank Conference, 20^th June 2012
• The Drinks Business, Pernod Ricard eyes more acquisitions, 5^th September 2013 http://www.thedrinksbusiness.com/2013/09/pernod-ricard-eyes-more-acquisitions/
• Euromonitor, Passport – Pernod Ricard Groupe in Spirits (world), August 2014
• Pernod Ricard Annual Report, 2014/15
• Pernord Ricard Charter, 07/12/2011