PARIS (Reuters) - Pernod Ricard’s (PERP.PA) chief executive is banking on a thirst for premium drinks from a fast-growing middle class to help deliver robust revenue growth in China.
The maker of Absolut vodka and Martell cognac estimates that sales in China — its second largest market after the United States — could grow by as much as low-double figures in percentage terms in some years, Alexandre Ricard told Reuters in an interview.
“We reaffirm our confidence in the potential of China. China sales will continue to grow. Some years we will grow high-single digit and other years low-double digit,” he said.
China, where Pernod will hold an investor day on Wednesday, accounts for around 9 percent of the company’s global sales of 9 billion euros ($10.5 billion).
When Alexandre Ricard, 46, the founder’s grandson, took over in February 2015 as chairman and chief of the world’s second-largest spirits maker behind Diageo (DGE.L), he made sales growth his top priority.
At the time, sales were flat as a government clampdown on extravagant spending was hurting demand for high-end spirits in China while in the United States, its largest brand, Absolut vodka, was struggling versus newer, more artisanal brands.
In June 2015, Ricard set a goal of accelerating group underlying sales growth to between 4 percent and 5 percent medium-term, with high-single digit growth for China. At the time, Chinese sales were falling 20 percent.
Three years later, Pernod Ricard is delivering above these targets, with sales growth accelerating to 6.3 percent for the group and to 19 percent for China alone for the nine months ended March 31 this year.
The rebound in Chinese demand is so strong that Pernod cautioned in April that it would limit shipments of Martell cognac sold to China in its fourth quarter, in order to serve other markets and also further support price increases.
In China, Pernod Ricard is reaping the fruits of a strategy that entailed diversifying its brand portfolio and revamping its sales teams to tap rising middle-class consumption.
China’s austerity measures forced the group to shift its focus away from selling prestige spirits to the wealthy. It created a separate sales force to address more sustainable demand from an emerging middle-class with premium but lower-priced spirits such as Martell Noblige.
The group accelerated the marketing behind its other premium brands in China such as Absolut vodka, Ballantine’s scotch and Jameson whiskey, whose sales grew 21 percent in the nine months to March 31.
As a result, Martell cognac sales are up 19 percent and Chivas whisky ended five years of declining sales after promotional investment and the launch of Chivas Extra 12, a brand dedicated to China.
“We are growing on the whole portfolio in China,” Ricard said.
Underlying this focus is a middle class with increasing spending power set to number 611 million individuals by 2024 from 437 million in 2018.
“We think that between now and 2025 the penetration rate of imported spirits in China will double to 2 percent,” he said.
Pernod has 44 percent of the market for imported spirits in China by volume.
Another potential driver is a partnership sealed in June 2017 with Chinese internet giant Tencent (0700.HK), owner of popular WeChat social media app, to work together on content production and brand marketing targeted at young consumers.
Tencent, which owns the exclusive rights to broadcast all National Basketball Association (NBA) games on mobile platforms in China, joined Chivas’ existing NBA partnership in China.
Pernod is also expanding elsewhere in Asia, which makes up about 40 percent of group sales, and last month unveiled a whisky joint venture in Myanmar.
India is now roughly on a par with China as the company’s second-biggest contributor to sales.
Similar to China, the Indian market had setbacks from issues such as a ban on liquor outlets, but Ricard said the company’s performance in India was also improving.
“We had a few headwinds that are now behind us. Consumer fundamentals are such that we remain confident long-term on India,” he said.
Given the signs of improvement in China and India, some analysts expect Pernod Ricard to go from its mid-term guidance of 4-5 percent group sales growth in the coming years to close to 6 percent.
Ricard, however, would not commit to a new target, and cautioned that its Absolut vodka brand in the United States, which counts for a fifth of Pernod’s U.S. business, was still in decline. He added Pernod had cut investments on Absolut.
“Absolut in the U.S is the only disappointment.”
Reporting by Dominique Vidalon; editing by Jason Neely/Keith Weir