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While the effects of the 2008 financial crisis are still impacting the global economy and the global alcoholic drinks market, we have the opportunity to examine how the two leading international spirits companies, Diageo and Pernod Ricard, are set to perform in the future by looking at how they have performed in volume terms in 2010 and 2011, both organically and inorganically.
Both Diageo and Pernod Ricard have almost identical volumes in 2011 but over the longer term have divergent growth prospects, with the French company in a position to grow far quicker than its UK-based counterpart.
Despite its rapid growth during the year, Diageo, the world’s leading spirits producer by volume in 2011, is not in a good position to see strong growth in the coming years. The company’s rapid growth of 8% in 2011 can be attributed to its acquisitions of Mey Içki and Sichuan Quanxing. Organic growth in 2011, as in 2010, was nearer to 2%.
Diageo’s growth is being hindered by two issues – its too strong a historical focus on the mature markets of North America and Western Europe and an over-reliance on key brands such as Johnnie Walker, Smirnoff, Baileys, J&B and Captain Morgan in a limited number of markets in these regions. Consequently, these brands are now mature in markets which themselves are either in decline or at best seeing sluggish growth, thus leading to weak performances.
Not all of its brands have been as badly affected as Johnnie Walker, the company’s main growth driver being the most geographically diverse, while brands such as J&B and Baileys have struggled due to their narrow focus.
Diageo still has potential to grow. Its two recent acquisitions and increasing its stake in the leading spirits player in Vietnam have been focused on developing its emerging market presence, and it still has further funds available for other acquisitions.
In addition, in emerging regions where the company has remained focused, for example in Latin America and the Middle East and Africa, it performed well in 2010 and 2011.
In contrast to its major rival Diageo, Pernod Ricard has seen far more rapid development, with organic growth of more than twice that of Diageo in both 2010 and 2011. While much of this growth has come from low-value local Indian whiskies, Pernod’s fundamentals for growth are far stronger than those of Diageo. This is due to sustained investment in emerging markets and a large number of underdeveloped brands which have potential to grow in mature as well as emerging markets.
Pernod Ricard’s investment in emerging markets has come in the form of low-value local products such as Royal Stag Indian whisky or Montilla rum in Brazil, giving it a distribution base for its higher value international brands. Alternatively, as in China, the company has focused primarily on its international brands. While Diageo sold all its local spirits brands and pulled back from key emerging markets, notably in Asia, Pernod Ricard maintained its investment in them, putting it in a prime position to now exploit growth in markets such as India and China.
Diageo can improve its position through acquisition, notably of Grupo Cuervo and the remaining stake in Moët Hennessy, thus strengthening its position in both Mexico and China as well as filling gaps in its portfolio. Of the two, the acquisition of Grupo Cuervo is the only one that is likely to occur in the foreseeable future due to the distribution agreement coming up for renewal in 2013. This could be countered, however, by Pernod’s acquisition of key Beam Inc brands when its debt profile improves in the latter part of 2012.
Part of the difference in performance between Pernod Ricard and Diageo is down to luck, such as Diageo’s heavier exposure to the troubled markets of Greece and Spain, while Pernod Ricard’s greater exposure to France and Germany can partly be attributed to better long-term planning. Its better performance has not just come from remaining in key emerging markets, but also from developing its brands in a broader number of markets, thus giving it a stronger base from which to grow them.
All these factors put Pernod Ricard in a prime position to not only become the leading international spirits producer in 2012, but also to extend its lead in the years ahead.