Pernod Ricard and Diageo are the two giants of a global spirits industry that is increasingly gearing itself up for a future where growth will almost entirely be driven by emerging markets; for example, rising incomes in China and India allow consumers to trade up to their high margin premium brands. Both companies already attribute about 40% of their annual sales to non-developed markets, and have aspirations to grow their exposure to over 50% of annual sales over the coming years. In the case of Pernod, which can count on terrific exposure to China's premium cognac market, growth is likely to be driven primarily by organic expansion over the next few years with the possibility of bolt-on rather than large-scale acquisitions as it looks to reign in its debt levels.
|Pernod Looking To Reign Debt In|
|Diageo and Pernod Ricard Total Debt To EBITDA Ratios|
As the chart illustrates, by the widely used total debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) measure, Pernod has been carrying a significantly higher debt load as a multiple of its EBITDA compared to Diageo over the past few years. Pernod's last major deal was back in 2008 when it acquired Sweden ' s Vin & Sprit (producer of Absolute Vodka) for EUR5.7bn. Pernod has made it clear that retaining its investment grade credit rating is a priority, so any potential large deals are on the backburner for now.
In the current climate, with Asia , and in particular China , showing tangible signs of slowing down, even in the luxury spirits category, Pernod has been discussing its intention to grow in Africa. From a beer perspective, which of course is an area that Pernod does not have a business in, Diageo is head and shoulders above its main rival in Africa. We have made the point before that operating a longstanding beer business in Africa gives Diageo a key competitive advantage in terms of its getting to grips with distribution in particular, which is a key issue across a lot of Sub-Saharan Africa. Africa accounts for about 12% of Diageo's global business (about GBP1.3bn in annual sales), so Pernod has significant work to do to generate anything close to this scale. Diageo has built its advantage in Africa on its Guinness brand, which has had a strong presence in Western Africa for some time. This, in our view, has helped the firm to develop its spirits business over the past few years.
While Pernod does not have Diageo's head start, the premium spirits industry across Sub-Saharan Africa is still extremely immature. Taking a long-term view, it is very difficult to make the argument that Pernod is too late to the party. Compared to China, which is miles ahead of much of Sub-Saharan Africa in terms of the purchasing power of its consumer base, consumption levels of premium spirits have a lot of growth room across Africa. The key challenge for consumer-goods focused companies in Africa is getting the products to the market in the most efficient manner possible.