Registration Document - Pernod Ricard

3 Risk
60
MANAGEMENT REPORT
factors
Risk factors
Risks in connection
with business activity
Risks relating to the global economic
environment
Pernod Ricard is co-leader of the global Wine and Spirits market.
It sells products in 70 countries, via distribution subsidiaries or,
in smaller markets, third-party distributors.
In most countries, the consumption of Wine and Spirits , closely linked
to the broader economic environment tends to decline during periods
of economic recession, falling revenues, higher cost of living and
inflation. Wine and S pirits consumers also have the option of trading
down to less costly product categories (“standard” as opposed to
“P remium” products) when the economic environment is depressed.
While the Group’s business has held up well during the current crisis,
it is nonetheless exposed to the consequences of economic downturns
and the possibility of more muted growth in consumption, particularly
in North America and some European countries.
Despite the fact that the diversified geographical spread of the Group’s
activities can help smooth out difficulties encountered in specific
markets, there is a risk that global recessions or severe contractions
in our leading markets could have an adverse impact on our sales,
sparking a deterioration in our earnings and outlook.
Risks relating to seasonal trends
Pernod Ricard makes an above-average portion of its sales during
the Christmas and New Year season (November, December) and the
Chinese New Year (January, February). This means that an event
occurring during these periods could prompt a reduction in the
Group’s revenues and a deterioration in its full-year earnings.
Risks relating to competition
The Group is present in fiercely competitive markets, where brand
recognition, corporate image, price, product quality, D istribution
N etwork and services provided to consumers are differentiating
factors.
While the Group aims constantly to strengthen the recognition of its
brands, particularly its 15 strategic brands, via advertising campaigns
and promotions, to enhance the quality of its products and to
optimise its distribution and service networks, it must also face up
to heightened competition from major international players on its
international brands and from smaller groups or local producers on
its local brands.
The fierce competition prevailing in mature markets and the
increasingly competitive nature of the emerging markets could oblige
the Group to boost its investments and advertising expenditure, or
even to cut its prices in order to defend its market share.
PERNOD RICARD
The Group is dependent on third parties
for the distribution and, in some cases,
for manufacturing of its products
in a number of key markets
The Group has signed agreements with third parties covering the
distribution and, in some cases, the manufacturing of its products in
a number of key markets. It also distributes brands belonging to other
groups via its global Wine and Spirits distribution network. These
include Four Roses American whiskey, Sandeman ports and sherries,
and Polish vodka Zubrowka, for which the Group has distribution
rights covering more than 70 countries.
The terms of these agreements vary for each brand, but are generally
signed for a specific number of years. The termination of some of
these contractual relationships could block access for consumers to
the relevant products, which could be prejudicial to the Group’s shortand
long-term performances.
The Group is not in a position to guarantee that it will be able, when
such contracts expire or are terminated, to renegotiate distribution or
manufacturing rights on favourable terms. The impact on the Group’s
sales and earnings, should it be unable to renegotiate distribution
agreements on favourable terms when they expire, could be negative
on its sales and earnings. The Group’s sales could also be adversely
affected by any conflicts arising with its third-party distributors or
the makers of its products.
Further consolidation among spirits
producers or merchants could hamper
the distribution of the Group’s products
The consolidation of distributors and merchants has not in the past
had an adverse impact on the Group’s Wine and Spirits activities.
However, further consolidation among foreign spirits producers
and merchants in the Group’s key markets could potentially hamper
the distribution of its products due to (i) less attention and fewer
resources for its brands, and (ii) the lesser importance of the Group’s
brands in the third party’s sales and/or a change in the competitive
environment. Change of this nature could have an adverse impact on
the Group’s reported results or outlook in these markets.
Risks relating to the Group’s geographic
footprint
The Group derives a considerable portion of its sales from emerging
markets in Asia, Latin America, and Central and Eastern Europe (Brazil,
Russia, India and China for instance). The Group’s operations in these
countries are exposed to political and economic risk, including risks
relating to change in government policy.
The Group is accordingly subject to a number of risks stemming from
exchange-rate controls, change in exchange rates, inflation, problems
with the repatriation of foreign earnings, dividends and investment
capital, as well as political instability in these countries.
I REFERENCE DOCUMENT 2008/2009 I