Boring Liquor's Exciting Opportunity
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Boring companies can be some of the most exciting investment opportunities. When I say “boring" companies, I mean the types of companies that sell the types of products that have existed mostly unchanged for decades, if not longer. When looking for these types of boring investments, it does not get much more boring than the alcoholic beverage industry. And Pernod Ricard (NASDAQOTH: PDRDY), the 216-year old French wine and spirits maker, is a particularly boring company.
Pernod’s Boring Liquor Portfolio
As the world’s second-largest wine and spirits maker, Pernod Ricard has an impressively boring portfolio of 36 strategic brands, many of which are likely familiar to readers. These brands include Jameson (world’s No. 1 Irish whiskey), Chives Regal (world’s No. 2 super-premium Scotch), Martell (world’s No. 1 XO cognac) and Absolut Vodka (world’s No. 4 spirit brand of any type). Together these and other brands took in $10.67 billion dollars last fiscal year.
Mergers and Acquisitions
In 2005, Pernod teamed up with the US spirits maker Beam (NYSE: BEAM) to acquire the much larger Allied Domecq, an acquisition that helped to transform both companies. In the deal Beam (formally the conglomerate Fortune Brands) acquired Allied Domecq’s Sauza tequila, Courvoisier cognac, Teacher’s Scotch and Pernod’s Maker’s Mark bourbon, some of the world’s top telling brands. In the process Beam instantly jumped from the world’s No. 7 spirits company to No. 4, more than doubling the conglomerate’s liquor revenues. Thanks to the deal, Beam continues to grow today by creating innovative variations on some of those acquired products. One such innovation is a ready-to-drink version of its Teacher’s scotch brand (Teacher’s & Soda and Teacher’s & Cola) sold in a can, with has been very popular in India.
Pernod Ricard was similarly transformed, and catapulted into the world’s No. 2 position overnight. Following this and another big acquisition in 2008, Pernod went into a self-imposed takeover cool down period to focus on their newly acquired brands, rebuild their cash position, and reduce the company’s debt. The recession has been good to Pernod, as boring liquor tends to sell well in good times and bad. Today the company is looking at making small “bolt-on” acquisitions, as well as the possibility of another major acquisition that will once again transform the company in a major way. Last month was one of those small bolt-on acquisitions--the purchase of Le Main au Bois, an acquisition that will further bolster Pernod’s already strong position in the XO (extra old) cognac category.
Pernod is also open to the idea of acquiring another big name: the privately held Tequila Cuervo La Rojeña, owners of the world’s No.1 selling tequila brand, Jose Cuervo. An acquisition of this size would be a major coup for Pernod Richard. Jose Cuervo is currently partnered with Diageo (NYSE: DEO), which holds the international distribution rights to the brand. That distribution partnership between the two companies will end on June 30 of this year, however. Diageo’s own talks to acquire Jose Cuervo ended in December, leaving the door open for another potential acquirer.
If Pernod is able to acquire Jose Cuervo at the right price, not only will Pernod be acquiring the No. 1 selling tequila in the world, but they will also be taking away the No. 1 selling tequila from their British rival, Diageo. Jose Cuervo is not just the world’s No. 1 selling tequila, but comfortably so, with nearly twice the global market share of Beam’s No. 2 Sauza tequila. Acquiring Jose Cuervo outright would be a significant acquisition for any company (and a significant loss even for the world’s No. 1 spirits maker, Diageo).
Pernod Ricard's strong exposure to emerging markets has been of great benefit to the company during these trying economic times. Sales in certain European countries, such as Spain and Greece, have been weak. Strong sales in China and India (where Pernod Ricard recently became that country's most profitable spirits company) have been able to offset the lack of European consumer spending, though. As the middle-class in these emerging markets continues to grow, so too does the demand for premium aspirational brands.
Asia has been a very profitable and fast-growing region for the company, as it will continue to be far into the future. Pernod Ricard, though, has now begun to set its sights on a new market: the African continent. Africa has always been a tough continent to penetrate, largely untouched by many brands we are familiar with in North America and Europe. With a combined population of over a billion people, the Africa of today could very well be the China and India of two decades ago, primed for many decades of explosively-quick consumer spending growth.
Boring Industry’s Exciting Initiative
Boring investments are not without a little excitement, though. Although size and scale in the liquor industry are critical to the long-term success of a company, that can sometimes be a double-edged sword. As companies grow, creativity can often suffer when management becomes less inclined to take risks and try new things.
To address that concern, Pernod Ricard recently created Our/Vodka. Described as “one part global and one part local,” Our/Vodka is a small-business initiative inside of the much larger global company. Operating autonomously of Pernod Ricard’s usual managerial oversight, Our/Vodka is a combination micro-distillery, bar and store that will be found throughout the world. The first test market for this concept will be Berlin, Germany (Our/Berlin).
All Our/Vodka drinks will make use of the same general global recipe, but each local distillery will use locally-sourced ingredients to make their local vodkas. In the future it will be possible to see an Our/London, Our/New York, or any number of other Our/Local City businesses located throughout the world. Each location will create their own local vodkas using local ingredients and catering to local tastes. Although Our/Vodka is just in a single test market for the time being, the idea certainly adds a little excitement to the mix.
Boring Bottom Line
The liquor industry in general has been one of the particularly boring spots in the stock market. But in these exciting times of market crashes, European uncertainty and Washington-inflicted artificially-created crises, I will take boring any day of the week. And it does not get much more boring than the liquor industry and Pernod Ricard.
WhichStocksWork has a position in Pernod Ricard. The Motley Fool recommends Beam and Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!