Q&A | Alcohol
Pernod Ricard CFO Hélène de Tissot
Olly Wehring speaks to Pernod Ricard CFO Hélène de Tissot about growth opportunities, expanding into the American whiskey category and the Chinese market, and more.
In late August, Pernod Ricard reported its results for fiscal 2019, the 12 months to the end of June. Sales in the year rose by 6%, although the group's key US market came in flat. Following the company's presentation of its most recent performance last autumn, just-drinks.com caught up with CFO Hélène de Tissot in London to find out about her experiences with the group in Asia and in the M&A arena, macro-economic challenges facing the likes of Pernod, Kentucky Bourbon, Castle Brands, Chinese whiskey and Pernod's wine operations.
Can you give us a potted history of your time with Pernod? You became group director for finance just over a year ago.
Hélène de Tissot:
I started my career as a tax lawyer and joined the group as tax director in 2002. I've spent all of my 17 years with Pernod Ricard in the finance function. After eight years as tax director, I moved to Asia as CFO for the region, based in Hong Kong, for six years.
In 2016, I came back to Paris to take charge of strategic M&A, reporting into then-CFO Gilles Bogaert. I was at HQ at the time of our mega deals - The integration of Seagram, Allied Domecq and Absolut. Then, 14 months ago, I became CFO.
Do you miss the mega-deals?
The energy was great at the time, but I find the same level of energy with smaller deals. We get to meet the founders, the negotiations with the sellers are much more direct - we don't go through bankers, we meet the people, so we get to understand what they've been trying to build.
It's a really positive environment to talk about the culture and values of Pernod Ricard and how we want to grow their brands. So, it's less financially-driven than the mega-deals, but I find it very positive and enjoyable as well.
It's been great to contribute to the success of those acquisitions and to see how powerful and ambitious the group is, thanks to the deals we've made in recent years.
With M&A in international spirits moving away from consolidation, what are the requirements you have in mind when making bolt-on acquisitions?
It's difficult to summarise everything. While we're looking at spirits and wine products, we're also looking at services such as the e-commerce platform.
If we focus on spirits, what we're looking for are brands that can bring new growth opportunities to the group, because of their categories, geographies or moment of consumption. They need to be relevant, compared to where we are today with the rest of our brands. Usually, we look at brands that are already at a critical size, so the proof of concept is already behind them. That means we can leverage their potential with the right investment from Pernod Ricard and use the strength of our route-to-market.
Of course, the answer is different depending on the target. Sometimes, the brand is big enough to be immediately integrated into the group's platform. For example, Malfy gin (acquired in June 2019) has joined 'The Gin Hub'.
The criteria include the dynamism of the target brand, the strength of the equity, the quality of the product, its pricing strategy, the consumer opportunity and what we can bring in terms of acceleration and value creation.
When you talk of "critical size", what do you mean?
We don't have specific guidelines for a volumes number. There's nothing prescriptive for us in terms of size.
What we want is to bring the right ecosystem that would be relevant to any entrepreneurs who would like to partner with us or sell their brand to us. It's not only about the amount on the cheque that we give them.
You covered Asia during quite a challenging time in the region for international spirits, most notably the introduction of anti-extravagance legislation in China in late 2012. Did you see these measures coming?
I would be a bit arrogant if I said yes! I didn't see it coming before anybody else. What the situation showed, however, was our resilience - this was a significant change in one of our key growth markets. What's more important is what we have done since then to diversify our growth. We want our growth to be broad-based, so we've been doing things quite differently in China since those days.
Today, we're enjoying very strong growth with brands such as Absolut, Ballantine's, Jameson and Jacob's Creek. Having said that, Martell is still growing significantly. It's difficult to say we're not relying on Martell for our performance in China, but we've also been diversifying our growth within Martell, in terms of channels and of quality. We've also been working on recruiting new consumers and premiumising them.
Another learning is that we want to globalise Martell. Our aim of high single-digit growth for Martell in the mid-term, it's globally, it's not only for China. We've been quite successful in developing Martell strongly in the US - we're still small there but we're making progress.
Several analysts have suggested there may be another wave of legislation in China coming soon.
I think the situation is very different now. The approach to entertainment was very different then to what it is now. It's more within private businesses than before. What's of more concern right now is the impact on consumer confidence of the trade war with the US.
We'll be paying lots of attention to this in the coming weeks and months.
The US is set to introduce tariffs on goods from the European Union. Reports set the amount at as much as $10bn.
In our guidance (for fiscal 2020), we mentioned a particularly uncertain environment - the US tariff situation is part of that environment. The list of products that could be affected has been evolving, but Scotch and Irish whiskey are on the list, as are Cognac, wine and Champagne.
The addition of Scotch and Irish whisk(e)y to the list could have a significant impact on us. We don't yet know if it's going to happen, or when. We're taking the threat very seriously and we're monitoring the situation. It's critical for us to have a free-trade environment.
How do you mitigate against a tariff war?
First, you need to know how much is at stake. Then, we'll work on our pricing strategy, depending on the elasticity of our brands. There could also be such things as early shipments to limit the impact of the timing of implementation.
Earlier this year, Pernod returned to Kentucky Bourbon in buying a majority stake in Rabbit Hole Whiskey, ten years after selling Wild Turkey. Is this the year that Pernod admits it was wrong to sell Wild Turkey?
Hélène de Tissot: I don't think it was a mistake. You need to look at what the options were at the time of making that choice. We were revisiting our portfolio as well as deleveraging.
In the US, we want to deliver more, we want to beat the market, that's our ambition. Having said that, not being in the American whiskey category has been something we wanted to change. That's what we've been doing with these bolt-on acquisitions.
Pernod recently made another Kentucky Bourbon play, lining up the acquisition of Castle Brands. The US company has a handful of other spirits brands beyond Jefferson's Bourbon.
It's too early for me to comment on this. The offer is being launched in the coming days - we have a process we have to go through. Our intention is to buy the full company and to merge it into our affiliate in the US. Jefferson's is the most strategic brand for us to add to our portfolio.
What do you intend to do with Castle's Irish whiskey brands, Clontarf and Knappogue?
Irish whiskey isn't the priority of this acquisition, for sure. But, it's very early days: We first need to make the acquisition happen. Then, we'll see what we can do with those brands.
Staying with acquisitions, Pernod has been busy recently in Spain, buying two e-commerce platforms in the space of a year.
We want to really fast-track the e-commerce opportunity, not only in Spain but also in other markets, through our Drinks & Co platform. It's a question of whether we invest capital expenditure or make an acquisition, or both. It depends on how much you can accelerate your e-commerce strategy with this type of acquisition.
Why the increased interest in the route-to-consumer?
We want to be relevant to consumers beyond the more traditional channels. E-commerce is growing for our industry and we want to be part of it. Building our own platform is very relevant, so we've been accelerating our e-commerce strategy through these two acquisitions. Our strategy here is much more global than just Spain.
August 2019 was a busy month for Pernod, with plans announced to build a whisky distillery in China. You've pledged to invest $150m in the project over ten years. Considering Edrington's outlay of almost $190m on The Macallan's new distillery last year, that's quite a small spend.
We're building a new business and a new brand. It's a starting point. For us, it is a significant investment. If we're successful, we can probably spend more. This is just the beginning. The intention is to show that we are doing things in an ambitious way.
Will the Chinese whisky be limited only to domestic availability?
Let's age the product, taste it, and then see. We'll start with the domestic market then we'll see later on if there's an export opportunity. We'll start distilling in 2021 and will be ready to taste in 2023. It's obviously a different pilot to Scotland or Ireland - we'll see what the quality will be.
Turning to the US spirits market, how concerning is it to Pernod to see Diageo doing so well there (sales +5% in fiscal 2019)?
For us, what really matters is the very strong strategic priority that the US is in our 'Transform & Accelerate' plan. It's our number one market. We're extremely focused on delivering the ambition we have to beat the market. We didn't do that this year, but this was linked more to our inventory optimisation in the country, which is why our sales came in flat.
It's not changing the level of priority, in terms of investment and ambition, we're putting behind the US. We're extremely motivated to deliver on that ambition. Do we need to accelerate our investment? We did that already by increasing our A&P investment in the US. Do we need to do more? That's a good question. I think we're quite clear in terms of resources and innovations. This is a very important market for us, which is also very profitable.
The fact that our competitor is accelerating as well just shows how important this market is for many groups.
What was the reason for the flat performance in the US in your fiscal 2019?
We used the opportunity from the renewal of our wholesalers contracts, which took place in fiscal 2019. We started those negotiations about six months ago. There were things we believed we could leverage in our negotiations with wholesalers, such as our stronger activations behind our brands. Then, there are additional operational efficiencies that we are bringing into our group. The flat performance was the implementation of what we wanted to do.
We believe our route-to-market now is much stronger, more agile to launch innovations and better-positioned to monitor our price-increase strategy. We believe our sales figures in the US will be more dynamic in fiscal 2020.
Finally, Pernod's wine performance in the 12 months to the end of June 2019 was poor - sales down by 5% overall and by 14% in the UK. How much longer can your wine operations remain core to Pernod?
That question has two different angles. What we saw in fiscal 2019 was the impact of our value strategy on wine, especially in the UK. We also faced some very competitive pressure in markets like Australia and New Zealand.
Putting this to one side, we saw a strong performance from Campo Viejo in markets like the US. Jacob's Creek also did well in some key emerging markets for us, China, India and Russia, for example.
There are trends within wine that are quite relevant to the consumer, such as low-alcohol, female consumption and the meal occasion. There are many things that make a lot of sense from a strategic point of view when we talk about our wine portfolio, whatever the short-term performance could be.
You're not alone in adopting a value strategy in wine, though.
We're ready to accept some significant delistings where we believe there is no room for value creation for us. We believe that everything we've been doing with our wine brands is consistent in terms of a value proposition to the consumer. This can support a more aggressive pricing position.
If the competition is playing the value game as well, it's usually helpful!