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April 25 (The following statement was released by the rating agency)
Drinks companies Pernod Ricard and Diageo can adapt to
the slowdown in China more quickly than rival Remy Cointreau due to their
greater ability and strategic decision to adjust their product offering and
pricing points, Fitch Ratings says. Remy's more limited flexibility means a
recovery could take much longer, although in the long-term it could benefit from
a less crowded high-end market.
Results from all three companies over the last week show falling Asian sales due
to the Chinese government's introduction of rules against extravagant
gift-giving and consumption. Remy is the most exposed of the three purely in
terms of the percentage of sales in China, which resulted in overall sales
falling, while Pernod and Diageo managed to maintain slight organic growth at
the group level. We believe Remy's product range constrains its possibilities to
rapidly adjust to changing consumption.
Remy's China business is focussed on the premium and ultra-premium end of the
market and the company has not launched any lower priced cognacs because of the
risk that they could damage its brand image in the country. We also do not
believe the company has the firepower to quickly develop its other non-cognac
brands and diversify its product offering in China.
These risks are currently reflected in the Negative Outlook on Remy's 'BBB-'
credit rating. We revised the Outlook in January due to uncertainty over how the
market will look beyond 2014 and our expectation that leverage would reach the
top end of the range acceptable for the current rating.
In contrast Pernod and Diageo, both of which have Stable Outlooks, already have
a broader product offering in China and are also bigger and more globally
diversified. This reduces the risk involved in launching new products and gives
them the fire-power to promote other western-style spirits in China. This is
demonstrated by Pernod's recent launch of Martell Distinction, a cheaper cognac
with a younger target market, and by Diageo's initiative to accelerate the
penetration of its Baileys drink in the country, backed up by a major media and
While these product launches should help revenues recover more quickly in China,
they will also lead to a slowdown in operating profit growth, as they will
generate lower margins than premium brands.