Pernod versus Rémy: battle of the booze-makers

February 11, 2014 7:20 am

Pernod versus Rémy: battle of the booze-makers

By Adam Thomson in Paris

Pernod Ricard and Rémy Cointreau share more than a passing resemblance. Both are French, both make cognac and other spirits and both founding families retain important stakes. They also both have offices in Paris – in Haussmann-era buildings, less than two miles apart.

But when Pernod Ricard publishes results on Thursday, investors are likely to overlook these similarities and seize instead on the two groups’ startling divergence of fortunes over the past year or so.

Pernod, which produces Absolut vodka and whoseannual sales of €8.6bn are close to seven times those ofRémy, is expected to report broadly flat like-for-like revenue and operating profit for the fourth quarter of 2013 – hardly shining figures.

But Rémy said last month that sales during the same quarter fell nearly 19 per cent. Analysts were prepared for a decline – but only of 4.5 per cent. Late last year, the group warned that operating profit for the full business year would likely fall at least 20 per cent.

Then there is the share price. Pernod Ricard’s share price has fallen 10.2 per cent over the past 12 months, while Rémy’s has lost 42.5 per cent – against an overall market that gained 15.9 per cent over the same period.

“The Pernod ship continues to sail,” says Ian Shackleton, an analyst at Nomura Securities. “Remy’s appears to have run aground.”

All this has left investors wondering how two albeit different-sized groups operating in the same industryand across the same geographic regions seem to have ended up on such different tacks. Ask most analysts, and they say the reason has to do with diversity and succession.

Like all cognac producers, including Pernod Ricard, Rémy has been hit hard by the Chinese government’s decision a year ago to crack down on lavish spending and generous gift-giving by officials. But the group has felt it more than its Paris-based rival because it has come to rely on cognac so heavily.

Dependency was perhaps hard to avoid, though it tried. Attempts at diversification include its determination to develop the US cognac market and its 2012 purchase of the Bruichladdich whisky distillery. Rémy also has brands such as Cointreau liqueur and Mount Gay rum, which it has been building.

They have been the victims of their own prior success. They have been trying to develop other categories but cognac is the nature of Rémy.

– Trevor Stirling, analyst at Bernstein

Yet China’s discovery that it loved the twice-distilled brandy from France’s Cognac region proved far more potent. According to Bernstein Research, Greater China had developed such a thirst by 2012 that it accounted for 43 per cent of the global cognac market by value, up from just 14 per cent a decade previously.

Not only that, but China had a penchant for extremely expensive tipple. By 2012, the ultra-premium cognac category, which starts at $500 a bottle, accounted for a remarkable 13 per cent of the Chinese market by 2012, compared with less than 1 per cent for the UK or the US.

Until the crackdown, such refined taste fitted beautifully with Rémy’s portfolio, which is almost all either premium or above, and includes the $2,500-a-bottle Louis XIII cognac. By the time sales started to dive, cognac accounted for 82 per cent of Rémy’s operating profit, compared with just half in 2009.

“They have been the victims of their own prior success,” says Trevor Stirling, an analyst at Bernstein. “They have been trying to develop other categories but cognac is the nature of Rémy.”

By contrast, Pernod Ricard has what it calls its “Top 14”, which is more or less a roll call of the most familiar brands in any drinks cabinet: Chivas and Jameson whiskies, Absolut vodka, Beefeater gin, Malibu liqueur and Havana Club rum.

Even so, the group’s other brands, which include premium wines and 18 local spirits’ brands, still account for about 40 per cent of annual sales. Its Martell cognac, which is highly exposed to the Chinese market slump, only provides an estimated 15 per cent of group operating profit.

As Pierre Pringuet, Pernod Ricard’s chief executive officer, told the FT late last year: “We have a lot of depth in our portfolio and no obvious holes.”

Rémy’s China troubles have coincided with, or perhaps exacerbated, succession difficulties. Last month, Frédéric Pflanz’s surprise resignation after less than 100 days as the group’s chief executive sent tremors through the investment community.

François Hériard Dubreuil, chairman and a member of the group’s controlling family, has become chief executive temporarily. But the incident, together with the unexpected departure in the same month of the much-respected Patrick Piana from Rémy’s all-important cognac division, has some onlookers concerned that China-linked business problems have made the Hériard Dubreuil family want to tighten control.

As one analyst put it: “Rémy has dramatically shifted from professional management to family being in the driving seat.” Rémy’s 12-member board has five family members, and the family holds more than 60 per cent of the voting rights.

At Pernod Ricard, one analyst described a succession plan in place since 2012 that will see Alexandre Ricard become chairman and CEO in January next year as “maturing slowly and smoothly”. The Ricard family holds about 14 per cent of group shares.

With just one times net debt to earnings before interest, taxes, depreciation and amortisation (ebitda), Rémy has plenty of scope for acquisitions to help diversify its portfolio. The problem is that targets are few and far between.

“If there were more Bruichladdichs out there, Rémy would buy them,” says Mr Stirling at Bernstein. “The trouble is, there aren’t.”

For now, that leaves Rémy’s future performance tied firmly to a recovery in the Chinese market. Few doubt that such a recovery will come. Many are even optimistic about the long-term prospects for growth of cognac sales. The question nobody can answer is, when?

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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