Mixed fortunes: Cognac’s rise slows

While Cognac’s meteoric rise in Asia appears to be slowing down, it is also undergoing a reinvention in the region’s bars, while edging towards new frontiers in Africa, writes Richard Woodard

WHISPER IT, but could the Cognac boom be coming to an end? August and October figures from the Bureau National Interprofessionnel du Cognac (BNIC) show export shipments were either flat or down on last year. The Cognac market, which has been on fire for the past few years, could finally be cooling off.

It might be no bad thing. The Far East’s insatiable thirst for aged Cognac is squeezing supply and inflating the cost of older eaux-de-vie. Grande Champagne spirit with a decade or more in barrel was changing hands for just over €4,200 per hectolitre of pure alcohol in December 2011 (BNIC figures) – by October 2012, that figure had risen to nearly €5,700.

Such price increases are “causing serious difficulties” for many houses, says Hine MD François La Grelle – a point echoed by Philippe Jouhaud, sales and marketing director at Bacardi-owned Château de Cognac, owner of Baron Otard. “When you have a good part of your growth coming from China and old Cognacs, it’s very difficult to cope with that,” says Jouhaud. “Clearly in the region there are some shortages.”

AGE CONSENT

A bad time, you might think, to increase the minimum required age for XO, one of the main drivers of value in China and elsewhere. And yet, come 2016, it will be forbidden under BNIC rules to sell XO with fewer than 10 years in the cellar (the previous minimum was six).

The rule change was agreed in 2005, before luxury Cognac in China took off, but could the BNIC change its mind? Bertrand Laclie, owner of Maison René Laclie, hopes so. “It has to be abandoned,” he says. “It is completely unrealistic if you look at the market today.”

Others are not so sure, although all can see the cold logic of the move. “If today this regulation was revised, this would certainly – at least momentarily – give a little more oxygen back to some of the smaller suppliers, who would see this as an opportunity to be able to obtain eaux-de-vie for which they have an urgent need, at a more reasonable price,” says Hine’s La Grelle.

Any U-turn at this late stage risks looking ruthlessly cynical, but the fact that it is even being debated is indicative of the transformative power of the Asian Cognac boom of recent years. That boom is evolving, both within China and in Asia at large. Vietnam, from a small base, is beginning to resemble a “mini- China”, with its big population and love of VSOP and XO. South Korea is showing signs of recovery after a tricky recent past, and Burma’s rehabilitation on the global stage – most evident in President Obama’s recent visit to the country – is already catching the eye of several Cognac houses.

MIXED BLESSING

But the game in Asia remains one played predominantly in Greater China – and there are signs here that the rules are changing. Geographically, first: Cognac is increasingly breaking out of its stronghold in the south and east of the country, spreading to fast-growing cities in the interior, and to the north and north-west.

And in terms of trends: banquets, corporate entertainment and gifting remain hugely important, but Hennessy VSOP is now increasingly consumed in clubs, mixed with ice, soda, tonic or ginger ale, served in jugs or sold by the bottle.

Meanwhile, Camus president Cyril Camus highlights an increasing interest in the taste (rather than purely the glamour) of Cognac, and in the differences between individual brands – alongside a fast- developing bar culture. “Cognac has a place in that scenario, and that’s where we have positioned our brand,” he says. “Tapping into this, we created our own lounge in downtown Beijing’s business district. It’s all about the product there, as opposed to music or entertainment. Other brands position themselves as a banquet or nightclub brand. We’re taking a different route.”

China is famously all about VSOP Cognac and above, but official figures show a small but growing proportion of VS being sold in the shape of products like Hennessy Classium. Jouhaud is concerned that this might be counter- productive to Cognac’s luxury positioning, but to Courvoisier senior marketing manager Claire Richards, this is part of the evolution of the market – particularly the drive into bar consumption, mixed drinks and cocktails. “And there is only a defined amount of liquid to go around,” she points out. Supply concerns again. And if this is beginning to affect China, what impact is it having on the rest of Cognac’s world? When sales are surging in Beijing, Shanghai and Guangzhou, why would you bother with cash-strapped eurozone consumers?

“We are holding our position in Western Europe, which for us means Germany, Belgium and the Nordics,” counters Jouhaud. “There is no way that we will forget about these markets. They remain very important and [the boom in Asia] doesn’t mean that we should totally divert and neglect the markets in Western Europe.”

For some, holding onto historic market positions despite slowly declining sales is a function of fear – the dread that China might “do a Japan” and collapse as that market did 20 years ago.

Jouhaud doesn’t think that will happen – “the fundamentals in China are very solid” – but finds another reason for Cognac to maintain a high profile in the West: “The Chinese are travelling, so the product needs to be visible in the key on-trade accounts in cities like Paris and London.”

REGARDING EUROPE

Others simply cannot compete with the big four in markets such as China and Vietnam, meaning they can ill-afford to turn their backs on the West. And yet, if you believe a few dissenting voices in the region, that’s exactly what is happening as more and more houses scrabble for the riches in Asia’s El Dorado.

“I think the whole Cognac region is neglecting our historical markets such as Germany, the UK and the US,” argues Laclie. “The price increase on the raw materials will lead to a lot of markets that are going to be lost.”

This is particularly true for smaller houses, he adds, which face trying to enforce price increases of 40% in less than a year on reluctant (to say the least) market gatekeepers. “So I am afraid that many importers will decrease their orders, or stop completely. We are in competition with whisky, and you do not see such price increases in whisky.

“And if I was an importer of Cognac, I would be fed up with this bullying attitude, and this price instability. To be honest, I would look for other products. Nobody plays the game in the Cognac region. There is a lot of stock in the region at the moment, but most farmers are playing a speculating game, and most of them forgot that we have a final consumer who is going to buy a bottle.”

If Laclie is angry about the means being employed by Cognac at the moment, he is equally sceptical about the end. “Even if China becomes the number one market,
it will not absorb the losses in Europe that we are facing at the moment,” he says. “And will it be wise to depend on one market only? Does the region of Cognac want four or five big players only?”

This fear of over-reliance on the markets of the Far East is perhaps natural, but also easily overstated: China may now be Hennessy’s biggest market by value, but it’s a different story in volume terms, where the VS-dominated US market continues to play a huge role.

Cognac is holding steady here amid a rising tide of innovation (see chart above) and signs of growing interest in smaller brands and “artisan” products – illustrated by the work of brands such as Ferrand, and Hine, which has just appointed Anchor Distilling Company as its new importer to focus on the on-trade.

WHERE NEXT IN THE WORLD?

In the longer term, whatever happens to Cognac in Asia, companies will begin to look further afield to expand their international footprint. But where? Latin America, now a huge market for Scotch whisky, is little more than promising for Cognac, with only Mexico featuring in the sector’s top 20 markets.

Philippe Manfredini, international director at Cognac Frapin, admits that volumes remain “rather limited” in the brand’s local markets of Chile, Brazil and Uruguay, but has noticed a “growing interest” in the category across the region, and in Brazil in particular.

The presence of domestic brandy here and elsewhere in the world might provide a leg-up, rather than unwanted competition.

Consumers already understand brandy/Cognac and, as economies improve, aspire to the category’s luxury expressions – a theory which, Richards at Courvoisier suggests, holds true for markets as diverse as Mexico, Brazil, India and South Africa. “When I was in Cape Town recently, young people were drinking Cognac like they would vodka in the UK,” she reports.

Similarly, Jouhaud and Baron Otard are setting their sights beyond the obvious Cognac hotspots next year, and not necessarily in Latin America. “We see more potential in other parts of the world, markets that have been quite neglected like Africa,” he says, pointing to fast-rising sales in Nigeria. “The demand is consistently growing – and South Africa too, where the economy is getting better.”

Whatever the continued status of China and Asia, if Cognac wants to emulate Scotch and carve out a significant presence in a growing number of markets, houses will have to secure the necessary supply – which brings us back to where we started.

In 2013, the BNIC is set to launch a major study into long-term production planning for the Cognac region. The temptation simply to plant lots of new vineyards – the area has ample space for that, unlike Champagne – is an understandable one, but it comes with all the risks of engineering a glut, should demand diminish in the years to come. Instead, many would like to see more made of what the region has already. “Rather than planting, it’s more about investing in the existing vineyards,” argues Jouhaud. “A lot are damaged and not operating at full capacity. We could easily produce more per hectare – it’s more about fixing what already exists.” Anecdotal evidence suggests that Cognac’s existing vineyards are operating at 75% of their capacity, and Hennessy says it paid 10% extra for the 2012 crop “in order to allow producers to work on their vineyards … It’s very important to take care of the weak vine stock to allow vineyards to answer to the increasingly strong demand”.

A cynic might suggest that the 10% price premium was more to do with securing supply than some avuncular concern for the health of growers’ vineyards. But if one of the consequences of Cognac’s current boom – however long-lived it might be – is a renewed focus on viticultural excellence and production efficiency, few in the industry can complain about that.