Drinks firm Diageo is expected to rebound more rapidly from the Covid-19 pandemic than Pernod Ricard due to its stronger presence in the US, according to a new report.
The European Spirits report by investment bank Credit Suisse evaluated European drinks companies Diageo and Pernod Ricard, which are both ‘well placed for a solid recovery’ from the pandemic.
The report noted that it expects Johnnie Walker owner Diageo to recover quicker than its French competitor due to its ‘higher exposure to the robust US market’ and lower exposure to the ‘weaker’ global travel retail channel. The global travel retail channel represents 4% of Diageo sales, while for Pernod it makes up 8% of sales.
For full-year 2021, Credit Suisse predicted an 8.5% organic revenue growth for Diageo, and a 6.1% increase for Pernod Ricard.
The investment bank also noted that Diageo has a larger presence in fastest-growing spirits categories in the US, a more premium portfolio and a ‘better innovation track record’.
According to National Alcohol Beverage Control Association (NABCA) data cited by the report, Tequila, Cognac, US whiskey, Canadian whisky and pre-made cocktails are the fastest-growth categories for the US spirits industry.
The report said Diageo is ‘well exposed’ to the Tequila category, where Don Julio and Casamigos are taking share, and in the North American whisky category with Bulleit Bourbon and Crown Royal. While Diageo does not have a direct presence in the Cognac category in the US, Credit Suisse forecasts its indirect exposure is 4%-5% of earnings through its 34% stake in Moët-Hennessy, owner of the world’s best-selling Cognac brand.
In comparison, Pernod Ricard is ‘well represented’ in the Cognac sector with Martell, but it is ‘significantly underweight’ in the Tequila category, which could become a high priority for the firm in the future, Credit Suisse said. Pernod has also made several US whiskey deals in recent years, the report noted.
The group acquired Texas‐based Firestone & Robertson Distilling Co, maker of TX whiskey, as well as Kentucky Bourbon producer Rabbit Hole and US drinks group Castle Brands, maker of Jefferson’s Bourbon. In August, the firm said it had “big ambitions” for American whiskey.
‘Resilient’ US spirits market
Diageo generates 45% of profits from North America. As such, the firm is ‘most leveraged to the strong US spirits industry growth trends’.
Pernod Ricard has the ‘lowest exposure’ to North America (20% of the company’s sales) compared to other drinks firms, including Diageo, Rémy Cointreau and Campari Group.
Credit Suisse said the US spirits market has accelerated to 11% growth in the 2020 third quarter, ahead of its long-term average of between 4% and 5%. The US spirits industry has been among the most resilient globally during the pandemic, Credit Suisse said. Furthermore, the coronavirus lockdowns have created ‘increased consumption occasions’ for the drinks industry with household penetration for spirits continuing to grow.
As the on-trade gradually reopened in the US, the off-trade has not slowed down, growing by 24% in Q3. In comparison, sales in the US on-trade fell 40% in Q3 and by 75% in Q2.
The report also found that Diageo is outperforming Pernod in the US due to its lower on-trade channel exposure. The channel represents 20% of Diageo’s sales, while for Pernod it represents 25%.
In addition, Credit Suisse said Diageo’s innovations ‘have been more impactful’ on its bigger brands. The report cited the success of Crown Royal’s flavour innovations and the launch of 30% ABV Ketel One Botanicals, which taps into the health and wellness trend.
Looking outside of the US, Credit Suisse said it still expects Pernod to outperform Diageo in Europe due to its lower on-trade exposure.
The spirits sector has been steadily gaining share from beer over the past two decades, and this has accelerated during the pandemic, the report found.
Furthermore, the report said it does not expect the ‘accelerated premiumisation trend to reverse significantly’ after the pandemic due to a number of reasons, including the strong growth of e-commerce. Consumers have gained a better understanding of the ‘value proposition of premium brands’ in the off-trade and see spirits as an ‘affordable luxury’. The report also said data from Nielsen proves that consumers are more willing to trade up in the on-trade.
In terms of e-commerce, the report said the channel accounted for just 1% of industry volumes pre-pandemic. Credit Suisse said Nielsen estimates that the channel has grown 250% in 2020, while leading e-commerce platform Drizly has increased by 350% in the year to date.
The report said: “On this basis we estimate that the e-commerce channel accounts for 4% industry volumes in 2020. Drizly forecasts e-commerce to reach 20% of off-premise channel sales by 2025, which we estimate would imply 12% of industry volumes.”
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Author: Nicola Carruthers