Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Investors should have been raising a glass to Pernod Ricard.

Instead, the shares fell 7 percent, the most in six months, after the world's second-biggest distiller failed to partake in the rebound in Chinese sales seen by industry rivals Remy Cointreau and LVMH.

This reaction looks harsh. Pernod Ricard said Thursday it gained market share in all of its key markets in the first half of its fiscal year  -- including China --  and lost ground in only the U.S., Korea and Mexico.

The news from America, which accounts for 17 percent of Pernod's sales, wasn't all bad. The U.S. still generated 3 percent sales growth, a big improvement on the flat performance in the previous full year.

The shares after Thursday's tumble trade on about 17 times the next 12 months' earnings, a discount of about 11 percent to both the European beverage sector and Diageo.

Premium Brand
Diageo tends to trade above Pernod, but changing tastes may unwind that trend
Source: Bloomberg

That discount's too deep, from the perspective of the company's fundamentals. Pernod consistently reports higher organic sales growth than Diageo. The latest results show a 3 percent gain versus 1.8 percent at its rival.

True, both companies are suffering from the same problem: American millennials are turning off from the the big vodka brands in favor of smaller producers. 

Yet Pernod's trying to boost the advantage it has with its Absolut brand, playing on its provenance. It's made only at a carbon-neutral estate in Ahus in southern Sweden, which should sit well with millennials' desire for authenticity and sustainability. Diageo's Smirnoff, named after a czarist-era Muscovite, has production facilities as far-flung as India, the U.S., and Australia. 

So far, this appears to be paying off. Pernod estimates its sales lag the broader U.S. market by about 1 percent, versus 2 percent a year ago. 

And while whiskey is in vogue in the U.S., it's American, Irish and Japanese blends rather than Scotch that are most popular. Pernod leads the Irish segment with Jamesons, while Diageo is the world's largest distiller of Scotch whisky.

This should help it to offset the continued weakness in China, which accounts for 9 percent of sales. Pernod's portfolio includes affordable spirits that will appeal to consumers in more austere times.

Getting Better
Pernod's organic growth picked up across the board, despite hit from China
Source: Company presentation

But it's not just being in the right place at the right time. Better execution also helps.

One percentage point of Pernod's organic sales growth came from new products, indicating that it's trying to cater to changing consumer tastes. Crucially, new products tend to have higher prices. Spending on advertising and promotion was also up 11 percent, demonstrating that Pernod is investing behind its brands in anticipation of sales growth. In contrast, Diageo's marketing spend fell 5 percent .

But there's more to assessing the premium than looking at company fundamentals.  At Diageo, investors are expecting a windfall.

Gadfly has already argued that Diageo is ripe for the intervention of an activist investor to reshape its portfolio and breathe life into its brands. Chief executive Ivan Menezes has come under pressure from some shareholders, who are becoming frustrated at the slow pace of his turnaround. 

But despite Diageo's attractiveness to an activist, no fund has yet been bold enough to come forward.

Shareholders are looking for an exciting night on the town, but are stuck in the queue outside the nightclub. While they wait to be let in, they should reconsider the advantages of a quiet night in with Pernod.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net