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April 25 (Reuters) - (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 promotional campaign.
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.