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Morningstar | Pernod Firing on All Cylinders, Driven by Asia

Pernod Ricard, formed in 1975 through the merger of two French aniseed liqueur makers by the same names, has established itself as the world's number-two distiller through a series of acquisitions. Although the industry is fairly concentrated (we estimate a four-firm concentration ratio of 0.6, above many other fast-moving consumer goods categories, including the global brewing industry at 0.5), we believe there is more consolidation to come. Outside of the top five firms, the industry is highly fragmented, with local players often dominating in niche product categories or narrowly defined geographies. These firms present a new wave of merger opportunities for the industry consolidators--including Pernod--to strengthen their presence in emerging markets.Volume in the spirits industry is fairly stable (albeit more cyclical than beer), but trends in the industry are transient, providing another incentive for acquisitions. For example, the current shift away from white spirits (mainly vodka) to brown spirits is a reversal of the trend in the 1990s. The breadth of Pernod's portfolio across categories, with both global strategic and local niche brands, mitigates some of the risk to volume from shifting consumer preferences, and its Jameson Irish whiskey brand is certainly on trend at present. Nevertheless, its product range is narrower than that of Diageo, and single-malt scotch, bourbon, and tequila are all examples of gaps in Pernod's portfolio.We believe premiumization will be a long-term tailwind for the global distillers. In developed markets, spirits are taking share from beer and wine as consumers trade up. In both the United States and the United Kingdom, the distilled spirits category has added an average of around 20 basis points of share of throat from other categories every year for the past decade. A continuation of that trend could support Pernod's volume in developed markets, despite an underlying headwind of falling alcohol consumption. In emerging markets, however, trading up is occurring within, rather than between, categories, although China and India are two small but fast-growing growth drivers.