Cognac brands must ditch ‘generic’ branding to thrive
At first glance, latest figures tell a rosy tale of redemption for Cognac, but producers need a fresh approach to tackle ongoing market challenges and complexities
Speak to almost any Cognac producer and they will tell you that their industry has adjusted to a ‘new normal’ over the past 12 months.
Global sales have significantly increased as difficulties in China subside and the US market continues to go from strength to strength, with VS and VSOP expressions now driving growth. Luxury XO brands have failed to bounce back at the same rate, but Cognac houses with a full ladder of products certainly have reason for renewed optimism in 2016.
Data released by trade body the Bureau National Interprofessionnel du Cognac (BNIC) earlier this year confirmed the category’s recovery. Record shipments were witnessed in 2015, increasing 8.5% by volume to almost 168.9 million bottles and 21.3% by value to €2.6 billion (US$2.9bn).
“This dynamic was seen on all the famous Cognac markets – America, the Far East and Europe,” claims Ruslan Grigoryev, development director of Ladoga Group, maker of the Roullet Cognac brand. “Today, young VS continues to progress and the category is now more than half of total Cognac sales, with a skew towards the US market.”
Indeed, North America, spurred by demand in the US, proved once again to be the strongest market for Cognac, importing 65.3m bottles last year. Cognac’s performance in the long-beleaguered Chinese market bounced back to 2013 levels, growing 23.4% to 1.4m nine-litre cases, in turn bolstering overall sales in the Far East. Furthermore, China’s growing demand for VSOP variants has led to “significant improvement” for the sub-category, which now accounts for 40% of global Cognac exports.
However, volumes of older variety Cognac fell 4.7% due to lagging demand in China, traditionally a haven for luxury buying. The vicissitude of the category in China has been well documented since a government-backed austerity campaign launched in 2012. Sales of the ‘Big Four’ Cognac houses – Rémy Martin, Hennessy, Martell and Courvoisier – were all hit by destocking in the market, and while most have now heralded a return to growth, this progress is skewed towards VS and VSOP.
Nevertheless, value sales of XO expressions increased 8.1% last year. It is in this new environment of altered market dynamics that Cognac producers are attempting the tricky task of establishing stable growth strategies.
“For me, the situation in China just needed to settle down a bit and now we are seeing growth at a more affordable level,” says Jeanette Edwards, global director at Beam Suntory-owned Courvoisier. “China has always been a small part of our business because our strength lies in the US, UK and travel retail, which are more driven by VS and VSOP. But we certainly see an opportunity in Asia.”
In a report released last year, analysts at Rabobank argued that there is “even more room for optimism” among Cognac producers than before Asia’s slowdown. The contemporary market is a “truer reflection of real consumer demand”, they claimed, creating a “rational environment for long-term sustainable brand-building”.
While many brands agree this is the case, they are not blind to the complex geopolitical challenges that continue to stymie their international ambitions. Mirroring the challenges of categories across the spirits sector, Cognac has been hit by market turmoil in Russia, Latin America, and numerous other emerging markets.
“The current situation is relatively paradoxical as globally for exports the figures are positive but Asia, Russia and Africa have not been as successful as hoped for over the last two or three years,” admits François Le Grelle, CEO of Hine Cognac.
“There is a clear upturn in certain qualities such as VS, notably in the US, and a significant decrease in premium eaux-de-vie generally. In this environment, the big players are coming out better than the smaller houses.” Charles Mazeau, export and sales manager at A. de Fussigny concurs: “Things have gotten a little better lately, [but] mostly for the big brands as importers and wholesalers are still reluctant to take risks with smaller producers. The situation is getting better, but it takes time.”
As VS and VSOP brands steer growth in the category, Cognac brands now find themselves vying for shelf space with higher end whisky, rum and gin. “What we do know is there’s a big crossover between Cognac and Scotch drinkers,” says Edwards.
“One third of malt whisky drinkers drink Cognac.” She adds that this insight led Courvoisier to create a new travel retail exclusive range that uses “whisky language” in a bid to capture malt enthusiasts. “The jury is out for now on whether it will work, but the research we found was very compelling,” she claims.
Mazeau also identifies positive opportunities for Cognac in what has been seen as a loss of loyalty among spirits consumers, meaning they now flitter between both brands and categories. “[Consumers’] brand sensitivity has started to fade away,” he says. “This process will happen in all categories, including Cognac, and we small producers will benefit from this.”
However, due to the stringent laws that regulate the production of Cognac, can producers compete on an even keel with brands from other categories and meet their levels of innovation? Hine’s Le Grelle is sceptical. “The AOC (Controlled Appellation of Origin) for Cognac is very restrictive, implying tight control on potential product development,” he states. “This is a great way of protecting our tradition, but implies less evolution than other fast-growing categories – rum for example.”
In order to increase its experimental offering, in 2014 Hine released a single estate and single vintage Cognac made using grapes sourced from the house’s 70 hectares of vineyards in the prime Grande Champagne enclave of Bonneuil, called Domaines Hine Bonneuil 2005, and is preparing to release a 2006 variant. According to Le Grelle, the range is an “exciting way of magnifying the very best plots we own, stepping off traditional blends”. The CEO believes this focus on “micro-provenance” is a strong innovation offering in Cognac and is where Hine’s “efforts are focused”.
Other leading brands believe the rise of VS and VSOP has provided an opportunity for Cognac brands to solidify their position in cocktail culture, at the same time recruiting new millennial drinkers. “Cognac was one of the first spirits used in cocktails and there’s a massive resurgence in classic cocktails across the US,” states Edwards. Fellow market leader Hennessy agrees that bartender advocacy provides an ideal growth avenue.
A spokesperson for the brand claims: “There is a need for on-going creation with a continued focus on cocktail innovation, alongside education and inspiration for the on-trade to keep the category growing and evolving.”
Despite ample opportunities available to Cognac, some producers have called for a radical revaluation of marketing tactics. For David Baker, managing director of Brandy Classics and Hermitage Cognac, the category needs to move away from “generic” branding. “Many retail outlets offer far too many ‘me too’ products all with the same age classifications – this is not a consumer choice,” he argues. “Customers seek greater individuality and another VSOP is no longer good enough.”
However, he adds a note of caution: “We have to be careful that we do not lose the traditional values of Cognac. Driving sales along the volume market route certainly provides short-term success but if we lose the image of Cognac we will lose the uniqueness of the product.”
While once defined by flash packaging and high price tags, Cognac now needs to communicate its heritage and production methods to an educated consumer base, believes Courvoisier’s Edwards. “I don’t think there has been a lot of communication about how Cognac is produced and there’s an opportunity here to tell the story further,” she claims.
“If you look at the whisky category, producers here also have challenges, but Scotch brands have done a better job at talking about their products than Cognac. We need to tell consumers why it’s worth paying more for Cognac and now is the perfect time for reappraisal as we have a lot more to say.”