2023-03-24 12:56:40 ET
Summary
- I expect the US spirits market to continue normalizing, eventually reaching 4-5% growth, with price/mix being the primary driver of this trend.
- Despite being underindexed in Tequila, PRNDY has a solid footing in the US market which will allow it to outgrow the market, especially with its overindexation to the premium segments.
- PRNDY's shift from a brand-centric to a portfolio-approach strategy and management's commitment to continued significant investment in advertising and promotion are expected to drive expansion in the near term.
Thesis
Pernod Ricard ( PRNDY ) is a premium spirits company. PRNDY owns several global market leaders in the spirits industry, such as Absolut Vodka, Jameson Whiskey, and Martell Cognac, which together account for the bulk of the company's sales. The PRNDY portfolio also offers a number of different champagne and wine labels.
Management held their North America Conference Call on March 23, 2023, and it shed a lot of light on the state of affairs in NA. Therefore, the NA market is the focus for this post. While the exact breakdown of the "Americas" segment is unknown, NA likely accounts for a disproportionate share due to its size and GDP. The call focused on the expanding role played by PRNDY's other brands, such as Martell, its US whiskies, or the recently acquired Skrewball or Código , while management maintained its emphasis on the power of its Foundation Brands. Since PRNDY is addressing its underindexation in the rapidly expanding tequila market, a major concern for investors, I find Código appealing due to its ultra-premium and prestige positioning. I believe management has the ability to make premiumization a success, but I also recognize the possibility of a temporary lull due to tough comparisons during the pandemic. How the management team configured its sales mix is probably the most important factor driving expansion in the near term (pricing goes up due to better product mix). In general, I think PRNDY's focus on innovation and marketing is a great idea - of which the accomplishments of the company's media campaigns were singled out by management. In light of PRNDY's shift from a brand-centric to a portfolio-approach strategy and management's commitment to continued significant investment in A&P, I am optimistic about the company's future performance in the US.
US financial updates from the conference
With bold pricing and the expansion of premium brands, PRNDY increased its revenue in the United States by 5% in 1H23. Notable within this context is the fact that Jameson has maintained an impressive trajectory, with a high single-digit run rate in 1H23. Looking ahead, it's encouraging to hear management echo my view that the US spirits market will continue normalizing, eventually reaching 4-5% growth, with price/mix being the primary driver of this trend. On Foundation Brands, management has been touting the company's consistent innovation and strong performance, with one example being Malibu's growing 150bps faster than the off-trade rum category. Double-digit growth is also being seen in both Absolut RTD drinks. Despite being underindexed in Tequila, I believe PRNDY now has a solid footing in the US market which will allow it to outgrow the market, especially with its overindexation to the premium segments.
Growth outlook
As a result of the push from COVID which led to elevated growth, the US spirits industry is now facing the normalization pace - growing at a rate of about 3% annually, down from 8% over the previous three years. Gains made during COVID are, surprisingly, sticking around. Management expects that industry growth will normalize to 4-5% in the mid-term, with FY23 continuing to see normalization through the year. Categorically, while premiumization has slowed, I believe there is still consumer interest in the category and discretionary income available because spirits are seen as a relatively inexpensive luxury. A minor setback for PRNDY is that it is underindexed to Tequila, which has experienced nothing but extraordinary growth and is stealing market share from all other categories as a result. As for cognac, given the lack of stimulus checks, the cognac industry appears to be undergoing some course corrections, but I have faith that it will eventually recover. My opinion is that this "share loss" should not be evaluated at this time while normalization is still in progress.
PRNDY's three-year revenue growth averaged around 7%, which was below the 8% average growth of its industry. As a result of its updated portfolio offerings and improved execution, I believe PRNDY will outgrow its industry at a faster rate than its competitors. When it came to the former, PRNDY fell short in both the areas with the most robust growth and the types of products it offered. Today, things are different. Today, PRNDY has more opportunities for distribution thanks to its stronger plays into American whiskey, such as the Codigo. When it comes to execution, the use of digital tools should prove immensely helpful. The company's ability to activate more brands at scale should improve as a result of the digital transformation, I believe. To be more specific, the digital transformation is a radical shift in methodology, not just an extension of e-commerce. Management at PRNDY identified six key digital projects at the capital market day, which I expect to drive activations for various brands, better improve distribution capabilities, etc. My conclusion is that the company has become more digital and less analogue, which should result in a structurally higher margin in the long run.
Improved portfolio
To consistently outperform the market, I believe PRNDY must increase brand activation across its entire portfolio. Thus, PRNDY's move to a portfolio approach should liberate more growth, with more pinpointed knowledge of growth relays and their place in the portfolio. Specifically, to expand the business and increase market share, the emphasis has shifted from individual brands to the entire portfolio. Half a decade ago, the US's growth story mainly revolved around Jameson. Presently, growth opportunities can be seen across the portfolio, with Jameson still experiencing growth.
Conclusion
Management has also emphasized the importance of the company's consistent innovation and strong performance in its Foundation Brands, such as Absolut RTD drinks and Malibu. While the US spirits industry is now facing a normalization pace, PRNDY's focus on innovation, marketing, and digital transformation is expected to help the company outgrow its industry. With its move to a portfolio approach and a stronger play into American whiskey, such as the recently acquired Código, PRNDY is poised to expand its business and increase market share.
For further details see:
Pernod Ricard: North America Growth Outlook Is Healthy