In High Spirits

By Coco Masters

Pernod Ricard's recent $17.1 billion acquisition of most of Britain's Allied Domecq makes the Paris-based company a competitive No. 2 operator in wine and spirits worldwide, behind London's Diageo, with sales of 77 million cases. But it's not about figures, says

Michel Bord, the CEO of Pernod Ricard USA. It's about the transformational growth of a French spirits company born of wormwood and anise to a "gentlemanly" global gorilla with a premium portfolio of wines and spirits centered on 14 major brands.

Chugging two-thirds of Allied Domecq (Fortune Brands downed the rest, for $5 billion) will add 65% more to Pernod Ricard's global revenues, reaching about $7 billion in 2004 sales. Says Bord: "Premium is growing in all categories" --one reason Pernod Ricard decided to ride the industry's wave of consolidation and, in the process, doubled its U.S. sales. Pernod thinks it can lift sales growth of the acquired brands--including Malibu, Kahlua, Ballantine's and Beefeater--from 3% to match the 9% rate Pernod is getting out of the rest of its portfolio.

That's quite a leap in the booze business, but Pernod Ricard is no stranger to the power of consolidation. It turned sales around for Chivas Regal and Martell, up 9% and 7%, respectively, since acquiring Seagram in 2001. The degree of difficulty is greater now though, since Allied Domecq's brands and distribution channels are comparatively stronger than Seagram's were. "I don't think they'll get anywhere near the level of growth they got with the Seagram business," says Deutsche Bank analyst Graeme Eadie, citing dragging sales of Kahlua liqueur, Ballantine's scotch and Beefeater gin.

One blue chip to help deflect acquisition costs is Pernod Ricard's recent $120 million deal with SPI Group to extend its U.S. distribution rights for Stolichnaya--second to Absolut vodka in the U.S. and second globally--to the rest of the world. "Good for them," says New York City--based industry expert Steven Olson, whose clients include Diageo. "Owning a brand is one thing, but what are you owning? Distribution of Stoli will be far more profitable than owning Grey Goose [bought by Bacardi for $2 billion]. It's a much smarter move."

Pernod plans to hold its No. 1 spot in Europe and Asia by "adapting to lifestyle and consumer behavior in every market"--getting customers to pay up for premium brands. In China, Pernod just repositioned Chivas Regal with an 18-year-old edition--at twice the price of the 12-year-old--boosting sales 17% over the past six months. In the U.S., where tequila is the fastest-growing premium category, the company will launch Tezon (named for the stone that pounds the agave plant in production) at $60 a bottle in January. Its wine portfolio, including Jacob's Creek, surges with more than 150 of Allied's Spanish wineries, particularly in the Rioja region. "Those are going to be one of the hottest segments for wine in the next decade because of value and the depth of variety," says industry expert Paul Pacult.

And everywhere Pernod will push newly acquired Mumm and Perrier-Jouet, as well as Stoli, at women. Particularly in the U.S., "the future is women, leading to further sophistication of the consumer," says Pierre Pringuet, director general of Pernod Ricard.

America's return to the cocktail--industry-wide sales of hard liquor are up about 8%--also bodes well for Pernod. Investors are certainly drinking it in; since the acquisition, the company's stock price has spiked 38%. But before the celebratory champagne is all gone, Pringuet is confident "something will happen soon" in the trend of consolidation. The industry is looking to a Bacardi and Brown-Forman merger as the probable next big deal, but one thing is clear: the Continental gorillas at Pernod Ricard are thirsty.