Fortune Brands blamed for Absolut slump

Pernod Ricard SA, the distiller of Absolut vodka and Glenlivet scotch, plans to get through the recession and pay off its debts with help from the bartenders slinging $15 cosmopolitan martinis at Manhattan's STK.

The steakhouse was hopping on a cold, late-February night, with cobblestone-sized steaks served to Wall Streeters stealing glances at a corner table where NBA stars Elton Brand and Chris Duhon held court. "Not bad for a Wednesday night when it's raining," J.B. Woodwurth, who runs Paris-based Pernod's U.S. bar and restaurant business, said between bites of a ribeye served with truffle and parmesan fries. "You wouldn't know there was a recession from this place."

His boss, U.S. chief Paul Duffy, said the distiller is "absolutely not going to sacrifice margins" by cutting prices. Both men say STK's crowds and vodka's buzz in the trend-setting hip-hop world show there's enough punch left at the higher end of the U.S. market to resist the worst economy since the 1930s.

There had better be: Pernod almost doubled its debt last year to 12 billion euros ($16.3 billion) when it bought Kanye West-endorsed Absolut, America's second-most-popular vodka.

Pernod also spent more on ads after hiccups in distribution during the deal's completion drove sales down. Meanwhile, larger rival Diageo Plc kept its ad outlay flat and watched revenue from its cheaper Smirnoff brand increase.

However, Absolut still gives Pernod the long-term edge, according to Kevin Dryer, assistant vice-president at Rye, New York-based Gabelli & Co., which manages about $20 billion, including Pernod shares and a smaller position in Diageo.

Absolut vs. Smirnoff

"Diageo kind of missed the boat on premium vodka," Dryer said. "Absolut is a very important brand that changed Pernod from an also-ran to a prime contender in the U.S. Smirnoff has strength of volume. It's not so much a driver for profits."

After Diageo pulled out of the race for Absolut, it opted to instead buy a stake in Ketel One, a smaller premium vodka from the Netherlands. The U.K. distiller has "no regrets" about that decision, as Ketel One better met Diageo's financial criteria, spokesman James Crampton said. "Ketel One provides better growth. It complements our existing vodka portfolio globally, and we're extremely happy with it."

Pernod says Deerfield-based Fortune Brands Inc., which distributed Absolut on behalf of its former Swedish owners, discounted the brand to clear inventory after it lost out to Pernod in the bidding, and the French distiller lost sales after restoring regular prices.

Aside from Absolut, so far it's already paid off for Pernod to focus on free-spending Americans. "We may be a little more selective in which brands we are going to promote and where, but we are totally focused on the premium segment," Duffy said.

Jameson, Glenlivet

U.S. sales of Pernod's Jameson Irish whiskey, whose 12- year-old blend retails for about $40 per 750-millileter bottle, jumped 29 percent last year. Glenlivet scotch and Wild Turkey bourbon also improved sales by 7 percent and 3 percent, respectively. Profit for the six months to Dec. 31 rose 15 percent, Pernod said on Feb. 13, above analysts' estimates.

"There is still room for growth in the U.S.," said Trevor Stirling, an analyst at Sanford C. Bernstein, who advises buying Pernod shares. "Pernod has a very diverse portfolio and a very clear strategy to build on premium brands. It makes sense to continue building on that, even in a downturn."

The scene at STK suggests there's a crowd immune to the recession. To be sure, most U.S. nightspots and restaurants aren't doing as well. The U.S. Distilled Spirits Council says sales of liquor in bars and dining venues, measured per drink, fell 2.2 percent last year, the first drop since at least 2001, and the decline has accelerated since the beginning of the year.

"When you go into a recession, what's the first thing people stop doing? They stop eating out," said David Ozgo, the council's chief economist.

Drinking at Home

Americans may still choose to splurge at home. "When it comes to stuff like single-malt scotch, people still buy even the very expensive bottles," said Ed Bunter, 59, watching customers at his Warehouse Wines & Spirits store on Broadway in New York. Customer David Rieger, a store manager waiting to pay for two bottles of Jameson, said he was stocking up for a house party, and "trying to cut down" on socializing at bars.

Diageo is cutting its expenditures too. The U.K. company let its 2008 promotion budget contract by 1 percent as magazine ads and billboard space became cheaper.

Pernod, however, boosted its ad budget by 17 percent to 731 million euros in the six months through December, and now spends about 17 percent of its revenue on advertising, up half a percentage point from the same period a year earlier.

Hip-Hop Trends

Absolut ads drove that gain, though without the brand, the six-month spending increase was still 8 percent. The 2008 "In an Absolut World" campaign's Web site features videos including a fake infomercial by Kanye West, whose album 808 and Heartbreak made its debut at No. 1 on Billboard's U.S. chart in December.

While West's involvement ended with the new year, Pernod said it "expects to continue to connect" with hip-hop fans. They're an important target market for distillers: earlier this decade, Sean 'Diddy' Combs and Busta Rhymes rapped 'Pass the Courvoisier,' helping revive demand for cognac at the time.

Cognac has since fallen from favor, and Diddy now endorses Diageo's Ciroc super-premium vodka. Sales of Martell cognac are plunging in the U.S., and Pernod is courting a more avid market for the French brandy in Asia instead.

'Defocusing' Cognac

"There is a broader question of what African Americans are consuming today, and whether they are moving towards white spirits like vodka," Pernod's Duffy says. He adds that Pernod is "defocusing" cognac brands to stay on top of U.S. trends.

Elsewhere on Absolut World, gossip columnist Perez Hilton was filmed imagining his arrival in heaven. The videos deepen an edgy marketing tradition that made Absolut an icon soon after it was created in 1979, aimed at spicing up the image of alcohol distilled from local grain in southern Sweden.

Print ads mined references from literature and travel, featuring slogans such as Absolut Vonnegut and Absolut Prague, and the brand collaborated with Andy Warhol and Damien Hirst.

Besides glamour, Absolut gave Pernod distribution heft. Stirling says Pernod's U.S. sales increased about 50 percent in volume terms last year after it paid Sweden's government 5.3 billion euros for Vin & Sprit AB, Absolut's creator. Pernod declined to confirm that sales increase.

The French company also clinched better distribution deals with Republic National Distributing Co. and Southern Wine & Spirits of America, Inc. Southern Wine is among the leading alcohol distributors in markets including California, Florida and New York state. Under a deal announced in January, the distributors now have teams that sell only Pernod brands, Chief Executive Officer Pierre Pringuet said on Feb. 13.

Those teams have some catching up to do. U.S. Smirnoff sales in the last six months of 2008 rose by 3.4 percent, while Absolut revenue fell 3 percent, according to data by AC Nielsen. Smirnoff's sales by volume are about twice Absolut's.

Absolut "gave great depth to our business here," Duffy said. "When you have that kind of volume you get priority. You get focus and resources. People begin to pay attention."