Pernod Looks to U.S. as China Sales Stall

By Ruth Bender 

PARIS--France's Pernod Ricard SA is betting on U.S. consumers' thirst to boost sales while China's hangover lingers.

The maker of Martell cognac and Absolut vodka is looking to bolster its presence in the U.S. with further acquisitions and deeper distribution channels to make up for faltering growth in some emerging markets, Chief Executive Pierre Pringuet said Thursday.

"We strongly believe in the growth potential of the U.S. market," Mr. Pringuet said.

China was seen as the luxury industry's main growth driver when the 2008 financial crisis damped sales for luxury goods in the U.S. and Europe. But the trend began to reverse last year, when wealthy Americans returned to spending freely on expensive clothing, accessories and drinks as the U.S. economy bounced back from recession while troubles began to emerge in China.

Drinks makers have been particularly hard hit since the Chinese government's crackdown on extravagant gift-giving and lavish dining among officials. Pernod's French rival Rémy Cointreau SA said last week it suffered another steep fall in sales in China in the latest quarter while Diageo PLC also saw sales slide in Asia.

While Pernod Ricard continues to believe that growth in China will eventually come back, it is looking for alternative sources of growth in the U.S. in the meantime. The Paris-based firm Thursday said it bought California winery Kenwood, a brand that sells bottles for up to $50 apiece mainly in the U.S. and Canada.

"It is not abnormal to think that we could make other acquisitions of this nature," Mr. Pringuet said. He declined to be more specific.

Pernod is also strengthening its distribution network in the U.S. and signed new agreements with Southern Wine & Spirits and Republic National Distributing Co. of the U.S. this month.

In China, on the other hand, the situation will remain difficult throughout the rest of the year, Mr. Pringuet said. "It is reasonable to believe that we will see some improvement in 2015 but 2014 will still be tough," he said.

Pernod Ricard has been trying to counter the steep fall in China by launching cheaper drinks marketed at a younger crowd and sold in more modern places such as nightclubs, aiming to change consumers' habits in a lasting way.

Mr Pringuet has previously suggested that the days when Chinese sipped $2,000-bottles of cognac over a business lunch may be over, while some analysts have said the Chinese market may not return to the double-digit growth rates experienced in recent years, in which case having a larger presence in the US to sell pricey drinks to wealthy consumers will be important.

Pernod Ricard said sales in its latest quarter fell 7% to EUR1.62 billion from EUR1.74 billion in the same period last year, weighed down by currency swings, in particular dipping emerging market currencies, as well as the troubles in China.

Russia is another formerly strong market that is causing the group some headaches, with a significant slowdown in sales as the economy cools, Mr. Pringuet said.

Sales in Russia grew 4% in the first nine months of the group's fiscal year ending in June, compared with 17% in the same period a year ago. In Ukraine, the political situation has also caused sales to drop sharply, Mr. Pringuet said.

Pernod Ricard said it still aims for organic growth in operating profit to reach between 1% and 3% in its current fiscal year, a goal it had lowered earlier this year on the dire China prospects.

Write to Ruth Bender at [e-mail]

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