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| October 10th 2006 |
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| Pernod Ricard`s wine empire |
by Joel B. Payne
Pernod Ricard's purchase of Allied Domecq in 2005 sent shockwaves through the spirits industry. The group is now the second largest liquor company in the world. Little noticed by many were the wine acquisitions in the deal which turned... |
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 ...Pernod Ricard into the world's fourth largest wine producer.
Two decades ago wine was only of marginal importance to Pernod Ricard's global strategy, but not anymore. They are now New Zealand's largest winemaker and also the dominant player in Spain's key Rioja region. Indeed the Allied deal brought 12 million cases of wine to the group's portfolio, doubling the company's wine sales to 23 million cases worldwide.
After fits and starts in the early eighties, the current ascension began in1989 with the acquisition of Orlando. At that time Pernod Ricard's original goal was less to build Jacob's Creek into the worldwide brand that it has become today, but to ride the rest of their portfolio into the Australian market on the back of Orlando's domestic sales. Then as now Pernod Ricard has always sold wine through its own spirits organization. In the near future, as they readily admit, the company will probably need to trace a middle path, establishing separate units for wine sales in the bigger markets, but staying as they are elsewhere. At present it is still the same people who are in charge of both portfolios, but as Adrian Keogh, the group's category director for wine marketing, relates, "this is not the problem that you might think. Our salesman may not all have learned the intricacies of the individual vineyards in Burgundy or the classification in Bordeaux, but they know Rioja, Barossa Shiraz and Marlborough Sauvignon Blanc."
This is particularly true in each brand's domestic market where the strong loyalty to local brands, as once with Jacob's Creek in Australia, serves to leverage foreign wines and spirits into the market. The same may well turn out to be true for New Zealand and for Spain, now their second largest market outside the United States. The long term goal – through further organic growth or acquisition - is to have an enhanced geographical footprint with critical mass in all key markets, culminating in a direct presence in some 70 countries. However, critics of Pernod Ricard's historical performance can point at its less than impressive attempts to replicate the Jacob's Creek model in South Africa with Long Mountain and in Chile with Tera Andina, which the company launched in 1995 and sold in 2001 to the Claro Group, owners of Viña Santa Rita and Viña Carmen. The Montana purchase, which gave Pernod Ricard a dominant presence in New Zealand, also brought a parcel of other brands, including Stoneleigh, Church Road and once sizeable Corban's, which was allowed to grow dormant in the domestic market following its original purchase by Montana. Current plans include revitalizing this brand, which still retains a strong name among New Zealand’s wine drinkers. Similarly in Spain, with 13 wineries pegging different price points, the group has an enviable presence – and hopes to expand further. Nonetheless, building premium brands such as Tarsus and Ysios has not been easy going. Perhaps giving Phil Laffer, the redoubtable chief winemaker of the company's Australian operations - and now |
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also responsible for New Zealand - a global role might raise both the quality and the potential of many of the currently underperforming brands.
Serving the customer
In order to better penetrate its global markets Pernod Ricard has created four regional divisions. "To serve the customers," says Keogh, "you have to be close to them. That means being decentralized, so that you know them better and can react faster." Albeit that decentralisation is not particularly a French trait, local roots with global reach is the business model the company claims to favour. Of 18,000 employees, only 140 are at headquarters overlooking the Place des États Unis in Paris. In each country the local distributor must decide what is right for his market. The key brands are a must, yes, but the others can either be included in the local portfolio, farmed out to other importers or wholesalers on an exclusive basis or, often enough, not sold at all.
"Think global, act local" is thus the company motto. "In Brazil we're Brazilian, in China were Chinese," states Patrick Ricard. "The Chinese know better than we what their countrymen want to drink and why. A Pastis salesman from Marseille, however talented, is not likely to have much success there." To that end they have their own sales organization in China, appoint distributors in the individual provinces who appoint smaller distributors for the cities. They are all Chinese, except for the boss, who is French. Although in 2002 the group's declared goal was to reach 10 million cases of wine annually, the acquisition of the brands in Allied Domecq's portfolio has enlarged their footprint in many markets faster than anyone in the company had expected. One of the strategic goals of the group will now have to be to distinguish between key wines brands and those of only local importance, much as they have already done with spirits – and deciding where to go from there. In Brazil, for example, the group is strong with Almaden, but that brand – famous in the US – does not belong to them elsewhere. Similarly, in Mexico, where Calafia sells over 100.000 cases, or in Argentina with Etchart, success is only local. "It is a good brand in South America, but patchy elsewhere," says Adrian Keogh. The group also inherited Graffigna from San Juan in the same country by acquiring Domecq, but that brand had been going nowhere. Although Patrick Ricard is often quoted for his quip "a thirst to be first" there are no immediate plans to expand the wine business further, even where synergies could well be found. Apparently they have enough to digest at presence, not only having doubled the size of the company in the last twelve months, but also taking on three new countries and four new types of business.
A strong French wine brand?
When Patrick Ricard took over his family's business in 1978 France represented 90% of the company's total sales, today it is merely a tenth; |
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but given that Pernod Ricard is French, you might think that they would want to either buy or create a strong French brand - as such are sadly lacking on the world stage. This is currently not a priority according to Keogh, carefully giving a politically correct answer. Thierry Jacquillat, former managing director and later board member at Pernod Ricard, was more direct at Wine Evolution 2006 when he said that he was glad to have sold Pernod Ricard's French wine business - after making a profit from the deal - and that “I see more future in Pernod Ricard's business as a wine producer in Georgia and India than in France. Even if the rules changed here, there is a problem of attitude.” Jacquillat's comments about producing wine in France presumably do not include Champagne which, with Mumm the world's third-best selling Champagne, and Perrier Jouet, represents 7% of the company's wine sales. Revealingly, however, when the sales and marketing of the wine brands were divided into four segments, Champagne was left out. Pernod Ricard clearly feels that the business of selling premium bubbles is better performed by people with experience of distributing spirits. As Jacquillat implied, the company already has a majority share in Georgian Wines and Spirits which boasts 700 hectares of the best, most modern vineyards in that former Soviet Republic. Internationally, the Tamada brand produced there has been well received, but the company is currently smarting from the closure for political reasons of the Russian market - traditionally by far its largest – to Georgian wines. Life has also been made difficult by revelations from officials such as George Kheviashvili, head of the Georgia's parliamentary agriculture committee, that over half of the wines produced by GWS's local competitors are made in a laboratory and that, according to another official, “the expression wine without grapes is now common”. Hopefully, this cloud will blow over, but sagas like this must leave Pernod Ricard's strategic planners wondering whether spirits aren't less of a headache than wine If Eastern Europe is complicated, the same could be said of Asia where Pernod Ricard is now quietly preparing to launch a wine from the Indian wine operation that it bought in embryonic form in 2001 as part of the Seagram deal, which helped to make the French company the biggest foreign liquor producer in the subcontinent. Many outside observers believe that this brand conscious market could prove very fruitful, but the low current consumption, high taxes and infrastructural difficulties also make any investment here a gamble.
More likely than a French or even Italian brand as a future acquisition, would be a strong brand from California. The group has more clout there since their acquisition of Allied Domecq, but they are still only number four in the peckin order. A strong Californian brand, like Clos du Bois that they were forced to relinquish in the Allied deal, would certainly boost their credibility in the market where the most money can currently be made with wine.
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Origins, markets and price points
Although Pernod Ricard can now provide something for every palate, they still need to define their global strategy more precisely. "It's not only about share of throats, it's also about quality, perceived quality and price," responds Keogh. "The heart of the debate is origins, markets and price points. After that, it is all mathematics."
Pernod Ricard estimates the total wine market at 2,850 million cases, of which 2,350 are still wines; the remaining volume being fortified wines with 325 and sparkling wines with 175 million cases. While the market for still wine has grown over the last ten years from 2,100 to 2,350 million cases, most of that growth has come from branded wine; but still only 1,475 of the 2,350 million cases are western style branded wines that are traded internationally. The rest are largely unbranded wines that are consumed only locally. Further, of those 1,475, only 965 million cases are sold internationally at over $3 a bottle retail. The rest is moved at lower, generally unprofitable prices. Of what remains, not only has branded wine grown from 675 to 965 million cases over the last ten years, it has generated the lion's share of the revenue. While it accounted for only some 40% of total volume, it brought three quarters of net sales revenue - and this growth continues to be led by imports, not domestic production, and today accounts for almost half of the total volume.
That comes, though, as no surprise, for the New World has generated three quarters of this growth over the past decade and now accounts for a third of all sales. In particular, though, it is the premium brands at over $7 a bottle that have shown the greatest growth globally – and though they account for only 13% of this market, they do twice that in terms of net sales. It is thus not surprising that Pernod Ricard, and its major competitors, covets this vector - and the markets like the United States and Asia where this growth is taking place. In trying to trade up the ladder, the group has learned a great deal from Jacob's Creek. Premium may mean over £6 per bottle in the English market, but that is a far cry from premium Scotch – and varietal driven brands are more exposed to price competition in promotions. Rumours that Pernod Ricard’s decision to slash promotional budgets in the United Kingdom was the result of the company either having paid too much for Allied Domecq or not having received everything they wanted were specifically countered by the company in a recent statement. Its objectives following the acquisition, the company asserted, had all been “met or exceeded”, integration costs were “less than expected” and the disposals [of unwanted Allied assets] made “on better terms than anticipated.”
A future in wine?
The financial reality is that Pernod Picard has just reported full year sales to the end of June of 1.6 billion Euros, a full 68 percent increase, of which organic |
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growth represented 4.3 percent. The debt ratio after the Allied deal is only 5.6 times EBITDA, compared to 6 after the Seagrams acquisition. That deal turned out well, but the total debt is higher today - and an important part of the acquisition this time was wine. The question remains, whether wine can generate as much income as other beverages. This topic will be even more hotly discussed if the rumours about Inbev or SAB Miller's intentions in their potential acquisition of Foster's turn out to be true. Neither is apparently interested in Beringer, Penfolds, Rosemount, Lindemans or Wolf Blass, but only in the beers. The brewers' are not alone in their views. No one looking at the overall drinks sector can have failed to notice the recent comments by Paul Walsh, the canny head of Diageo, that he doesn't “foresee a lot of opportunities in wine” and that his reason for not taking up the option to buy Montana was the insufficient return for his shareholders. Patrick Ricard could retort that sales of his New Zealand brands have risen by a healthy 8% since the acquisition, while the performance of the former Allied spirits brands has ranged from a fall of 12% for Ballantines to a rise of 16% for Stolichnaya.
Although not true, critics say that Pernod Ricard has grown more through mergers and acquisitions than through the organic development of their own brands; but after all the consolidation in the drink's sector, most of the easy prey is gone or – like Bacardi Martini or Brown Forman - little inclined to discussion. What will happen next is an open question. A century ago Pernod was an entrenched aristocrat and Ricard a brash upstart. This can no longer be said of today's group. Still, as the third or fourth largest, depending on your numbers, producer of branded wine in the world and a leader in emerging countries such as China, India, Brazil, Mexico, Thailand and Argentina, they still seem to have the urge to shake up the market. |
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