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Industryweek 11810 Absolut Vodka G

Pernod Ricard to Cut Costs as Absolut, Chivas Brands Suffer

Sept. 1, 2016
The company is also reorganizing its business in China and trying to speed decision-making in the U.S. through a new structure.

Pernod Ricard SA (IW 1000/444), the world’s second-largest distiller, plans to cut costs by 400 million euros (US$446 million) after sales of Absolut vodka and Chivas Regal whisky declined amid weakness in Asia.

The company is also reorganizing its business in China to add a dedicated salesforce for premium brands, and it’s trying to speed decision-making in the U.S. through a new structure, Pernod said Thursday. The stock rose 1.9% to 104.90 euros as of 11:44 a.m. in Paris.

Pernod Ricard is seeking to sell more Chivas Regal to the emerging middle class in China after a four-year government campaign against graft and extravagant spending eroded the market for high-end cognac. While full-year profit met analysts’ estimates, sales of Absolut and Chivas Regal, two of its largest brands, declined 4 percent on an organic basis.

“Sales were weak, leaving a bit of a bitter taste to the close of the year,” wrote Javier Gonzalez Lastra, an analyst at Berenberg. “It feels like there is some urgency at Pernod to improve financial performance.”

Profit from recurring operations rose to 2.28 billion euros in the 12 months through June, the Paris-based company said. The increase was 2% on an organic basis. Higher sales of Jameson Irish whiskey and Perrier-Jouet champagne helped offset the drop from Absolut. Pernod also forecast earnings growth of 2% to 4% this year.

The company expects to achieve the cost cuts by fiscal 2020 and plans to reinvest 100 million euros of the savings on advertising and promotions.

It’s too early to say whether sales in China will return to growth this year after falling 9% in the past fiscal year, Chief Executive Officer Alexandre Ricard said on a call with analysts. The scotch market is shrinking by more than 10% there, and Pernod won’t raise its prices in that country to avoid making them even more expensive than rival brands, he said.

“We clearly expect to do better in China next year,” Chief Financial Officer Gilles Bogaert said in an interview. Pernod has split its team in China into two parts, with one focused on high-end brands such as Martell cognac and the other on the company’s so-called premium brands such as Chivas Regal.

Sales of Absolut, the company’s largest brand, fell as efforts to reinvigorate the label through new packaging and a high-end alternative, Absolut Elyx, fell short. The company is seeking better performance from the brand by releasing Absolut Lime in the U.S. next year amid rising demand for Mexican-themed drinks such as tequila cocktails, Bogaert said.

Pernod aims to make the cost savings by focusing on raw materials and manufacturing costs rather than cutting jobs, said spokesman Olivier Cavil.

By Thomas Buckley

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