The proposed tariffs on European whiskies being put forward by the US government are likely to be credit negative for Diageo and Pernod Ricard, ratings agency Moody’s has warned.
In a new report, Moody’s said that the tariffs would likely affect the profit pools of both firms in the US.
Major Market
The US accounts for 35% of the net sales of Diageo and 18% of the net sales of Pernod Ricard, across all categories.
According to Moody’s, Diageo and Pernod will have to choose whether to pass on any tariffs on impacted products to their customers, or alternatively absorb the higher costs themselves.
‘Higher prices will reduce volumes and more US customers would probably switch to local whiskies, while the decision not to increase prices would erode underlying margins,’ Moody’s said.
The ratings agency cited the examples of Brown-Forman Corporation, which saw its gross margin fall 160 basis points in the year to April 2019, due to EU tariffs on American whiskies.
While its portfolio includes the likes of Johnnie Walker, Diageo’s whiskey arsenal also includes a ‘significant contribution’ from whiskies not located in the UK and Ireland, which could help to offset volume declines, according to Moody’s.
‘Modest Slowing’
The ratings agency added that while tariffs would create ‘additional uncertainty’ around Diageo and Pernod Ricard’s operating performance, it is likely to lead to a ‘modest slowing’ of both firms’ earnings growth.
‘This is because the companies will continue to benefit from strong geographical and product diversification which continue to support profit growth,’ Moody’s said.
The US government’s decision to impose tariffs on European whiskies stems from a recent WTO ruling that the European Union subsidised Airbus, which has long been a contentious issue for the US, home to rival airline manufacturer Boeing.
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
