Can anyone break the Big Four’s Cognac grip?

Booming sales in China, a mature but strong market in the US offset by stagnant or slowly declining markets in Europe – that’s the global picture for Cognac at the end of 2011, as the figures of the Bureau National Interprofessionnel du Cognac (BNIC) illustrate.

Smaller Cognac houses are finding their own place in the market that’s dominated by the Big Four

China has been on fire for some years now, driven by sales of aged, expensive, high margin Cognac. This neatly complements the VS-reliant but still huge US market, and that neatness isn’t lost on the Cognaçais.

“Total shipments have been increasing significantly, in terms of volume and value,” points out Agnes Aubin, director of communications at the BNIC. “We have gone from a concentration of exports to a few countries to a balanced spread through three continents, which is a very good sign for Cognac’s future.”

It’s a view echoed by many in the region, including Rémy Martin CEO Patrick Piana. But when we talk about Cognac’s global markets – and especially when we discuss the dynamic growth in the emerging markets of Asia – we’re talking for the most part about four brands: Hennessy, Martell, Rémy Martin and  Courvoisier.

These multinational-owned powerhouses gobble up well over 80% of the total value in the Cognac sector, and more than 75% of volume, making it entirely understandable that all the media talk focuses on Martell’s surge in China, Hennessy’s dominance in the US, Courvoisier’s perceived over-reliance on Western Europe and Rémy Martin’s success with Louis XIII.

But what about the many other houses that dot the map of Cognac and which, without ever being able to match the marketing budgets of their enormous rivals, aim to carve out their own special niche in this golden age for one of France’s most successful spirits?

Bacardi’s D’Usse Cognac launched in the US in May

First of all, could any of them be serious rivals to threaten the dominance of the big four? Er, no. Not one of the second band of Cognac houses – names such as Camus, Baron Otard, Hine, Frapin and Delamain, plus regional players in Scandinavia including Grönstedts and Braastad – can muster much more than a 1% market share.

There’s been much noise about the US launch of Bacardi’s latest Cognac brand D’Ussé, but even if the newcomer fulfils the company’s wildest dreams, it’s unlikely to become even a twinkle in the Cognac firmament.

But does that matter? As with Champagne and labels like Moët and Veuve Clicquot, the existence of brands of the scale of Hennessy and Martell is the proverbial rising tide that lifts all boats.

“The Asian market is without any doubt controlled by the big players,” says François Le Grelle, Hine managing director. “Without wanting to put them in any definite order, it is important to measure the work that is done by these houses, and which enables the other houses to have an opening if they want to do so.”

For some, China – for all its astonishing recent growth – still isn’t a major focus. “At Ferrand, our customer is mostly an educated drinker,” explains Alexandre Gabriel, president of Cognac Ferrand. “Often our customers are single malt fans who discover Cognac. For this reason, we are more present in markets where high-end spirits are already doing well, such as the US and North Europe, for instance. So, for us, the booming sales of China don’t have a very big effect on our sales for the moment, while we continue to grow significantly in the US.”

But other companies – Camus springs immediately to mind – have made Asia a focus for years, and are reaping the rewards. Hine has made China a strategic market, not least because of the house’s focus on higher expressions of VSOP and above, which fits nicely with consumer demand. All very well, but is there a risk of being too dependent on the Chinese consumer?

The potential for Cognac in the Asian market is probably the biggest in the world, according to Le Grelle

“In theory our dependence on this market exists, but even if there were to be a significant decrease in sales, this would not really put us in danger, as in reality the market is so vast and is not supplied everywhere that there still remains space for all the houses who feel up to tackling this market,” insists Le Grelle.

China has been pretty much exclusively a VSOP-and-above market to date, with only small quantities of VS-grade Cognac shipped to the region in the past couple of years. As the market matures and the economic buoyancy of the country trickles down through the middle classes, this may begin to change.

“As these [Asian] markets mature and Cognac is increasingly used in mixed drinks, there could equally be an increase in sales at the VSOP or even VS level,” says Aubin. For Gabriel, however, the domination of older Cognacs in China is likely to continue “for quite a while”, and Le Grelle, too, is less than convinced, arguing that VS will not be “tomorrow’s product” in the region because of Cognac’s current positioning as a luxury.

Continued growth of luxury products from Richard Hennessy and Louis XIII to Hine’s rarer vintages and exclusive bottlings such as Ferrand’s Ancestrale is music to the ears of the Cognaçais; but the more decades-old Cognac you sell in China, the greater the toll on the region’s stocks of older eaux-de-vie.

Gabriel is fairly relaxed about the situation, arguing that it is “something that has been seen generation after generation”. But Le Grelle offers a less optimistic assessment: “The profile of the stocks is what counts, and effectively for the last few years now, China has been importing huge quantities of the oldest eaux-de-vie.” This, he continues, has resulted in “some tension” in the Cognac region, leading to “massive” price increases of up to three times as houses that have oversold try to rebuild their stocks of the older eaux-de-vie.

Le Grelle admits that Hine, too, is selling more of the older eaux-de-vie than in the past, but a stock coverage policy instigated some years ago is helping to ease the pressure and maintain supply and quality.

“Our vision for the Asian market is positive and we feel that this region is where the potential is perhaps the biggest in the world today and,in this sense, this diminishes any dependence solely on the Chinese market,” he says.

In any case, China is also doing a sterling job of building brand Cognac in the region’s other markets, Le Grelle adds. “It should also be added that the Chinese market offers excellent brand visibility, which enables us to be seen by all the other markets in the region – which would also give us additional solutions if there were to be a decline in the Chinese market.”

Cognac is beginning to settle in with young, educated consumers in France

Which other markets? Gabriel name-checks Vietnam, where he sees potential in the high end on-trade, including discotheques and restaurants in a similar way to China, while Le Grelle adds the names of South Korea, Malaysia and India which, he says in hope, “one day will finally open the doors”.

In most cases, Le Grelle adds, consumption trends mirror the clubs of Shanghai, Beijing and Shenzhen. “Cocktails are starting to appear here and there, but this remains in very select places, in major cities, and commercially the volumes remain relatively low. Today, Cognac is consumed during meals and at weddings in large bottles, sometimes up to three-litre sizes, and in nightclubs.”

The Cognaçais’ excitement over Asia in general and China in particular is as understandable as it is overstated. The US remains arguably the single most important destination for shipments from Cognac and Jarnac, being an established market of many years’ standing – even if about 60% of it is made up of Cognac’s lowest expression, VS. To Gabriel, the US market is “bi-polar”: dominated by VS at one end, but a good market for speciality, high-end Cognacs – which is where Ferrand is located. This niche, he adds, is “smaller, but growing”.

Hine’s avoidance of VS makes the US less interesting to the house, but Le Grelle admits that this may change. “The US market, not including the VS, is starting to look for artisan brands, and Hine fits perfectly in this category,” he says.

Asia’s dynamism… the “bi-polarity” of the US… but what about Western Europe, Cognac’s heartland, and still responsible for nearly 30% of its sales? What, indeed, about the home market of France, whose inexorable decline has seen it now sell barely one-tenth of the Cognac consumed in the US?

Even here, it seems, the Cognaçais are optimistic. “It is not too ‘hip’ in France for the moment,” admits Gabriel. “But we see pockets of interested, young, educated consumers, who have done all the single malts and are now looking at other high-end spirits. “It is going to take a while, but it will come back for sure. Cognac is for ever.”