Behind the Actual Announcement
Early last week global drinks giant Pernod Ricard announced that it had decided to base its global wine business in Sydney. Not surprisingly this announcement attracted some attention, including some rather mischievous statements interpreting the announcement along the lines that Pernod Ricard New Zealand’s (the former Montana Wines, in the process of being rebranded as Brancott Estates) head office was being shifted to Australia. The latter comments were swiftly and categorically refuted by Pernod Ricard. They were very clearly beyond the scope of Pernod Ricard’s actual press statements.
However, the brazen misstatement with regard to PRNZ “abandoning New Zealand” obscured the reality that in fact the base of decision-making with regard to New Zealand operations has been shifting offshore for some time, and that the latest global re-organisation was very likely to continue the trend.
The reality also has its base in the history of Pernod Ricard’s wine business, and in the changing directions that have consequently resulted. It is interesting that the press coverage of the Pernod Ricard changes mentions the four key regional volume brands (Jacob’s Creek, Montana/Brancott, Graffigna and Campo Viejo) involved and the comment that Pernod Ricard “acquired” Montana Wines in 2001.
Of course Pernod Ricard did not in fact “own” any of the brands mentioned other than Jacob’s Creek until 2005, when it acquired Allied Domecq. Allied Domecq had itself acquired Montana, Graffigna and Campo Viejo as part of a series of acquisitions in 2001. Unlike its entry into New Zealand, Allied Domecq already owned other operations in both Argentina and Spain beforehand.
More importantly, the change of ultimate ownership of these three (and other associated) brands resulted in several significant operational and directional changes, especially in terms of marketing and distribution. All were export-oriented brands, even though in all three cases the domestic market dominated sales. Under Allied Domecq the philosophy was to augment existing successful international sales channels with Allied Domecq distribution into new or under represented markets.
By contrast, the Pernod Ricard way was to bring most international distribution “in house”, and then to focus more heavily on core products. To some extent this change was necessitated by the increased level of intra-portfolio competition that resulted from combining the Allied Domecq brands with the existing Pernod Ricard wine brands.
This is where the Pernod Ricard global decision really starts to acquire meaning. It says that five years after the Allied Domecq acquisition, Pernod Ricard still views the world from a “Corporate Wine Australia” (as distinct from a wider Australian industry, or elsewhere) perspective. From a similar perspective to Constellation and to Fosters/Treasury, where the keys to wine profitability are low cost base (exemplified by the hot irrigated vineyards of inland Australia), big scale wineries and lots of marketing and advertising dollars pushed in behind a limited number of brands aimed at a wide range of markets.
The next implication is that decisions regarding international marketing of the New Zealand, Argentine and Spanish businesses are being driven by the team responsible for Jacob’s Creek and what used to be the Orlando Wyndham organisation.
In practice this has already been happening. Pernod Ricard New Zealand has for some time been reporting to Pernod Ricard Pacific, based in Sydney. It has long been assumed by most in the industry that this was where decisions were actually made, including the huge de-stocking round of discounting that squashed domestic supermarket prices from late 2008 until earlier this year, single-handedly pummelling the profitability and cash flows of most of the rest of the industry, large and small alike, far more than export price pressures ever did.
Looking even deeper, the change in philosophy has meant that many of the old Montana’s virtues became vices. In truth the company was to some extent burdened by old inherited assets and an unwieldy set of brands from its own past acquisitions, including duplication of facilities from the Penfolds NZ and Corbans acquisitions. With the wider Montana portfolio, originally developed to support a portfolio that targeted the breadth of the NZ domestic market, what was a relatively balanced portfolio now became an unbalanced portfolio. Translation: too much product other than sauvignon blanc.
Moreover, previously Montana products were very successfully sold through a range of distributors in many markets. While it is likely true that Allied Domecq substantially boosted sales in some markets, it also failed to deliver in others. However, under Pernod Ricard stories are occasionally heard of successful distributors in several markets losing the brands they had nurtured owing to decisions to shift handling to local Pernod Ricard offices.
This was where new problems appeared. Local sales people with a history, affinity and rewards systems built around selling Jacob’s Creek were always going to be slow off the mark selling competing products from New Zealand. This may be one reason why PRNZ also seemed to get caught out by the sudden explosion of exports of New Zealand pinot gris – could it be the that fact Jacob’s Creek already shipped a pinot grigio label, largely sourced from early picked hot climate irrigated grapes, created confusion as to where a New Zealand Montana label might fit into the portfolio? In a similar vein Montana’s long standing Gisborne Chardonnay label, frequently cited internationally for its quality to price ratio, was a clear internal competitor to the much higher volume (and lower production cost) Jacob’s Creek chardonnay label.
The conclusion to this is not that what has happened to the Montana/Brancott labels is a consequence of overseas multinational ownership. That is not a direct causal nexus. What is more subtle and pervasive is the way that ownership and other changes can directly or indirectly change the business models used by producers in export oriented businesses, sometimes for better (and it must be stressed that Pernod Ricard has brought a number of positives to its New Zealand business) and sometimes not. The implications of those changes can be very significant and lasting, and can affect other corners of the industry that would not normally have tended to consider themselves direct competitors. Down the track, when restructuring results, the changes start to reach the people level. In the case of Pernod Ricard in New Zealand it is well worth asking whether some of the enormous base of local knowledge and skills built up in the Montana and Allied Domecq eras, is now starting to dissipate.
Whether Pernod Ricard has made the smartest call as to the ideal business model for its global wine business will be interesting to follow.
Lindauer – A Case Study?
Montana Wines introduced the Lindauer sparkling wine brand in 1981. Over the last three decades it has won a reputation for a level of consistent quality that can compete with much more expensive products while selling at a low price point for a traditional method wine (technically most Lindauer is made, however, through the more economical transfer method).
The 1990s and early 2000s were a period of rapid export growth for Lindauer, especially in the United Kingdom and a number of smaller and European markets. Indeed, export growth in the period after the Allied Domecq acquisition was rapid.
Under Pernod Ricard this growth rate was not maintained, leading directly to the situation in 2008/2009 where PRNZ identified that its stock levels were too high and the subsequent moves to cancel grower contracts and to severely discount Lindauer in the domestic market. The two reasons most easily identified for this change of fortunes were:
- The severance of distribution arrangements with some highly successful offshore agents, in order to bring distribution “in house”; and
- A decision, whether tacit or otherwise, that Lindauer would play second string to the Jacob’s Creek Sparkling range. The advantages of Jacob’s Creek in this situation were much lower fruit and production costs (and therefore higher margins at similar price points), plus the leverage of brand spending on the multi-faceted Jacob’s Creek brand versus the smaller and sparkling wine only Lindauer brand.
There is a considerable additional irony in the treatment of the Lindauer brand, and that relates to the events around the original acquisition of Allied Domecq by Pernod Ricard. In each country affected by this acquisition Pernod Ricard had to deal with domestic competition authorities, in New Zealand the Commerce Commission. In its original application to the Commerce Commission, reflecting what one assumes was an original analysis that there would be competition problems, Pernod Ricard entered into a voluntary deed of undertaking to sell the Lindauer brand (and certain other brands also) within 12 months.
The implication of this undertaking was very much that Lindauer would be competing with Pernod Ricard’s own sparkling wine brands (inter alia Jacob’s Creek).
Within less than 12 months Pernod Ricard came to its senses once it realised just how foolish and damaging the undertaking would likely prove to be – not to its export business, but rather its domestic market. What it realised is that Montana Wines had built a domestic on premise distribution business that dominates the lower to middle end of the domestic on premise market. It is widely estimated that this distribution system controls more than 60% (and in some regions as much as 80%) of the on premise licenced cafes, wine bars, theatres and restaurants in the country. It achieved this through a portfolio covering all major styles likely to be required, excellent service (brought about by having a level of scale advantages that smaller on premise distributors cannot compete with), and perhaps most important of all, Lindauer.
Lindauer is the anchor product without which the system most likely would not exist. What Pernod Ricard most of all realised during that few months when it was staring at the possibility of losing Lindauer was not just how difficult it would be to replicate, because Jacob’s Creek simply would not have been accepted as a replacement, but rather the potential damage to the market share and profitability of whole distribution system that might result if it was forced to sell Lindauer to one of the several companies that had opted out of the mass on premise market for the simple reason they did not have a Lindauer substitute product.
In short, regardless of how it was itself priced, Lindauer underwrote the profitability of a very significant part of the entire domestic business.
During 2006 Pernod Ricard went back to the Commerce Commission with an application to be released from its undertaking to sell. The Commerce Commission’s analysis looked only at the broad market for sparkling wines and found that competition would not be unduly affected by allowing the acquisition of Lindauer. Whether the Commission even thought to ask questions about other implications of the transaction, rather than just a largely perfunctory analysis of market share numbers dominated by retail, may never be known.