Ian Buxton

Comment - Spirits - Cognac/Brandy: East is East

By | 21 June 2013

A recent bout of activity in the Cognac region - from investment to divestment - suggests lively times ahead for the brandy and Cognac category. Ian Buxton looks at the headlines, and sees his eye being drawn east, not only for future growth, but also for future Cognac players.

Exactly what is happening in Cognac? On the one hand, there is a long-running story of continued progress, expansion and long-term growth. Yet, on the other, some seem more pessimistic, particularly when considering the until-recently booming Chinese market, suggesting the purge on Government gift-giving in the country may depress sales for the foreseeable future.

Despite moving back into Scotch with the purchase last year of Bruichladdich (the historians amongst us will recall that they were previously represented by the tiny Glenturret operation from 1981 to 1990), Remy Cointreau is still heavily dependent on Cognac – and on Cognac in China - for around 40% of its operating profits. While production at the Islay distillery has been stepped up, it will be years before this additional inventory is available for sale as mature single malt. Company CEO Jean-Marie Laborde was recently moved to acknowledge that not everything in China was going Rémy's way, with the gift-giving crackdown hampering luxury sales and inventory issues, while a resulting weak Chinese New Year affected wholesaler shipments. He stayed clear of the word “slowdown” though, opting instead for “soft” and “lacklustre”.

Alongside that, Pernod Ricard’s chief executive, Pierre Pringuet, also said in April that he expects sales for high-end alcoholic drinks in China to remain sluggish until the end of the year, before rebounding in 2014. The group's Martell Cognac brand will be far from immune from the climate in the country, with performance softening in recent months.

Yet, despite this, Remy Cointreau, Moet Hennessy and Pernod are all looking to expand production back home. In contrast, CL World Brands is seeking to dispose of the Hine house, although this is evidently more to do with the travails of ultimate parent CL Financial than specific fears about the long-term future of the Cognac market.

So, with some alarm bells sounding in China, who might be the runners and riders in a Hine auction?

It’s worth considering that it may not just be the usual suspects – Diageo, Pernod Ricard, Bacardi and so forth – who could enter the fray. In fact, all of the above are probably unlikely bidders.

Rumblings out of Diageo suggest that the company is far more interested in acquiring the majority share in Moet Hennessy from its parent, LVMH, rather than chase the smaller Hine, despite the undoubted cachet attached to the brand. Moet Hennessy has ambitious growth plans for its Hennessy Cognac brand, recently acquiring a 30-hectare plot of land on the outskirts of Cognac to build a new bottling plant. "A couple of years ago, we announced plans to increase annual output from 5m 12X70cl cases (in 2010) to 10m cases by 2025-2030,” a spokesperson for Moet Hennessy told just-drinks.

Meanwhile, Pernod’s recent acquisition of Le Maine au Bois may have sated the need for stocks to support Martell and, in any event, Martell’s recent growth rates (+23% by value; 8% volume 2012/13) hardly suggests an urgent need for an infusion of brand glamour. The company did not respond to our request for further information on the Le Maine au Bois, offering no more than April’s low-key announcement. 

Although unlikely, Bacardi could be a more likely home. The privately-held group already has Baron Otard amongst its plethora of brands, and Hine would sit nicely above that in image terms, and would complement its other prestige French brands such as Benedictine, Noilly Prat and Grey Goose. 

Remy Cointreau, however, is building for the future, with a EUR30m (US$39.7m) expansion programme just announced. That would seem to rule them out as serious bidders, leaving perhaps Edrington Group and William Grant & Sons as the main Western contenders, especially as Edrington is ending its US distribution partnership with Remy Cointreau. There would seem to be an obvious gap in the new Edrington USA portfolio.

So, a second look at the world of Cognac and the wider brandy scene is clearly due, with most of the dynamism in this category being generated by ‘regional’ brands from the Far East.

Unless you monitor the sector very closely, you may have missed the dramatic rise of Alliance Global Group’s Emperador brandy from the Philippines, which last year recorded a stellar 54% increase in sales. Remarkably, it was already selling more than 20m cases so the impressive increase saw it pass 31m cases in 2012, as exports to Thailand and China grew dramatically.

To put these figures into context, consider the global sales of Smirnoff (26m cases), Bacardi (20m) and Johnnie Walker (19m). So, even if you’ve never encountered this admittedly regional brand, it has to be regarded with some respect. Or possibly awe.

Elsewhere, Indian brandies turn in some very respectable numbers, with McDowells No 1, Mansion House and Honey Bee all breaking the 5m case barrier.

Thai Bev (owner of Inver House Scotch) and Suntory (with Morrison Bowmore and their own Japanese whiskies) could put in realistic bids and Hine would sit well alongside their single malts.

So, do not underestimate the thirst of previously ‘regional’ producers for global status and a wish to add trophy brands to their volume generators. Look east, I say and be prepared for long-term structural changes that challenge the established order.

Expert analysis

Global market review of brandy and Cognac – forecasts to 2016

At over 26,000 words, containing over 40 tables, IWSR's proprietary brand volumes and market forecasts, exclusive interviews with the top global brands, and including all the invaluable insight you have come to expect from the drinks publishing experts IWSR and just-drinks, this report is essential reading and provides fundamental market and brand data for your market planning and analysis work on this category.

Sectors: Emerging markets – BRIC, Spirits

Companies: Pernod, Cointreau, Remy, Ricard, Martell, Diageo, Bacardi, Edrington, CL World Brands, LVMH, William Grant, Smirnoff, Johnnie Walker, Inver House, Suntory, Morrison Bowmore

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