June 3, 2010

Talk with Pernod Ricard boss Patrick Ricard

Patrick Ricard, Chairman of Pernod Ricard (photo: Aleksander Perkovic)
Patrick Ricard: "With spirits the real issue is use or misuse"
Interviewing Patrick Ricard, Chairman of Pernod Ricard, again after seven years is like being in a time loop.

In 2003 the Paris-based spirits & wine group was using its strong cash-flow to lower the cost of its debt-financed acquisition of Seagram's wines & spirits business two years before.

2010 is almost a re-take. The company is again striving to reduce gearing – this time after the purchase of Vin&Sprit, the former Swedish government vodka monopoly, in July 2008 for €5.7bn.

In 2003 Pernod Ricard had just been delisted by Rewe Group subsidiary Penny for raising its prices; as recently as spring 2009 it had to face a disgruntled Edeka-Gruppe for doing the same.

One could almost say "plus ça change, plus ça reste la même", only Patrick Ricard has further advanced the two goals he set himself when his father's company, Ricard, merged with Pernod in 1975: The creation of an international brand portfolio while retaining French market leadership in anis spirits.

But Patrick Ricard hadn't come to Berlin for self-congratulation; he was here because of... pregnant women.

From French to global company

In 35 years, the company, with 2008/09 revenues of €7.2bn, has gone from 90 per cent sales in France to 90 per cent world-wide. Its global portfolio now centres around 15 major brands covering anis, whisky, vodka, rum and wine.

Society, too, has changed over the last three-and-a-half decades. In the wake of growing consumer health concerns and increasingly severe anti-smoking legislation, law makers have focussed increasingly on the spirits industry.

In France spirits manufacturers are obliged to print health warnings to expectant mothers regarding the dangers of alcohol consumption during pregnancy. Pernod Ricard bottles thus portray the black silhouette of a pregnant woman holding a glass with a red line running through the label.

Currently, there is no such law in Germany, although more than 3,000 children per year are born with health defects arising from foetal alcohol syndrome (FAS).

However, as recently in Baden-Württemberg, German federal states have begun to outlaw the consumption of alcohol in public places after 10 p.m. This represents a belated attempt to combat juvenile "Koma-Saufen" (binge drinking).

Fighting the FAS scourge

As FAS is most certainly not in Pernod Ricard's best interests, the company has become increasingly pro-active when it comes to combatting this scourge.

The company has just launched a national media campaign, entitled "Mein Kind will keinen Alkohol" (my child doesn't want alcohol), aimed at promoting awareness about FAS among young women and in society generally.

In order to do this responsibly, Pernod Ricard has teamed up with Stiftung für das behinderte Kind (charitable foundation for handicapped children) at Berlin's historic hospital Charité.

Talking to Lebensmittel Zeitung in Berlin's Hotel de Rome despite a heavy cold, Patrick Ricard had flown in from Paris in order to lend his personal support to the campaign.

Alain Dufossé, CEO of Pernod Ricard Germany, who was also at the venue in Berlin, didn't pull any punches: "It is not only society's responsibility, but also that of spirits companies to warn against FAS. We are calling on our competitors as well as the beer and wine industry to support our awareness campaign."

INTERVIEW

Monsieur Ricard, what makes a 65-year-old spirits & wine man with a heavy cold jump on a plane in Paris in order to attend a presentation in Berlin about pregnant women?

We are a big player in the spirits industry and we also want to be one when it comes to Corporate Social Responsibility (CSR). Under my remit at Pernod Ricard, I have always wanted us to behave as best as we can. The products we make are very good, but only if you drink them in moderation.

The misuse of alcohol can cause big problems, such as when women drink during pregnancy. That is why I have come in person to lend my support to our international awareness campaign on this subject.

Surely it is only a question of time before EU and US legislators force spirits makers to put health warnings on their bottles in a similar way to cigarette packets in the tobacco industry?

Well, that is already partially the case on our French home market where the law obliges us to print a logo pointing to the dangers of drinking alcohol during pregnancy. We think that this is right, which is why we have taken the decision to be proactive on the subject throughout Europe, even where we are not obliged to do so under local legislation.

But isn’t it only a question of time before activist groups start filing civil actions against the spirits industry in a similar way to the anti-smoking lobby against Big Tobacco in the US?

The real issue here is between use and misuse. Obviously, there is a big difference between alcohol and tobacco. When you smoke, you are an addict and you bother your neighbours. If you are an adult and drink in moderation, as long as you are not pregnant or don’t drive, you will neither hurt nor bother anyone.

The fact remains, however, that young people who regularly “binge drink” are addicted to alcohol, fall into comas and, longer-term, suffer from cirrhosis of the liver etc. They also frequently bother other people. Although few would seriously suggest that Pernod Ricard, or anyone else in the spirits industry, have any wish to promote this addiction, won’t governments hold you accountable for the health costs eventually?

I don’t think so because it is known that the excessive consumption of spirits can be dangerous. Also, it would be difficult to legislate against. Most people with an alcohol problem drink beer, wine and spirits in combination. It would be a disproportionate response to put the blame solely on the spirits industry.

Do you believe that you and your industry could be doing more to curb binge drinking?

It is a serious social issue which has essentially come from the Nordic countries and the UK, but which is progressing southwards in Europe. We will not be able to solve the problem on our own. It’s a long-term issue and must start with education as well as parental advice and control.

However, we producers have to make a contribution towards solving the problem. We must educate people not to drink when they are young, when they drive, or during pregnancy. Above all, alcohol must be consumed in moderation and not abused.

How do you view the recent legislation passed in certain German Federal States such as Baden-Württemberg forbidding the consumption of alcohol in public places after 10 p.m.?

Firstly, it is the law, and we have to respect this like everyone else. The legislation was passed because people have been abusing alcohol consumption on the streets. That is not the way to drink alcohol; that’s why you have bars or why people drink at home. The streets are not an appropriate place for alcohol consumption.

Some countries, especially in the past, have gone in for the total prohibition of alcohol. Does this worry you?

Historically, prohibition has never solved the problem of excessive alcohol consumption – on the contrary, this merely encouraged bootlegging and transhipping and increased alcohol consumption.

Are you worried that the world financial crisis will oblige many national governments to increase taxes on spirits?

No, governments are aware of the historical fact that increased alcohol taxation actually reduces revenues. There is a certain level above which taxation becomes counter-productive for the fiscal authorities. Poland is a case in point.

When high alcohol taxes had to be lowered on EU entry, state revenues actually grew without any corresponding increase in consumption. The same occurred in Denmark and other parts of Scandinavia.

Isn’t Pernod Ricard suffering from a hangover of its own in the wake of the €5.7bn acquisition of Vin&Sprit in July 2008? Even at the end of 2009, fallout from the deal had lumbered you with net debt in excess of €12bn.

No, gearing may still be over 100 per cent, but it is not an issue, because, with an annual net cash-flow of around €1bn ($1.4bn; £875m), we are more than able to pay back our debt.

Presumably, your strong cash-flow is partly due to your policy of “premiumisation”. However, doesn't this risk decreasing revenues in a global recession?

Everyone is able to fight on price, but it ruins an industry. Maybe sales will decline for a while during a crisis, but they catch up very fast. Currently, volume sales are not so bad anyway.

Do premium spirits really have the necessary volume?

Around 1.4 billion cases of spirits are consumed annually around the globe, half of which are very cheap quality. International spirits represent around 350 million cases, and of this, around 30 million cases are premium, as defined by the price of our Absolut Vodka upwards. I don’t think 30 million cases per year are such a bad potential universe!

How difficult are you finding it to raise money on the capital markets at the moment?

We easily raised €1.2bn ($1.6bn; £1.1bn)at only 4.75 per cent on the French bond market in March. In fact, we could have taken up almost €6bn ($8.1bn; £5.3bn) had we wished.

But didn’t Fitch Ratings reduce your credit rating to junk bond status?

Yes, but we are almost investment grade now, and the low interest rate we were able to obtain on the recent French bond market is a clear indication of how our creditworthiness is viewed by the financial community.

Haven’t you miscalculated though by taking on massive debt in what turned out to be a global financial crisis and weak consumer markets?

No, not at all! In our last fiscal year to June/July 2009, we were still able to grow net profit by 10 per cent. And, even this year, we are looking for annual internal growth of 3 per cent, despite disadvantageous currency effects.

Had there been no global consumer crisis, who knows, we might have been able to have grown by as much as 20 per cent!

In what way have currency movements affected you?

Over the past ten years, we have generally lost against the dollar. However, we now stand to benefit from the weakening of the euro because roughly 50 per cent of our sales are in dollars or in currencies linked to the dollar.

On the other hand, we are now making a lot of vodka in Swedish kroner and Scotch whisky in pounds sterling, so production costs will be relatively lower.

In order to reduce debt, you were obliged to sell some of your minor brands such as Tia Maria and Wild Turkey. Could you also be forced to dipose of one or more of your 15 flagship brands eventually?

Well, admittedly we also sold some wine business in Sweden and will probably reap slightly less than the €1bn ($1.4bn; £875m) we had hoped to net from the sale of part of our wine business in Spain. However, there will be absolutely no need to sell any of our strategic assets.

Can you really be so sure on today’s generally weak consumer markets?

We have sufficient credit lines from our banks and will not have to make a major repayment for three or four years. In addition to using our free cash-flow to reimburse, we shall also launch a bond issue every year. Also, remember that the cost of the debt we have borrowed from the bank is only 4.5 per cent.

Analysts at Deutsche Bank believe that you will be forced to reduce marketing expenditure in order to service your debt. Isn’t this a dangerous game to play longer-term?

Last year, we spent around 19 per cent of sales on marketing, and we shall spend around the same this year. So we don’t intend to decrease our spend.

How did you manage to increase your net profit despite increased borrowing costs?

Mainly by using synergies and reducing distribution costs, but we also improved cost efficiency. Furthermore, we benefited from a positive portfolio effect; it is very helpful to have a full range in Europe, the US and Asia.

Although you must reduce debt first, are you likely to continue your acquisitions strategy medium to long-term?

We are already big and strong and cover nearly all markets in terms of products and geography. Also, we would not be able to buy anything too major because there would obviously be difficulties with the competition authorities.

Where then do you see the most growth for Pernod Ricard?

We would particularly like to expand in the US because it is a major country where we don’t enjoy the strong position we have elsewhere. Certainly, we see a lot of growth potential in the US vodka segment for our “Absolut” vodka brand.

How are you doing in China?

Thanks to our Chivas Regal and Ballantine’s brands we are the number one whisky company there. Also Martell is making strong progress. We are pushing Absolut Vodka as well as our champagne because the Chinese seem to be open to everything.

How about Eastern Europe? Hasn’t consumer spending power decreased dramatically in the region?

Russia has experienced a strong decline in the past months, but is now catching up again. Poland is a good market, although obviously much smaller.

Will you be reducing expenditure in the region?

We do not invest so much up front, we follow the market.

Pernod Ricard is now the world’s second-largest spirits company. Are you approaching the end-game with Diageo in terms of global consolidation?

We are certainly approaching Diageo in terms of size. In regard to global consolidation, we are not approaching the end, there is still a lot out there, but we could not make a major deal for competition reasons. However, there are a number of smaller-sized players who all want to be big.

Could you put a time-frame on the global consolidation game?

No, you can’t put one on consolidation. Who would have said a few years ago that Seagram or Allied Domecq would be for sale? Nobody! Also, take Absolut, the Swedish government didn’t need the money, but they still put Vin&Sprit up for sale. So, you never know.

Consolidation in the spirits industry has been matched by growing concentration among retailers. To what extent are major retailers pressurising you to give them international terms & conditions?

The current situation is not improving! We try to offer a European price thanks to the euro, however, it depends on the country and brand concerned. In France, prices are net-net, but there are different customs in German or Italian retailing, for instance.

In general terms, however, as far as we are concerned retailers can buy where they want as long as they buy the quantity.

In May 2009, you increased prices by 5-10 per cent in Germany. Edeka then refused to support your POS and special offer activities. Are you really convinced that your brands have pricing power in Germany?

The one who should decide is the consumer and not the retailer. We promote and advertise our brands so that customers will go to the store. Obviously, we don’t want retailers to decide the price policy of our group, so there will always be conflict. However, at the end of the day, the consumer decides the issue.

Why do you think it is that, with the possible exception of Johnnie Walker, there is no truly global spirits brand?

I don’t agree. Pernod Ricard has Chivas Regal, Absolut Vodka and a number of other brands within their respective niches. But, in answer to your question, I would say that it is a question of history because many brands have changed ownership and distributors over the years.

Your company was originally solely based on aniseed spirits and you remain market leader in France within the segment. Why, however, do you think that its popularity hardly extends beyond the borders of France?

Firstly, let me say that it was only thanks to the money we made with aniseed spirits that we were able to create Pernod Ricard in the first place. However, it is certainly easier to sell Scotch whisky, vodka or champagne abroad because aniseed spirits are an acquired taste. You need to drink them four or five times before you begin to appreciate them.

Where do you see the main innovation in your industry?

There are very few really new product developments in spirits, as I would tend to call new flavours etc. mere line extensions. However, there will always be innovation in our industry in the sense that you have to follow your customers. If you take France only 30 years ago, 80 per cent of sales were in the bars, which obviously isn’t the case today.

How about Ready to Drinks (RTD)?

RTDs were always more for the brewer than for the spirits industry. They are on the decline everywhere. Among other things, they face a lot of problems with government legislators because they are very sweet. When drinks are sweet, you don’t taste the amount of alcohol they contain.

This gets us back to the type of problem which brings me here to Berlin today.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 20, 21.05.2010


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