Understanding Business Strategy of Pernod Ricard - Case Study Example

Introduction Pernod Ricard is a French company, a manufacturer of wines and spirits. In the wines and spirits industry, it ranks as the second biggest company. Market estimates show that Pernod Ricard sells at least 97 million cases of spirits, 25 million cases of wines and 900 000 cases of champagnes every year. What surprises most business analysts is the fact that Pernod Ricard has actually been in existence for only around three decades, and yet, in such a short time, it has achieved such substantial growth. In this case analysis, Pernod Ricard is looked at right from its inception and its moves followed till today, and then an analysis of what is behind its huge success is made. The history of Pernod Ricard In 1805, Henri-Louis Pernod founded the Maison Pernod Fils company in the town of Pontarlier, near France's border with Switzerland. This company produced an absinthe-based beverage, which was very popular during its time. However, in 1915, absinthe was banned. A few years after that, Pernod merged with two other companies to form Les 'tablissements Pernod (The Pernod Establishments) which manufactured liquors that used anis as a base. In 1938, the company launched the brand Pernod 45; in 1951, it started selling its first pastis, Pastis 51. In the very first year of its production, Pastis 51 sold almost two million bottles to caf's. On the other hand, in 1932, Paul Ricard produced the first pastis, named after him, in 1932 in a place near Marseilles. Soon, Ricard's company rose to take its place beside Pernod as one of the leaders in the French spirits industry. After four decades of intense competition, Pernod and Ricard decided to come together. Between 1971 and 1974, the management of the two companies had prepared meticulously for the merger. Pernod Ricard was born in 1975, with a consolidated turnover of 2.5 billion francs. In 1975, Pernod Ricard had a base in France and subsidiaries and implantations in Great Britain, Spain and Switzerland. The map below shows the reach Pernod Ricard had in 1975. Source: History of Pernod Ricard, www.pernod-ricard.com Pernod-Ricard today Pernod-Ricard today is the world's second biggest company in the wine and spirits sector. It has occupied key positions in every continent. It is the number one wine and spirits company in Europe and in the Asia Pacific, and number two in the Americas. The group has fifteen key brands of international renown: >Ricard >Ballantine's >Chivas Regal >Malibu >Stolichnaya >Havana Club >Beefeater >Kahlua >Jameson >The Glenlivet >Martell >Mumm >Perrier-Jouet >Jacob's Creek >Montana These premium brands play a central role in Pernod Ricard's development, but "the Group's success over the years owes as much to the talents of its employees, to its core values and to a decentralized structure unique to Pernod Ricard", according to the company's website. The map below shows the reach Pernod Ricard had in 2006. Source: History of Pernod Ricard, www.pernod-ricard.com At present, Pernod Ricard employs 19,000 people in more than 70 countries all over the world. Pernod Ricard has 113 production plants distributed worldwide. The journey from 1975 to 2009 From the very beginning, Pernod Ricard's main aim was internationalization of its products. For achieving this, Pernod Ricard followed a clearly chalked-out, almost aggressive policy of acquisitions right from 1975 itself. The first acquisition made by Pernod Ricard was that of the Scottish Campbell Distilleries, which made Scotch whiskies, in 1975-76. Next, in 1976, Pernod Ricard purchased Cusenier (Argentina), which made liquors from extracts of grains, fruits, and other parts of plants. In 1979, Pernod Ricard made its first step outside France, in an effort to maintain its sales growth. In 1980, while Austin Nichols, the England-based maker of bourbons, was acquired, Pernod Ricard launched a massive marketing campaign amounting to nearly $50 million in England, Spain and Germany. The campaign included gimmicks like giving away products at discos. The same year, Pernod Ricard also added Brut de Pomme, a low-calorie, apple-based soft drink, to its product line. In 1982, Pernod Ricard bought a 66 percent stake in SIAS-MPA, the world's leading producer of fruit-based beverages, thus venturing into the fruit-based beverage business. The next year, Pernod Ricard acquired the makers of Orangina soda, Fran'aise des Products d'Orangina, makers of Orangina soda, and followed it up with the acquisition of Italian company Ramazzotti (manufacturers of bitters) in 1985. In 1985, Pernod Ricard also bought a 15 percent equity stake in the Japanese subsidiary of American alcoholic beverage company Heublein, and a 30 percent stake in Heublein's Industriae Commercia in Brazil. This increased Pernod Ricard's foreign liquor sales to 19 percent from the 13 percent of a decade ago. To spread its presence in other countries, the company bought Prac in Spain, established a joint venture with Deinhard of Germany and acquired Perism in Switzerland; it also purchased a 45 percent stake in Soci't' des Vins de France. 1988 and 1989 saw Pernod Ricard acquiring Irish Distillers (makers of Irish whiskeys), Yoo Hoo Industries, and the Australian company Orlando Wyndham (wines). By 1992, Pernod Ricard's growth in international operations had led to an increase in the sales turnover from 8.5 billion francs in 1985 to 14.5 billion francs in 1992. However, in spite of all its efforts to become a global company, Pernod Ricard was still dwarfed by alcohol giants Grand Metropolitan and Seagram, and by the soft drinks giants Coca-Cola and Pepsi. Nevertheless, Pernod Ricard carried on undaunted with its frequent acquisitions and geographic diversification. In 1993, the company acquired the rights to distribute the most famous Cuban rum brand, Havana Club; the same year, the brand Havana Club International was created. In 1994, the company acquired the Russian brand of vodka, Altai. On the home front, however, the company faced a setback. In 1993, the sale of aniseed drinks had decreased by almost 9 percent in a single year; besides, the French government had increased taxes on alcoholic beverages, and by 1994, Pernod Ricard was forced to close down many of its French plants, including the one at Marseilles. Between 1995 and 2000, Pernod Ricard acquired the Portuguese company Somagnum (1995), the Venezuelan company El Muco Bebidas (1996), the Spanish manufacturer of gin, brandies and wines, Larios (1997), Riqules, from the Perrier Vittel division of Nestl' (1997), Yerevan Brandy Company of Armenia (1999) and the Mexican company Viuda de romero Tequila (2000). The company also obtained international distribution rights to the Wyborowa brand of rye vodka after its purchase of a majority share of the Polish company Agros. In 2001 came Pernod Ricard's most important step so far. It acquired 38 percent of Seagram wine and spirits activities from French conglomerate Vivendi Universal SA for $3.2 billion in partnership with the British company Diageo from Britain. Diageo was one of Pernod Ricard's greatest competitors, having long ago established itself as the world's leading premium drinks company. Diageo's chairman Paul Walsh termed the Seagram purchase as the "bargain of the century"; with this purchase, Pernod Ricard acquired four famous Seagram brands (Chivas Regal, Glenlivet Whisky, Martell Cognac, and Seagram's Gin). Asian markets which had so far been ruled by Seagram were now opened up to Pernod Ricard. In 2001, Pernod Ricard also acquired Jan Becher (bitters) and an 80 percent stake in Polmos Poznan (vodka).The company also began selling off its non-alcohol assets to Cadbury Schweppes. In 2001, Pernod Ricard also began selling off its non-alcohol assets like its Orangina-Pampry and Yoo Hoo brands to Cadbury Schweppes Plc. In 2002, Pernod Ricard reached agreements with Sogrape for the distribution of Sandeman (porto) and with Kirin for the distribution of Four Roses (bourbon) In 2005, Pernod Ricard acquired Allied Domecq, the UK-based company, for $14.1 billion. Allied Domecq had earlier been the world's second largest producer of wines and spirits; now, Pernod Ricard took its place. Many famous brands such as Stolichnaya vodka, Montana, Mum and Perrier-Jou't champagnes, and Beefeater gin became the property of Pernod Ricard. With this, company became the third-largest producer of branded wines, the top spirits company outside the US, and the leader in the BRIC countries. The acquisition gave Pernod Ricard a vital presence in the Asia Pacific, South America, Europe, and North America. Net sales increased from $4.611 billions in 2005 to $7.746 billions in 2006. Of this, America accounted for 27.71 percent, Europe (excluding France) for 33.2 percent, the Asia-Pacific for 28.3 percent and France for 10.78 percent. The next decisive step by Pernod Ricard was taken in 2008, with the acquisition of the Swedish based V&S Group for '5.69 billion. The company itself terms this move as an "ambitious initiative" which enabled Pernod Ricard to acquire Absolut Vodka, the leading international brand of premium vodka and reinforced the company's capacity to generate cash flow. Synergies were expected to "lead to cost savings of '150 million, with 50% due in the 2008-09 fiscal year". Following this transaction, Pernod Ricard Nordic assumed responsibility for the distribution of international and local brands in north European markets. Also, the Absolut Company was integrated into Pernod Ricard's Brand Owners network. Currently, Pernod Ricard's main objective is to pay off its debt, which is huge as of now, given that Pernod Ricard borrowed about $12 billion for the takeover of Allied Domecq. "Once the level of debt returns to normal", says the company on its official website, "Pernod Ricard will resume its active participation in the future consolidation of the industry". The external and internal growth of Pernod Ricard Source: History of Pernod Ricard, www.pernod-ricard.com "From unknown to internationally acclaimed in just 30 years" This is how Pernod Ricard describes itself on the home page of its official website. And truly, as the above graph demonstrates, Pernod Ricard has achieved extraordinary growth in the three decades of its existence. In 1975-76, its sales amounted to less than 500 million euros. Now, in the first quarter of 2009-10, Pernod Ricard reports "consolidated net sales (excluding tax and duties) totalled ' 1,646 million' (from 1 July to 30 September 2009)" (Reuters). Today, Pernod Ricard is the #1 wine and spirits company in Europe and the Asia-Pacific, and #2 in the Americas. 90 percent of its sales are generated outside France and 55 percent outside Europe.Worldwide, Pernod Ricard is the #2 wine and spirits company, behind Diageo- but in coming years, Pernod Ricard may well go on to become #1. Now, the question is this: how did Pernod Ricard manage to achieve such massive growth in such a short span of time' Pernod Ricard's strategy Pernod Ricard's strategy for growth was based on four top priorities "1. concentrated investment in its fifteen key brands 2. premiumisation of its brand portfolio 3. reinforced positioning in emerging markets with high growth potential 4. continued focus on external growth." (Hitt, et al. 2008) 1.Concentrated Investment in its fifteen key brands Pernod Ricard has a strategy of making major investments in developing its key brands by prioritising top-of-the-line products with a high profit margin. The group's current objective is to develop its brand portfolio, particularly its 15 key brands (mentioned in Page 2). Pernod Ricard owns some of the most famous brands in wines and spirits, and this impressive brand portfolio has been built by the company's strategy of focusing on its core business and divesting its non-alcoholic activities. The company's 15 key brands account for half of the group's profits and for about 70 percent of its advertising expenditure. . Source:1st quarter net sales 2009/10(Press Release) www.pernod-ricard.com 2.Premiumisation Pernod Ricard's management has observed two major trends in recent years. In developed countries, sociological changes have led to a desire for quality and luxury, meaning that customers are willing to pay higher prices for better quality products. On the other hand, in developing countries like China and India, the changing socio-economic picture leads to a higher standard of living and therefore a demand for better quality products than those traditionally offered locally. This dual trend was named "premiumisation" by Pernod Ricard's vice-president of marketing Pernod Ricard's Premiumisation approach is based on > a continuous improvement in quality > strong communications to establish the group as a luxury market player > an emphasis on innovation. 3.Pernod Ricard in emerging markets: the policy of Decentralization Pierre Pringuet, the Deputy CEO of Pernod Ricard, identified the company's decentralization strategy as one of its strengths and described it as "Pernod Ricard's hallmark". Decentralization helped the comapany to get a good standing in countries like India, China, Russia, Thailand, Mexico, and Brazil. The strategy of decentralization was preceded by localization, by which the Pernod Ricard let local companies introduce its brands to the local market. Then, implementation of the decentralization strategy involved two steps: 1. forming a global strategy and adapting it to the needs of a particular country 2. reacting quickly to changes in every market. Decentralization required that in a particular country, the group should have a holding company which would concentrate on strategic management and control of Pernod Ricard's business activities, and subsidiaries (brand owners and brand distributors) which would make operational decisions within their own geographical domains. Currently, Pernod Ricard has 6 brand owners and 70 distribution companies in each key market. 4. Focus on external growth This was achieved by Pernod Ricard's rapid, aggressive and ambitious acquisitions of wine and spirit manufacturing companies all over the world. For a while, Pernod Ricard had also acquired companies manufacturing fruit-based beverages, but later decided to concentrate only on the production of alcoholic drinks. The complete history of Pernod Ricard's acquisitions have been already discussed in this case analysis; below is a recapitulation of the key acquisitions: Campbell Distillers in 1975, Austin Nichols Ltd in 1980, SIAS MPA (the world's #1'producer of fruit preparations at that time) in 1982, sold in 2002,' Orangina in 1984, sold in 2001, Ramazotti in 1985, Irish Distillers in 1988, BWG (subsidiary of Irish Distillers, wholesale distributor) in 1988, sold in 2002 Orlando Wyndham in 1989, Larios in 1997, sold in 2005, Agros et Yerevan Brandy Company in 1999, 38% of Seagram's Wines and Spirits business in 2001, Allied'Domecq in 2005. V&S'in 2008 Of these, the most important moves were the acquisitions of 38 percent of Seagram's in 2001, Allied Domecq in 2005 and V&S in 2008 Conclusion From the time in 1975 that the two companies Pernod and Ricard came together, the merger Pernod Ricard has aimed to be the world's leading producer of wines and spirits. To some extent, it has achieved its goal, and that has largely been the work of its Chairman, Patrick Ricard. It was Patrick Ricard who restored the company's focus on wines and spirits from other activities. It was also Patrick Ricard who led the company to embark on the growth strategy that has made Pernod Ricard the world's #2. Ricard retired in late 2008, but continues as Chairman of the Board of Directors. His place as Chairman and CEO of Pernod Ricard has been taken by Pierre Pringuet. It remains to be seen what Pringuet can do for Pernod Ricard in the years to come. Meanwhile, competition from Diageo remains stiff. Although the gap between Diageo and Pernod Ricard had been narrowed by Pernod Ricard's takeover of Allied, Diageo still remains the leader, specially in the US, which is the largest and most profitable drinks market. James Dawson, an analyst at Charles Stanley & Co., a Londonm brokerage, was quoted in a CNN report as saying, "Diageo should not be underestimated. It is extremely good at managing its brands and will have an opportunity to widen the gap in North America as Pernod Ricard rejiggers its portfolio." However, Patrick Ricard had once said in an interview, "If we continue the way we have been going, we will be able to challenge for first place." So will Pernod Ricard eventually take its place at the top of the list' Time alone can answer that question. SOURCES: Hitt, Michael A, Hoskisson, Robert E, and Ireland, R. Duane. Understanding Business Strategy: Concepts and Cases (illustrated 2nd edition). Cengage Learning. Canada: 2008. Pernod Ricard. "Pernod Ricard-Press releases". 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