March 28, 2003

Patrick Ricard talks Pernod Ricard

Patrick Ricard (photo: Pernod Ricard)
Patrick Ricard: "We never dilute our brands" (photo: Pernod Ricard)
There are worse fates than going to lunch in Paris with the charming and beautiful niece of the largest shareholder in a global drinks company. Regrettably, this was purely for business purposes as the lady is head of press at Pernod Ricard and simply doing her job.

Afterwards, and equally regrettably, uncle and CEO Patrick Ricard only offered coffee at the group's elegant headquarters in the City of Light's well-heeled 16th arrondissement. Ricard is nothing if not a man of business. The interview kept strictly to theme and subject: the consistent global positioning of brands – and no price dumping.

Under his aegis Pernod Ricard has pursued an aggressive acquisitions strategy and risked high gearing levels on the way. But the group has always managed to reduce these over time...until the next buying opportunity comes along.

 "We're quickly paying off our indebtedness" 

Monsieur Ricard, how did you create value in 2002?
Firstly, 2002 was very different from 2001 because it was the first business year in which the Seagram brands we acquired in December 2001 were fully integrated. The integration of this huge amount of new volume made a significant contribution to creating value for our shareholders.

We were able to do so in many countries, including almost the whole of Europe, without having to significantly increase spending or staff because we already had good organisational structures.

In those countries such as the USA where we had to make a significant increase to the size of our business, the local operation benefited from being able to offer a broader palette of brands, which again created considerable value for our company.

In the rest of the world where Pernod Ricard's operations used to be relatively insignificant, we have been able to increase our sales volumes sharply.

What is your current level of indebtedness viz. gearing in the wake of the Seagram deal and does this mean that you will not be able to make any further acquisitions in the medium-term?
When we finalised the Seagram deal in December 2001 we said we would double our operating profit in wine and spirits as well as increase our earnings per share by 50 per cent within one year. We have not only met this goal, but are very quickly paying off our indebtedness.

At the end of last year we reached a ratio of equity to debt of one to one, and we are now below that. Prior to the Seagram deal, our ratio was roughly 0.4 or 0.5, and we shall soon return to those levels, unless we buy something new!

What product areas have you been able to grow, and what stimulated their demand?
Initially, we continued the strategic plans and advertising campaigns which Seagram had in place prior to the acquisition with only minor modifications. As from September we shall be starting a new advertising campaign for the main Seagram brands Martell and Chivas Regal.

Thanks to the mix of the Seagram and Pernod Ricard brands we can now present our customers with a better overall offer.

Today, whisky accounts for around a third of your sales and has overtaken aniseed-based spirits in terms of their importance to the group. Why has Pernod Ricard reinvented itself in this way?          
We haven't been purely aniseed-based for a long time now. In fact we created Pernod Ricard in 1975 in order to diversify our portfolio of brands. Aniseed-based spirits are mainly drunk in France and to a minor extent in French-speaking countries bordering France or in North Africa.

Therefore, it became clear to us that, if we wanted to grow more sharply, we should also have to sell spirits with a broader global appeal such as whisky, gin, vodka and rum.

This is exactly what we have achieved today with our portfolio of brands. In 1975, many thought we were mad because aniseed-based spirits gave us a very comfortable margin, but our strategy of diversification and globalisation has been vindicated by our strong and consistent growth.

In addition to our global brands, we have a lot of specialities which do good business on just one, two, three or four national markets. These small local brands have helped us create a strong sales organisation capable of promoting more than just Chivas Regal, Martell or Ricard.

Our mix of global and local brands provides us with the economies of scale to market whatever brand we consider has global reach potential.

How important is wine for your group as a percentage of total sales, and in what countries have you been most successful with wine to date?
We don't break down product groups by value, but Jacob's Creek is a big success and generates both considerable free cash-flow and some nice profit. This is particularly good because wine can be a big cash drain, if you are not careful.

In terms of national markets the UK is a major market for us; in the United States Jacob's Creek is the number one brand for wine; and we have strong consumption in Ireland. We also achieve free cash-flow in Australia despite having had to make a large initial investment in order to be able to supply these wines.

In volume terms we produce 26 million cases of wine and 52 million cases of spirits. Wine is therefore very important to us. Obviously we do not sell premium Bordeaux wines such as Château Latour or Château Margaux because we do not target those type of customers.

Instead, we provide wine for prices which can be sold in supermarkets and where we also sell our spirits. This provides us with a good complimentary portfolio.

How do you believe the trading environment will develop this year regarding consumer demand?
I am not a star gazer, but what I can say is that growth was according to plan during the first two months of this year although the first part of the year until June does not represent the largest portion of our annual business.

The long uncertainty about Iraq decreased the number of travellers around the world shopping at duty-free shops and drinking at airport and hotel bars etc. Some of our major duty-free shop customers have even cancelled their orders.

So we are a bit worried about this year, but are still forecasting growth. Don't forget that although there is a trend towards drinking less, there is also a parallel trend towards premium products, which of course benefits our company.

Furthermore, although we are at the quality end of our business, it is fortunate that we are not selling such major consumer expenditure items as cars or dresses.

Obviously, we adapt our strategies to the state of the economy. If there is strong global consumption, we increase our marketing spend to drive sales. If the economy is poor, we reduce our marketing spend to protect our margin and simply wait for better times.

Since the Seagram deal your commitment to spirits has lead to your selling non-core business representing around 60 per cent of the old group's sales, in distribution and soft drinks. What strategy are you pursuing, and what areas of the business are you looking to buy or sell in the future?
We have almost no more disposals to make. We are not looking for new strategic acquisitions yet because our first goal is to reduce our debt. If an exciting opportunity came our way in the wine and spirits sector, of course, we should seize it, even if we should prefer any such opportunity ideally to come in one to three years time.

There are countries where we are not so big such as in the USA where there are a lot of opportunities and where we can implement our dual strategy of local roots with global reach. So we are most likely to mainly invest in this geographical area.

What percentage of sales do you invest in new product development, and where do you see the most urgent need for innovative products?
We don't launch new products every day; otherwise it would kill all the strong brands on the market. New products only represent a very small part of total consumption although this varies considerably from country to country.

The largest category of new products is found in the RTD (ready to drink) segment whose growth, however, has started to level out or even decline in some countries.

There are two types of RTD: Those with white spirit and soda etc. and those which are malt-based for fiscal reasons. RTDs are moving increasingly from being white spirit-based to malt-based for fiscal reasons because then they are taxed as beers rather than as spirits. But I think this misleads the consumer.

We offer RTDs in some countries, but refuse to do so on a beer base. If we say we are selling vodka, we sell vodka and not beer.

There is one market which is a bit different from the others and that is Australia. Firstly most RTDs are white spirits, but in Australia they drink a lot of RTDs with brown spirits such as whisky. This is because most Australians spend considerable time out of doors.

When, for instance, they go on a picnic, instead of taking a bottle of Wild Turkey or cola or anis they take just one bottle with a mixed drink. Some of our competitors tried to use big brands to launch brown spirit-based RTDs in the States, but without success.

As far as white spirit-based RTDs are concerned, we use our Seagram brands to make some coolers in the States. We also make coolers with Allied Distillers, which are mainly sold in Australia, and Orloff iced vodka in Brazil.

Finally, we have launched an RTD under the Ricard label in France, but it is a true Ricard product diluted in a bottle. We sell it in places where Ricard is not normally bought, i.e., in the bars young people visit before they go to the disco because if you arrive at the disco before 2 or 3 a.m. your peers don't think you trendy.

However, most RTDs are not made by distillers, but by brewers who are our competitors. I must confess that I'm not keen on giving money to my competitors. With wine and spirits, it takes longer to build an RTD brand. We spend money on research, but it's not easy to come up with a new taste.

To date, we have one liqueur brand which has been fairly successful in France under the Soho label and in Japan under the Dita label, where we were not permitted to use the same name.

What growth opportunities do you see in the world regions you serve?
I think we should try to grow everywhere. Of course, it's going to become tougher and tougher for us to grow in France because we are already very strong there with two companies.

However, I still wouldn't call France saturated; it may not be growing so fast as in the past, but I'd rather grow 1 per cent on a huge market than 10 per cent on a small one. In other countries where we are strong, such as Spain, it's also going to be increasingly tough. But we still have growth potential there as well as in Italy and Germany.

Eastern Europe should be a place for growth. We started in Russia six or seven years ago, got our distribution right, and now do well there. Poland should be a good market. In the Czech Republic we have a well-structured organisation and a strong local product under the Becherovka label.

As regards the Americas, it is obviously more usual to do business in the northern part i.e. in USA and Mexico than in the south where the economy is very volatile.

Of course, our major brands had some difficulties in Latin America due to the long strike and strong currency devaluation in Venezuela last year. Simultaneously, however, we grew both sales volume and profit in Brazil and especially in Argentina.

Why are you relatively weak in Germany? After all it is Europe's largest market.
Because there is a lot of local product there, for example, in the wine brands segment. Compared with other foreign companies, however, we have a very respectable marketshare there.

Your price increases in Germany have already led to your being delisted by Penny. Isn't it dangerous to raise prices on Europe's most price-sensitive market?
Premium brand manufacturers must follow a consistent price policy throughout Europe otherwise they will face difficulties. We increased the price of our brands in Germany because we didn't want them to be sold cheaply.

We also don't want to encourage our brands to be bought cheaply in Germany and diverted to other countries for sale at a higher price elsewhere. Selling our brands at cheap prices simply doesn't fit our global positioning. It is sometimes better to lose sales in some countries in order to maintain a consistent price policy and positioning.

The cardinal sin is to dilute one's brands. If you want to sell a premium product, you are not selling price, you are selling a high-quality product. You have to sell your product at the price which you think reflects its value.

Of course, we knew that we should have problems when we raised our prices in Germany, but at the end of the day it is the consumer who makes the choice and not the retailer. Obviously, this is easier to say than to implement, but ideally we want the same positioning for all our brands.

Why are you planning to export Jacob's Creek to Germany, where consumer prices are considerably lower than, for instance, in the UK or the USA?  
But we're not selling our products at low prices in Germany! We sell Jacob's Creek in Germany because we feel that it has the potential to be a global brand and because we think that it should be present on all the big national wine markets. But, if it doesn't work on one particular market, it doesn't work, and we shall simply sell elsewhere.

Why haven't you introduced premixes and RTDs to Germany to date?  
Germany wouldn't be the first market we should want to market RTDs to, but if one day we had the right product for Germany with a mother product inside, why not?

But today, for instance, the largest international vodka we have is Wyborowa, and it is much more important for us to invest in developing this than to invest in a vodka-based RTD where we are not yet strong enough.

However, should Wyborowa make huge sales one day, and if people are still drinking RTDs, which after all are a fashion trend, then why not? We have learned to be careful from our experience with Seagram coolers in the States where sales are not so brilliant.

We have to re-market the product six or seven times a year and come up with at least one or two new products annually because it is a fashion business.

You now achieve around 77 per cent of sales outside France. Where do you estimate this percentage will be in three years time?
Medium-term it could be 90 per cent because, although France is relatively big, it is just one national market.

The purchase of 40 per cent of the Seagram portfolio of assets changed your company from a Eurocentric to a global one. What structural changes were necessary to your organisation in order to make a success of globalisation?  
We didn't have to change much at all. Essentially we only had to create regional holdings to take care of Asia, North & Central America, as well as South America.

So, today, we don't talk to Brazil directly, but to the holding which supervises that part of the world, which doesn't mean that we don't visit Brazil once in a while.

Your international management strategy is deliberately decentralised, but how do you ensure that local operations adhere to core values?  
We are very decentralised so that decisions are taken as close to the market as possible because the boss of our company is the consumer. We discuss with our subsidiaries their local company strategy and the global positioning of the main Pernod Ricard brands.

But once the overall strategy of each subsidiary has been agreed, they run their business virtually as a separate company. However, we do make sure that they respect the rules via a detailed reporting system.

For instance they are not allowed to invest without our consent, because after all it is our money, or to change the taste, name or labelling of a product, because these are group assets, or to hire people at Paris head office.

There is little danger of their disobeying these rules as we take 100 per cent of our subsidiaries' net profit. Prices are set by our brand owners on a global basis. If local managers can't agree, we in Paris act as referee.

How will increasing retail consolidation affect Pernod Ricard? As retailers internationalise, how close are you to offering them global buying terms and conditions?  
The pressure can hardly get any tougher than what it is today. Our consistent price positioning policy means that our prices are roughly the same throughout Europe although they are dependent on volume. For instance, Carrefour sells millions of bottles of Ricard in France, but in those countries where it only sells small volumes our prices might be higher.

In Germany, where sales of Ricard are relatively small, we couldn't offer retailers the same price as Carrefour in France unless they were able to radically increase their sales volumes. Carrefour may be a global player in terms of the number of countries they are in, but not all the products they sell are global. Carrefour is also obliged to adapt to local consumer habits.

When they open in a new country, they cannot simply offer the same product they have in France, it just won't work. The final decision as to whether a product is bought at a specific price or not must always be made by the consumer. But retailers increasingly want to be part of our price policy, so there are problems.

What is your policy on own labels?  
We once made an own label for orange-flavoured drinks, but don't make any own labels for Ricard or wine. We might produce some own label whisky because we have a huge inventory, but the danger is that when you know how to make a premium product, it is difficult not to make an own label version which is not as good as the original!

How would you describe your management style?  
If you are decentralised, it means that you have to let your people work; otherwise the whole operation won't function. So we are consensual. But if a subsidiary presents a budget, I won't simply rubber stamp it. Instead, it is discussed, and we make a shared global decision.

Of course, there are times when I have to whistle when things aren't working properly, and I have the privilege of being able to say no. I don't think I say no very often, but I do, if I have to.

Could you summarise the three-year vision you have for your company in a way that would make a potential investor want to buy your stock today?  
Firstly, our shareholders are very happy because our share price has performed well compared with the disastrous results from some other companies.

Secondly, we have produced consistent long-term growth year after year. This is likely to continue as we haven't changed our policy and now have an even better portfolio of brands.

Our strategy is to constantly grow our business where we are not strong, to diversify and to be a global player. It was what we said 28 years ago when we founded Pernod Ricard, and it is what we are saying now.

Some have said that we will not be able to seize opportunities because we are a family company. To finance the Seagram deal we even issued bonds, which proves that we are prepared to do everything necessary to increase the size of the company and the value of its brand portfolio.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Wir verramschen unsere Marken nicht' by international editor Mike Dawson on page 41 of
Lebensmittel Zeitung, no. 13, 28.03.2003

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