Pernod Ricard’s CEO on a ‘transformative’ 12 months

20th December, 2019 by Amy Hopkins

Alexandre Ricard, the CEO of French giant Pernod Ricard, is steering his company through turbulent times, facing debilitating tariffs, investor pressure and, most recently, headline-grabbing allegations of impropriety. But, he tells The Spirits Business, retreating to the watchtower is not an option: now’s the time for action.

In Alexandre Ricard’s words, 2019 has been a “transformative” year for Pernod Ricard. The French drinks giant has made a remarkable number of acquisitions, started construction of a major distillery in China, announced dramatic changes to the structure of its domestic business and made appointments in its leadership and governance teams. But the year was not without hardship, and just last month, the Absolut Vodka and Martell Cognac maker was hit by scandal.

French newspaper Le Parisien published testimonies from three Pernod Ricard salespeople – two of whom no longer work at the company – claiming they faced “permanent pressure” to drink on the job. One man said he knocked back 12 glasses of pastis a day, another recalled three‐day binges, while a woman said she suffered hallucinations caused by excessive drinking. All three were part of the same affiliate: the French distribution unit Ricard.

SHOCKING NEWS

However, Pernod Ricard strenuously denied the allegations, stating it “firmly refutes the existence of a policy to incentivise the consumption of alcohol among its employees”. For its chairman and CEO, the allegations came as a shock. “There’s absolutely zero obligation to drink,” Ricard says. “So it’s quite saddening because it not only shocked me – I can take a shock – it shocked people on the ground.” Speaking exclusively to The Spirits Business just days after the story broke, he stresses that his company’s code of conduct is “extremely clear” with regards to responsible drinking.

“In the code of conduct, the charter, we say not only is there no obligation [to drink], but if there’s inappropriate behaviour and abuse of alcohol, it can go all the way through to termination, and it has happened.” Ricard also highlights a court hearing last November, which ruled “there is no incentive on the part of Société Ricard to consume alcohol”. It is understood that the case, heard by the Tribunal des Affaires de la Sécurité Sociale, involved one of the people quoted by Le Parisien. Another hearing took place in September this year, but the outcome was not known at the time of writing.

The accusations come at a sensitive time for Pernod Ricard in France. In early October, the group announced plans to merge its French distribution subsidiaries and subsequently offer redundancy to 280 staff members. Referring to Le Parisien’s article, Ricard says: “It’s saddening to see because we are going through a huge transformation in France. It’s a transformative project, quite big. This happened and it gives the wrong impression of what people do, people who are strongly committed to being exemplary, and strongly committed to work.”

The proposal is being reviewed by trade unions, but if it is actioned, the two businesses – called Pernod and Ricard – will be combined into a single entity: Pernod Ricard France. Ninety new roles will be created, and the operation will move to Marseille’s new Les Docks business district. The consolidation is part of Pernod Ricard’s new Reconquer project, which will aim to increase the group’s market share in France, where its sales have declined by €60 million (US$65m) in just two years. The firm has suffered from “deflationary pressure” and admitted its model of using two in‐house distribution units has become “overly complex” and “lacks agility”.

Italian gin brand Malfy joined the Pernod Ricard portfolio in 2019

More broadly, the plan sits under Pernod Ricard’s Transform & Accelerate vision. Launched at the start of the 2019 fiscal year, the three‐year strategy seeks to secure “sustainable and profitable long‐term growth”. According to Alexandre Ricard, it is starting to pay off. In FY19, Pernod Ricard experienced growth in all categories and regions. Total sales reached €9.182 billion (US$10.17bn), an organic increase of 6%, boosted by particularly strong performances from China and India in terms of markets, and Jameson and Martell in terms of brands.

The CEO characterises FY19 as an “excellent year with real acceleration”, driven by “active portfolio management” – that is, acquisitions and divestments. “And we have been particularly active over the past 12 months.”

In particular, Pernod has been seeking to increase its presence in two promising categories through brand and distillery purchases: gin and American whiskey. The group started its 2019 acquisition spree with the purchase of Malfy, augmenting its super‐premium gin portfolio. Then came Kentucky distillery Rabbit Hole, which joined Smooth Ambler in Pernod’s budding Bourbon stable. The group bought a majority stake in South Africa’s Inverroche Distillery in the summer, followed by the Texas‐based Firestone & Robertson Distilling Co, maker of TX American whiskey. Pernod then made its most significant move in American whiskey to date, buying US drinks group Castle Brands, maker of Jefferson’s Bourbon.

“We went from roughly a zero position and now we have a nice portfolio of American whiskey brands,” enthuses Ricard. “What I like about every single one of these brands is they have a great story, they have a great taste and they have a very specific identity and positioning – there’s no cannibalisation issue. They are also all very premium, which is important to us. Exactly what we were looking for.”

When it comes to acquisitions, Ricard identifies three key questions that influence purchasing decisions: is there an opportunity to leverage “dynamic” categories? Will the asset strengthen the group’s footprint in “key” markets? Will it open up new “long‐term” markets? He claims Pernod Ricard’s focus on American whiskey achieves the first and second targets simultaneously, thanks to the continuing popularity of Bourbon around the world, and specifically in the US.

STRATEGIC ALLIANCE

The firm has also made a number of investments in emerging markets such as China, where just last month it formed a “strategic alliance” with baijiu maker Wuliangye International, and in Myanmar, where it acquired a 34% stake in joint venture Seagram MM Holdings. Pernod has also enhanced its digital routes to market, last year acquiring a stake in African online retailer Jumia, and adding to its e‐commerce repertoire this year with the purchase of Spain’s Uvinum and Bodeboca.

Ricard says the group’s “dynamic portfolio management” will continue, but that despite the so‐called ‘craft boom’ there aren’t as many quality brands to snap up as one might expect. “There is a lack of availability of really attractive assets, and when they are available, they might expect prices that don’t necessarily create value for us,” he says. “It’s frustrating for our M&A team because sometimes you work for months with a brand and at the end of the day they say ‘oh, we disagree on the value’. Sometimes it happens all at once, like recently, but the work behind all these acquisitions was going on for a while. Sometimes we never hear about it because it never sees the light of day.”

On the subject of ‘craft’, Ricard believes “all our brands are craft, especially the big ones”. But once new labels such as Rabbit Hole and Inverroche enter the company, they sit under the ‘speciality’ label because the word ‘craft’ “has been diluted”, says the CEO. He also says that Pernod Ricard’s portfolio is now “representative of the so‐called ‘craft market share’ in the industry,” adding that there is room for both smaller and global brands. “Like many booms, you get the good, the bad and the ugly. We only pick the good.”

Bunny business: the company goes down the Rabbit Hole

While Pernod Ricard has been remarkably active in terms of spirits acquisitions, speculation over its desire to remain in wine has persisted. The group has been gradually minimising its presence in the sector through the sale of smaller operations in Mexico, Argentina and Spain. However, Ricard claims: “Right now, we are happy to invest behind our wine portfolio.”

The firm also has a direct play in non‐ alcoholic ‘spirits’, with botanical drink Ceder’s and dark beverage Celtic Soul in the UK. The products target gin and whisky drinkers looking for booze‐free alternatives. One of Pernod Ricard’s “big global bets”, according to Ricard, is apéritif brand Lillet, which is “undergoing huge success”. However, the CEO is quick to add: “We shouldn’t disregard our regular global brands, whether it’s Absolut, Jameson or Chivas, because with mixology, a nice Jameson with lots of ginger [ale] also leverages the low‐alcohol trend.”

As well as capitalising on hot spirits trends, Pernod Ricard recently announced its intention to establish a new category by building a distillery in China. Based in Sichuan province, the US$150 million, 13‐hectare Emeishan Malt Whisky Distillery will produce single malt whisky using “innovative approaches” inspired by the surrounding area. It is said to be the first distillery in the world to appoint a Chinese master distiller, and is the first built in China by an international wine and spirits group.

Ricard calls the distillery a “50‐year project. We will start distilling in 2021 and the first eaux‐de‐vie that will come out of the distillery that we can taste will be in 2023, but it’s going to take time until we have an 18‐year‐old or 25‐year‐old proposition. Think about a consumer in 30 years who will be tasting a 25‐year‐old Chinese single malt – they will be tasting this during dinner, saying, ‘remember three decades ago that Brexit thing when it happened’.”

That may be so, but the UK’s impending departure from the EU has left many questions for Pernod Ricard, and the rest of the world. On Brexit, Ricard says: “One day we think there is going to be one, a hard one, one day we think it’s not going to be a hard one – no idea. But we are geared up for that.”

Brexit is one of the factors contributing to what Ricard calls “a particularly uncertain environment where there are a lot of unknowns. A lot of people say businesses like visibility to operate and in today’s world there is a lack of visibility.”

He also warns that as tensions between China and the US escalate, the potential impact on each nation’s economy could have consequences for global corporations. Likewise, the implementation of tariffs on EU goods imported into the US – including single malt Scotch – is bad news for business.

Ricard says the tariffs “have had an impact” on the firm. “We have internally qualified this but we took this into account when we gave our guidance for this current fiscal.” More broadly, this “particularly uncertain environment will be the main challenge for companies such as ours, to make sure we are agile enough, flexible enough to address all these challenges in the best way possible.”

Pioneering: Pernod Ricard’s Emeishan Malt Whisky Distillery in China

The group has also been subject to internal pressure in the form of activist investor Elliott Management Corporation, which at the end of last year announced it had built a stake of more than 2.5%. The move made headline news, and Elliott certainly wasn’t shy in its criticism of Pernod Ricard, which it accused of “inadequate” corporate governance and of “failing to generate operating leverage” despite “successive operational improvement plans”. Some reports even claimed Elliott had recommended that Pernod should consider merging with another big group – something that was quickly shot down by Ricard, who reaffirmed his company’s position as a “consolidator” in the industry.

On the firm’s relationship with Elliott now, Ricard says: “Elliott is a shareholder and as such we treat them just like we treat any of our other shareholders. We don’t disclose our discussions with our different shareholders, but we see Elliott as no more, no less than we see our other shareholders.”

EVOLVING GOVERNANCE

Ricard agrees that Pernod can improve governance, and says “we have been doing so for the past three to four years”. As such, the appointment of former Christie’s CEO Patricia Barbizet to the board was agreed before Elliott’s share purchase, but was made public shortly afterwards. Meanwhile, Pernod Ricard’s former CEO, Pierre Pringuet, voluntarily stepped down from the board last month, making way for aerospace technology executive Philippe Petitcolin and consumer goods executive Esther Berrozpe Galindo. “In my view, governance will keep evolving because it always has,” says Ricard. “Pernod Ricard is like a living organism; it has to adapt and evolve over time.”

Addressing Elliott’s other grievance, operating margins, Ricard says “of course, we can do better”, adding this is what Transform & Accelerate was designed to improve. This strategy, he notes, was under way before Elliott’s arrival. “We need to keep focused on delivering our plan; it’s as simple as that,” he asserts.

In today’s turbulent geopolitical climate, Pernod Ricard’s appetite for action may seem surprising. But Ricard says: “At the end of the day, there’s never the right time to change. There’s always a good excuse to say, ‘you know what, let’s postpone this change’. It’s never the right time, but if change needs to happen it has to happen, irrespective of what’s going on.”

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