Strategic Techniques of a Pernod Ricard Company - Assignment Example

Pernod Ricard With the passage of time and the advent of globalization, the world is become more and more contracted in terms of communication and the barriers of trade are diminishing as the businesses are entering new areas. Technologies that were once thought of as far sighted notion have now become necessities. With these changes taking place it is inevitable for organizations to expand and span a larger scope around the globe. This paper would focus upon Pernod Ricard; a France based alcoholic beverage company that is now amongst the leading wine and spirits distributers. It would aim to answer questions about the strategic decisions and techniques implemented in order to achieve greater market share and global presence within the growing alcoholic beverage industry. Discussion Q.1. Evaluate the main trends taking place in the alcoholic beverage industry The alcoholic beverage industry is one of the fast paced businesses that are growing rapidly. The market is becoming more fragmented with the increasing number of manufacturers entering to exploit the potential market. With the plethora of manufacturers, the share of the market of each participant has reduced. However, there are few major players that are dominating the industry as a whole. The alcoholic beverage industry comprises of three basic segments namely, beer, wine and spirits. Among these segments beer is the most consumed alcoholic beverage mostly lead by local production. The wine segment is lead by Europe having a 79.3% share in the global market. Compared to the other segments, the wine segment is the most fragmented having a large number of companies catering to the global market. The spirit segment has a lot of different products within it and was also largely fragmented with only a few global companies. With the passage of time, there is now more importance attached to the quality of products rather than the quantity. There is an increasing consumer interest in premium and super premium alcoholic beverage brands (Gill, 2006). As alcoholic beverages have been around for a long time, people are becoming more well-aware and informed over the kind of quality they want and its becoming increasingly important for companies to regulate their quality and taste according to the likes of the consumers. As modernization takes place around the developed regions of the world, countries like Europe and US follow sociological changes, leading to an increase in the importance of quality when it comes to brands. With the changes in sociological structure and the psychographic elements and lifestyles as well as the empowerment of women, people are willing to pay higher prices for premium brands that provide high quality products curbing their desire for luxury and lavishness. On the other side of the continuum, the rapidly developing countries such as India and China are becoming the center of attraction for alcoholic beverage companies. As these emerging regions are increasing their standards of living the alcoholic beverage industry is not only expanding in these areas but the consumers here are also looking for better quality brands rather than those traditionally offered locally. The dual effect in both, developed and developing countries is called ‘Premiumisation’ Another new trend following the alcoholic beverage industry is the growth in the trend of organic wine and beer. This demand is derived by the consumers that follow a health conscious lifestyle and are aware and concerned with the environment and ethics. Q.2. Upon what basis does Pernod Ricard compete in the alcoholic beverage market? Analyse the growth strategies used by Pernod Ricard to emerge as a multinational company. Pernod Ricard was formed through a merger of Pernod and Ricard. After the formation of the company in 1975 it steeped its way through a number of acquisitions. The growth strategy of Pernod Ricard involved acquisitions of companies that were well established and held a significant share in the market. The company has managed to develop a diverse and rich portfolio of brands through internal growth and acquisitions (Wakely, 2001). According to the Ansoff matrix, Pernod Ricard started with the richest portfolios following the strategy of acquisitions. An acquisition is a form of diversification strategy which enables the company to benefit from greater sales volume with the help of reaching new markets with new products. Diversification is a high-risk growth strategy which involves a lot of courage and valor to accomplish. The company spent large amounts of money over sales promotion in order to increase the consumption of its products in new regions and markets that did not have a large presence of Pernod Ricard brands. This strategy is of market development where the company enters new market with the same products in order to reach entirely new potential consumers (Baker, 2001). With the help of acquisitions, Pernod Ricard is able to benefit from established brand names and curb the resource limitations while expanding its product portfolio as well as geographic presence in different regions of the world. Having well established brands in different regions enables Pernod Ricard to have a significant share in the world market while having a preset consumer demand through the well-known and reputable brands. One of the major aims of Pernod Ricard was to strengthen its presence in the global market with growth potential. It focused upon geographic diversification by acquiring the well-known brands in the targeted regions. The growth strategy of Pernod Ricard was primarily to achieve global presence. This would be done through strengthening the distribution networks, entering new markets with local products that the consumers were well aware about and reaching them through adapting to the local cultures. Localization enabled the company to obtain a leading position in those areas. PR grew through developing brand portfolio that catered to the different regions of the world. It entered emerging markets in order to benefit from growing sales in those regions and enforced premiumisation of brands. Moreover, PR aimed to concentrate on its core business by divesting its non-alcoholic products and concentrating on its main area of brands, hence, becoming a dynamic player in the wine and spirits sector. Q.3. Using Hamill’s (1991) motives for acquisition analyse the rationale for Pernod Ricard’s acquisition of Allied Domecq. Acquisitions can be defined as the act of gaining possession, buying or selling of companies in order to grow quickly without having to go through the time consuming process of organic growth. Pernod Ricard, since the advent of the company has followed the acquisition strategy thoroughly. It started off with acquiring Campbell Distilleries in 1974 and since then the group has managed to create a rich portfolio with a series of acquisitions of companies in different parts of the world. The acquisition of Allied Domecq is one of the large steps taken by the company which created profitable opportunities for Pernod Ricard to expand its presence and market share around the world. The acquisition helped Pernod Ricard benefit from the 20 well established brands of Allied Domecq and in becoming the third largest producer of branded wines, the top spirits company outside the U.S and a leader in the newly emerging markets of Brazil, Russia, India and China. One of the motives of acquisition is diversify to reduce risk. One of the main features of the acquisitions of Pernod Ricard is to diversify and expand its product portfolio with a variety of brands catering to different type of consumers and in different areas. The Allied Domecq acquisition the reason behind this is to reduce the risk o failure of the acquisition. Synergy is another major factor to consider in acquisitions (Oster, 1994). The Allied Domecq synergy was expected to bring in synergies worth $300 million. Synergy is basically the additional value that is added to the firm after the acquisition. With the Allied Domecq acquisition, Pernod Ricard added 20 different wine and spirit brands under its name. One of the basic rationales behind this acquisition could be the synergies gained. The operational synergies included the greater pricing power that Pernod Ricard could benefit from. It would now have lesser competition and greater market share resulting in higher margins and operating income. An imperative reason which made the synergy vastly attractive was the ability for Pernod Ricard to take advantage of presence and growth in new markets as with this acquisition it took the established brand names recognition and well organized distribution network and gained importance in Asia pacific, south America, Europe and north America, hence, increasing sales. The management capabilities of the company improved. The acquisition led to a change in management practice in a number of ways which helped in increasing value. With the acquisition of Allied Domecq, PR was able to reinforce its organizational structure of decentralization. The decentralization strategy involved having managing directors that were close to the consumers and were better able to understand the needs of the consumers. The decentralized strategy involved more communication with the consumers (Grant, 2005). It also inculcated more belongingness among the employees, increased motivation and creates an enthusiastic corporate culture. However, this strategy had the prerequisite of having international scope in terms of brand placements where every region was catered according to the local cultures and perceptions. This prerequisite was attained through the acquisition as there was more exposure to international markets. The employment of a cross functional structure across the company was also attained through the major acquisition of Seagram and Allied Domecq and PR was now able to concentrate over its core business. Overall, the company followed the main motives of acquisition such as creating operational and financial synergies as the acquisition helped in expanding the portfolio of the company through adding well known brands and investing in key brands that would enable the achievement of strong international brand image of the products, it strengthened the company financially, the addition of the key brands helped the Pernod Ricard in achieving its premiumisation strategy of charging a higher price for quality brands in developed as well as developing regions, it also brought in experienced manpower and helped in production and distribution facilities. Moreover, it helped in following the strategies of restructuring and decentralization. Q4. Analyse the challenges facing Pernod Ricard in becoming the no.1 player in the wine and spirit industry? Although Pernod Ricard had become a dynamic player in the market it served, there were a few dilemmas facing the company. With the help of acquisitions, PR was able to take over a large market share by exploiting the developed as well as developing, emerging regions of the world. Despite the success, the retirement of Chairman Patrick Ricard and managing director of Irish distilleries Richard Burrow who were key players in the business had become a pressing concern. Although Pernod Ricard had acquired many companies and had span its brands in different regions of the world where alcohol consumption was seen, they were still behind the market leader in the alcoholic beverage industry, Diageo. Diageo was a world leader internationally which had a number of famous brands including Johnny Walker, Smirnoff, Baileys and Guinness. Diageo’s sales were 50% more than that of Pernod Ricard although the size of the company and its operational efficiency was less that PR, the profits were higher. This could be due to the popularity of the brands of Diageo in dominating markets and focused its efforts on major regional economies. Pernod Ricard had achieved its current position through the successful acquisitions it made. The Seagram acquisition was one that led to a significant change in the global recognition of Pernod Ricard through the well established brands, as well as its superior marketing and distribution network. It was argued that the company would have to replicate this success with the acquired brands of Allied Domecq in order to climb over the number 1 and 2 positions of scotch held by Diageo’s brands. There is no guarantee that Pernod Ricard would be able to replicate the success it achieved with the Seagram acquisition. To gain the complete potential of the brands of Allied Domecq would be a challenge for PR that may take them to look into other strategies. Moreover, the advertising regulations in the domestic market lead to a fall in the sales of local brands that were going into the share of smaller local competitors. Furthermore, there was decline in the consumption of wine in western Europe may have a significant impact over the sales of Pernod Ricard and it would have to take steps to overcome this shrinkage. However, while Diageo was the leading company in the market of premium drinks and had captured a large share of the international market, it differed from Pernod Ricard in terms of the business strategies employed. Diageo followed a centralized approach and this made them distant from its consumers and hence, losing direct contact and a more close relationship with the market and potential customers. While, PR had implemented the decentralized strategy that made them come closer to the consumers in each region that they served and also increase the morale of the employees. Moreover, Diageo may miss out on opportunities through the centralized decision making system. The internal strategies of Pernod Ricard were its main strengths. Also, Pernod Ricard’s plan of acquiring absolute vodka could prove to be a great success as the brand is one of the leading proponent in the industry. References 1. Trompenaars, F. and Wooliams, P. (2004) Business across cultures. Capstone. 2. Wakely, J. (2001) The International Spirits Industry. Woodhead Publishing. 3. Baker, M.J (2001). Marketing: critical perspective on business and management. Taylor and Francis. 4. Stimpson, P (2002). Business studies. Cambridge university press 5. Oster, S.M (1994). Modern competitive analysis. Oxford university press 6. Sandhusen, R. (2000). Marketing. Barron’s educational series. 7. Baker, M.J., Graham, P. & Harker, M. (1998) Marketing: managerial foundations. 8. Grant, R.M. (2005). Contemporary strategy analysis. Wiley-Blackwell. 9. Gill, M. (2006). Whisky Today. 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