PERNOD-RICARD - URD 2020-21

____ 4. RISK MANAGEMENT RISK FACTORS

4.2.2 Risks relating to business activities I. 1. Geopolitical and macroeconomic instability

Description of key risk factors

RISK IDENTIFICATION AND DESCRIPTION

POTENTIAL IMPACTS ON THE GROUP

Due to its international scope, the Group Pernod Ricard is exposed to the risks of geopolitical tensions and macroeconomic instabilities. The acceleration of the protectionist trends observed in recent years may lead to an increase in customs barriers, as was the case in the context of the trade conflicts between the United States and China, on the one hand, and the European Union, on the other. In addition, the global sanitary crisis triggered by the Covid-19 pandemic has increased the risk of the resurgence of a global macroeconomic crisis and social unrest.

These geopolitical and macroeconomic disruptions in the Group’s markets could lead to heightened volatility in Pernod Ricard’s commercial and financial results. Macroeconomic instability and, in particular, potential constraints on consumer purchasing power, may have a negative impact on consumption opportunities and the Group’s sales. Sustained geopolitical tensions could also lead to difficulties in accessing certain markets. These economic crises and trade tensions could weigh on the Group’s operating margins.

RISK CONTROL ANDMITIGATION For the Group, the best way to protect itself is to diversify its activities, both geographically and by category: it is present in 73 countries and has a leading brand in all major spirit categories. Pernod Ricard continues to develop new distribution channels (e-commerce, home entertainment) and to exploit new consumption opportunities, such as the “low/no alcohol” trend. Accordingly, the Group regularly reassesses its routes-to-market and local partners. In addition, crisis management programmes are in place in all affiliates. Similarly, in certain cases, the Group may increase prices in order to mitigate the impact on margins. Finally, under certain circumstances, production and logistics infrastructures can be adapted.

2. Pressure on prices and margins

RISK IDENTIFICATION AND DESCRIPTION

POTENTIAL IMPACTS ON THE GROUP

The concentration and consolidation of distributors both locally and internationally has been ongoing for several years. E-commerce is also becoming an increasingly important alternative to traditional distribution channels. This competitive environment affects the Group’s ability to increase its prices and may sometimes force Pernod Ricard to organise more aggressive and frequent promotional campaigns. The Group also faces heightened competition from both major international players on its strategic brands and local groups or producers on its local brands, driven by the increasing success of craft products, as is the case with vodka in the United States. Lastly, purchase price inflation (materials, services) is closely monitored by the Group in order to limit pressure on margins.

Potential impacts include: the increased bargaining power of Pernod Ricard’s customers leading to margin erosion and/or loss of market share; temporary delisting of products on shelves and/or removal of promotional materials; pressure on Pernod Ricard to align prices across markets within a region; the more intense competition in mature markets and the increasingly competitive nature of emerging markets, requiring the Group to boost its advertising and promotional investments, or even to reduce or freeze prices in order to protect market share, thereby weighing on results; damage to the brand image of products, resulting from price reductions; and a decrease in margins due to a deterioration in purchasing conditions from the Group’s suppliers and/or a limited ability to reflect cost increases in the price of its products.

RISK CONTROL ANDMITIGATION To mitigate risk, Pernod Ricard earmarks approximately 16% of net sales for A&P investments to reinforce brand equity and, in turn, the ability to increase prices. In addition, Pernod Ricard has rolled out several initiatives to boost net sales (Revenue Growth Management), such as the development of a promotional effectiveness tool, the analysis of commercial conditions and pricing structures, and the implementation of dedicated pricing resources. These initiatives are adopted in the affiliates and coordinated at Group level by the Headquarters. Particular attention is paid to the operating margin, a key indicator monitored by the management control teams. The Group has put in place the appropriate organisations and initiatives to ensure satisfactory purchasing conditions for its raw materials while maintaining relationships of mutual trust with its key suppliers.

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PERNOD RICARD UNIVERSAL REGISTRATION DOCUMENT 2020-2021