Thursday 15 November 2018

Pernod Ricard's growth could make it a winning investment tipple

Investor

Production At Pernod-Ricard SA's Jameson Irish Whiskey Plant...Bottles of Jameson whiskey, produced by Irish Distillers, are seen as they pass along the production line at the Pernod-Ricard SA bottling plant in Dublin, Ireland, on Monday, Jan. 23, 2012. Pernod-Ricard SA sold $2.5 billion of debt, its second sale in three months, as the maker of Chivas Regal whisky takes advantage of the investment-grade ratings gained last year from the two biggest credit graders. Photograph: Aidan Crawley
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Production At Pernod-Ricard SA's Jameson Irish Whiskey Plant...Bottles of Jameson whiskey, produced by Irish Distillers, are seen as they pass along the production line at the Pernod-Ricard SA bottling plant in Dublin, Ireland, on Monday, Jan. 23, 2012. Pernod-Ricard SA sold $2.5 billion of debt, its second sale in three months, as the maker of Chivas Regal whisky takes advantage of the investment-grade ratings gained last year from the two biggest credit graders. Photograph: Aidan Crawley ...I

Aidan Donnelly

There has been an explosion of gin and whiskey brands in recent years. Ten years ago there were only three distilleries for Irish whiskey. Now there are 20, according to the Alcohol Beverage Federation of Ireland, though that's still small when compared to the scotch industry. Every month seems to bring another 'new' gin to the market.

Notwithstanding this growth in Ireland, there has been significant consolidation in the spirits industry globally, and yet it still remains relatively fragmented. The French company Pernod Ricard has been built up through four large-scale acquisitions over the past 30 years: Irish Distillers in 1988 (its first international acquisition), Seagram Spirits & Wine in 2001, Allied Domecq in 2005 and Vin & Sprit in 2008.

Pernod now boasts the most comprehensive portfolio of brands in the industry with well-known names such as Jameson, Absolut, Martell, Chivas, Beefeater, Havana Club, and Malibu. The company also owns wine brands such as Campo Viejo, Jacob's Creek, and Brancott Estate. In recent times, the company has seen its whiskey brands driving sales in the United States, while over in Europe, the driver has been gin.

The whiskey category has been growing rapidly over the last few years, particularly in the US, and for Pernod, the Jameson brand family continues to grow by double digits. Jameson is now the highest volume spirit sold by Pernod in US, according to management. While the growing consumer appetite for Irish whiskey has seen the company launch several new product variations under the Jameson label, it has also increased the demand for the company's other whiskey brands: Powers and Midleton.

China and India were a roaring success for Pernod over the last year, and management expectations are for another strong year ahead. Recent financial results from the company showed that both these countries combined currently account for about 19pc of company sales and are growing at double-digit rates.

For different reasons, the penetration of international spirits in China and India remains low but should continue to expand in the future. The Indian market is quite different from others, as the government charges 150pc import duty on spirits. Pernod produces whiskey locally in India as well as selling its international brands to satisfy the growing demand in the country.

China in 2017 saw the international spirits category grow by 10pc, but the segment still remains a tiny part of the overall spirits market. China is growing richer all the time, and the demographics are very favourable for spirits consumption, as a growing middle and affluent classes should continue to boost demand for premium products. The evidence of premiumisation (consumers trading up to higher-quality or higher-priced drinks) is very clear, as both mainstream local beer and spirits consumption has been in decline in recent years, while the premium categories continue to grow.

Another factor likely to drive growth for the company is that Pernod Ricard is the only wines and spirits company in China which has an exclusive joint business platform with Chinese internet giant Tencent.

With the future growth prospects for Pernod Ricard looking good, this is one investment tipple which could take your fancy.

  • Aidan Donnelly is head of equities in Davy Private Clients. For disclosures, visit www.davy.ie/ AidanDonnelly
  • Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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