China’s Cognac demand proving a challenge

Demand in China is growing and creating a supply-demand imbalance and consequent price rises – but the Cognacais are loathe to alienate their established markets. By Richard Woodard

There’s only so much aged Cognac available, making luxury releases a tad tricky

China remains Cognac’s promised land, a country whose appetite for luxury appears insatiable, but in 2013 there’s a growing feeling that both market and product are evolving and developing a more nuanced approach in Shanghai, Beijing and beyond.

Having long ago outstripped the VS dominated US in value terms, Greater China now appears intent on taking America’s volume crown as well. Indeed, combine the shipments for China, Hong Kong and Singapore for the year to March and it’s already done so in some style.

Within this broad picture of prosperity, Cognac’s big players are eyeing the next stage in the market’s development. As a Rémy Martin spokeswoman notes, “clubs, restaurants and KTV lounges” remain the mainstays of consumption, but political changes and corruption scandals are, for instance, reducing the number of government banquets.

“Lavish spending seems to have stopped,” observes Frédéric Beerens, export director Asia Pacific at Cognac Frapin, while Hine CEO François Le Grelle reports flat sales of the company’s H by Hine three-litre format – a product specifically aimed at the banqueting market.

Retail could be the next big opportunity in a country where home entertainment is still a relatively rare concept. As the wealthy Chinese inherit the Western habits of shopping and dinner parties as leisure pursuits, Cognac is a likely beneficiary.

Geography represents more potential. Traditionally, Cognac’s heartland has been confined to the south of China, but Rémy for one is out to change that, organising a number of events in the west and north. “It’s a real ambition to try to get a well-balanced volume everywhere in China, even if the south is still the most important,” says the company.

And it isn’t alone. H Mounier CEO Christophe Juarez says all the prominent Cognac houses are targeting China’s second- and third-tier cities, and Hennessy – whose first shipment arrived in Shanghai aboard a brigantine in 1859 – is expanding into previously untapped cities such as Wuhan and Changsha.

The Cognacais fear increasing costs could price Cognac too far above other brown spirits

Supplying this apparently inexorable demand is the challenge facing the Cognaçais in 2013. Selling lots of aged Cognacs is great for profitability, but you can swiftly become a victim of your own success. Nobody saw this coming decades ago – so nobody laid down the stocks necessary to cope with the current boom.

The market value of eaux-de-vie has soared to stratospheric levels, in some cases increasing three or fourfold in the past five years, calculates Charles Braastad, MD of Delamain. Even in the past 11 months (April 2012 to March 2013), BNIC figures show that the price paid for grande and petite Champagne eaux-de-vie from the 2006 and 2007 harvests has more than doubled. Nor are these huge cost increases confined to the finest crus: prices for more “humble” fins bois and bons bois spirit have risen by similar amounts over the same period.

Put simply, the shipping east of so much old Cognac has “upset all the stock management strategies in the region”, says Le Grelle, who adds: “This has resulted in stocks needing to be reconstructed, which has obliged certain operators to buy more than usual to cover not only their immediate needs but also to start to put aside some of their purchases to rebuild their old eaux-de-vie stock.

“This has caused an imbalance between supply and demand, with huge price increases on all the eaux-de-vie, whatever the quality or the cru, which are not already in contracts that have been signed between the wine growers and the houses.”

The consequences of this scenario are as inevitable as they are dangerous: rising end prices and the risk that the market could overheat as a result. “The consumer hates price increases,” observes Juarez. “We are already threatened by other brown spirits. If we become too expensive the buyer will move to another shelf.”

It’s a fear echoed by Cognac Ferrand president, Alexandre Gabriel. “This is the big question,” he agrees. “I think that it is very important not to burn bridges and I think that we all understand this. Yes, China and emerging markets are buying a lot of Cognac and it is a good thing. [But] we also must keep in mind our historical markets that have been doing so much for Cognac.”

This last point is one well understood throughout Cognac, with Rémy Martin, for instance, on record as wanting to preserve a balance between the markets of Asia, America and Europe – however tough the challenges are within Europe at present.

Thus, however great the temptation to the contrary, China is emphatically not the basket into which the Cognac producers are depositing all their eggs. Leading players namecheck a lengthy roster of Asian markets, Hennessy reports growth in Nigeria and South Africa, while Braastad talks enthusiastically of “building our brand from scratch” in India, where Delamain has recently found an importer in Mumbai.

The price paid for grande and petite Champagne eaux-de-vie from the 2006 and 2007 harvests has doubled

Camus, meanwhile, plans to open a full subsidiary in Vietnam later this year, where a younger consumer base with a passion for premium Cognac augurs well for the future. And the next great potential trend back in China? VS. Previously concerned that pushing entry-level products might drag the market down, companies are increasingly changing their view. Hennessy has been selling Classium, a “Generation Y”-targeted VS in all but name, in China for two years and it’s still growing. The likely rise of VS is at least partly driven by reality and the availability of aged stock, but both Gabriel and Beerens believe the classification has a key role in targeting younger consumers and, in particular, the emerging middle classes.

However, there are dissenting voices too. At H Mounier, Juarez thinks pushing VS is a “mistake” and adds: “It is a real threat if some players are tempted to go in that direction. To downgrade the market is a nonsense strategy, just the opposite of the premiumisation phenomenon that boosted categories with a strong legacy like ours.”

Cognac’s fear of getting it wrong in China is both understandable and rooted in history. More than 20 years ago, the eastern El Dorado was Japan, only for recession to strike and send Cognac spiralling into a slump from which it has never recovered.

Could the same happen in China? It’s hard to believe, given the traction and volumes which the category has secured over the past decade or two, but there are enough doubts about the market’s future evolution to make the next few years potentially twitchy for the Cognaçais. Then again, maybe Japan isn’t dead and buried anyway. Rémy Martin is launching a renewed push there, citing positive trends and a whisky-loving market ripe for another look at Cognac. “For sure, Cognac has its place, but we need to do more education,” says a spokeswoman. “Our approach is to talk about the product, to talk about history, authenticity, tradition and legacy – all values which can reach the hearts of the Japanese people.”

A resurgent Japan? To inject a little realism, that looks at best a long-term bet, but it would certainly spread the market risk beyond China and the US for the category. That is, of course, as long as there’s enough Cognac to go around.