Research in Focus - Cognac Enjoys New "Golden Age"
Cognac is booming thanks to new thirst in Asia
From the somewhat depressing perspective of recession-ravaged Europe, the idea of any sector of the premium spirits market enjoying a golden age may seem somewhat surprising. But, thanks to the contrasting fortunes of emerging Asian markets, Cognac is experiencing precisely that, according to a new report from The IWSR and just-drinks.
It may be hard to credit as Europe and the US still recover sluggishly from the global downturn, but these are buoyant times for Cognac, a premium spirit associated in the past with economic prosperity, boom years and conspicuous consumption.
However, while the Louis XIII may not have been flowing all that freely in London and New York in recent years, in the Asia Pacific region Cognac sales are booming, according to a new IWSR/just-drinks report.
Having risen by 6.3% in 2010 to 11.4m cases, global Cognac shipments maintained that momentum in 2011, setting a new record at 162.9m litre bottles, according to the IWSR/just-drinks Global market review of brandy and Cognac – forecasts to 2016.
Between 2005 and 2010, the Asia Pacific region almost doubled its share of global Cognac consumption from 16.5% to 25.4% mainly due to growth in China, while Europe saw its share fall from 31.7% to 25.8% and the Americas from 37.5% to 32.8%, according to the report
In value terms, the shift towards Asia has been even more pronounced. The report suggests the "really dramatic aspect" of the current Cognac market is the growth in retail value sales. "In 2010, retail value (domestic and travel retail) hit US$7.16bn, surpassing the previous record of US$7.06bn in 2008. In 2005, retail value stood at US$4.9bn and just US$3.8bn in 2001. Much of this improvement is driven by Asia and travel retail," the report explains. Sales in travel retail have "recovered strongly" rising by 24.4% in 2010 to 1.3m cases.
It is the growth in Asia and travel retail that has allowed Cognac to enjoy such good times while other premium-orientated consumer goods sectors have endured recession-induced misery.
"Asian markets weathered the recession much better than Western markets. With economic growth, millions more consumers are entering the middle class every year. Armed with disposable income, these new consumers are seeking out products such as Cognac or Scotch that are a reflection of that new status."
Indeed, the report goes as far as to state that Cognac is in "the throes of a new golden age".
The previous golden age was something of a Cognac 'bubble' when very strong growth in the late 1980s and early 1990s, driven largely by growth in Japan, was followed by almost a decade of flatlining after the booming Japanese economy hit the buffers. That the global market is only now recovering to the previous record high of 11.62m cases in 1989 gives some idea of the market's more sedate progress since that boom.
Cognac's strong growth in Asia has coincided with a contraction in European markets, leading many to conclude that the sector is now looking at a two-speed world, with the balance of consumption continuing to shift from west to east.
"In general, consumers in Asian markets, particularly China (including Hong Kong), Singapore, Vietnam and Malaysia, are trading up to more premium brands and quality levels due to a combination of increased wealth, the perceived status of the drink and an increase in on-premise outlets."
So this golden era for Cognac is arguably built on a firmer foundation than that seen in the 1980s and 1990s, being fuelled by growth across a number of countries - albeit with China as the most important market by some margin - and a generally steadier growth curve.
It appears the only fly in the ointment for Cognac, as a delimited area, is meeting the demand, particularly as the emphasis in China is on aged qualities.
"One natural cap on Cognac’s expansion in China, at least from a product standpoint, is tightening supplies of aged inventories. This raises the question of whether there will be enough Cognac to satisfy growing demand, particularly for the higher qualities."
This potential lack of capacity is particularly worrying given Cognac's competition with Scotch whisky in these markets. While Cognac may have overtaken Scotch whisky in China in 2010, in many Asian markets Cognac and Scotch compete head-to-head in the premium categories. Cognac held sway for many years in ultra-premium and luxury purchasing but, the report points out, Scotch whisky has successfully moved into that space with new premium offerings which rival Cognac for quality, imagery and price.
In theory, any shortfall in aged, high-quality Cognac could create an opportunity for Armagnac, a comparable product in many ways. However, one of the key distinctions between Cognac and Armagnac has been the former's far greater international success and recognition. "Armagnac does rival Cognac in terms of pricing and premium imagery. However, it suffers from its inability to produce on any great scale due to its adherence to the historic production method," the report states.
Total sales of Armagnac are therefore fairly limited, at just 232,950 cases. Around 57% of sales come from the domestic market though sales in France have been steadily declining, a trend which continued in 2010, according to the report, when sales fell by 6%.
Meaningful export development, and particularly any attempt to ride in Cognac's slipstream in Asia Pacific, still appears a distant prospect for Armagnac. There has been little investment in the region by multinationals and the principal export markets are countries with strong ties to France, according to IWSR.
However, the report states that the recent performance of Armagnac in Russia does give "some cause for optimism". Last year Armagnac sales in Russia increased by 62% from a small base to reach 17,000 cases. Pointedly the report also suggests potential for Armagnac in China.. "China is also seen as having good potential, although producers acknowledge that there is a considerable amount of educational work to be done there."
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