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Pernod revises profit forecast after China woes

Pernod Ricard has continued to suffer from the Chinese government’s campaign of austerity as an 18% sales decrease in the region has forced the group to lower its full-year profit expectations.

Martell-Pernod-Ricard
Pernod Ricard has announced a revised full year profit prediction in light of a 7% decline for its half year results

Announcing its half-year financial results, the French drinks group, whose portfolio includes Absolut, Jameson and The Glenlivet, reported net sales totaling € 4.57 billion – a decline of 7%.

This decline was largely attributed to a slowdown in China’s Cognac market as the country’s government continues to clampdown on lavish gifting and spending.

In an attempt to counter claims of corruption, President Xi Jinping endeavoured to abolish hedonistic banqueting and gifting among the military and government officials.

As a result, Asia and the rest of the world suffered the most substantial net sales decline at 13%, while China’s slowing market caused Pernod Ricard’s Martell Cognac to drop 8% in global net sales.

Pernod identifies its difficulties in China as affecting the overall performance of the group’s top 14 brands, which although described as “virtually stable”, suffered a 4% decline.

The group has therefore announced the launch of an “operational efficiency” programme, named Allergo, to geerate savings of €150m over the next three years.

Performance in Europe was described as “very good”, with the region reporting 4% growth, while the Americas experienced a “return to growth” with a 3% increase.

Revised full year profits

However, this was not enough to counter difficulties in the Chinese market and Pierre Pringuet, CEO of Pernod Ricard, said the company would be revising its predicted organic profit growth to 1%-3%, compared to the 4%-5% forecast in October.

“We remain confident in the medium and long-term potential of China but we anticipate difficulties to persist for the full financial year,” said Pringuet.

“We want to prioritise the group’s future sales growth through a sound commercial policy and an appropriate level of investment.

“As a result, we are issuing new guidance for FY 2013/14.”

While Pernod Ricard’s Scotch whisky brands experienced a poor performance overall, with net sales of Chivas Regal, Ballantine’s and Royal Salute dropping 4%, 4% and 11% respectively, its The Glenlivet single malt shot up 10%.

The growing Irish whiskey market in the US also boded well for the group, as net sales for its Jameson brand were bolstered 16%.

Project Allegro

Pernod Ricard’s project Allegro – a scheme “aimed at delivering further operational efficiency” – is expected to generate €150m in annual savings over the next three years.

“We want to improve organisational efficiency in order to generate future growth, seize new opportunities (particularly innovation and digital) and increase the speed of execution,” Pringuet said.

“We will continue to rely on our decentralised model, based on the direct relationship between brand companies and market companies.”

It is not yet clear whether Allegro will involve a streamlining of operations or any job losses.

Separately, upon reporting its own half-year financial results last month, Diageo announced its own plans to “deliver operational efficiencies”and “de-layer” its business in a bid to save £200 million annually by June 2017.

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