Keep it in the Family - Part Four

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In the fourth in our series of reports on key family-owned wines and spirits groups, Ben Cooper and drinks industry analyst Canadean look at Rémy Cointreau, a company which has swum against the tide by consolidating while other major players have looked to grow through acquisition.

Family-run companies typically run the danger of being beset either by internal squabbles or by a general reluctance to move forward. According to industry analyst, Canadean, Rémy Cointreau has suffered little from the former but, until comparatively recently, was considered to have something of an old fashioned outlook.

That has changed under the stewardship of Dominique Hériard Dubreuil, who became chairman in 1998. Through disposals, partnerships and the astute acquisition of Bols in 2000, Hériard Dubreuil has been credited with turning the company around, culminating in a generally acclaimed major management overhaul in July 2004 which saw Jean-Marie Laborde take on the newly created position of CEO, whilst Dominique Hériard Dubreuil became chairman of the new Management Board.

Rémy Cointreau remains a family concern, with Orpar, which is 88.7% owned by the Hériard Dubreuil company Androméde, owning 44.29% of the capital. Other shareholders, as of March 2004, included the General Public (30.69%), Arnhold and Bleichroeder (9.99%, acquired in 2004) and the Treasury (1.41%). Earlier this year, Arnhold and Bleichroeder upped its stake in Rémy Cointreau to 10.04%, plus voting rights of 6.32%.

Through astute management Rémy Cointreau has become a lean, yet successful wines and spirits player, says Canadean. However, this has been achieved by eschewing the paths followed by competitors, opting primarily to streamline its portfolio through disposals, rather than expanding through acquisition. As Canadean notes, this potentially leaves the French company itself vulnerable to acquisition by a larger group.

Since becoming chairman, Dominique Hériard Dubreuil has embarked on a cost-cutting programme that has included a number of disposals including Krug Champagne for US$176m, Bordeaux negociant Grands Vins de Gironde (GVG) for US$156m, both in 1999, and a 40% stake in the barrel maker, Seguin Moreau. The company also exited from the Australian wine business in October 2002. Most recently, in 2005, the group sold Bols Sp z.o.o., a 50:50 Polish joint venture with a local partner Takirra, to the Central European Distribution Corporation (CEDC). Also in 2005, Rémy Cointreau announced the introduction of Fine Wines joint venture Dynasty Winery to the Hong Kong Stock Exchange.

During the 2004 fiscal year, disposals generated some €65m, providing a capital gain of €25m. The company has also significantly reduced its workforce over time. In fiscal 2004, Rémy Cointreau cut its workforce by 13% to 1,945. The cuts were made outside France, mainly in the Americas and Europe.

The company has also been mindful of cost control in managing its distribution operations. It says "an aggressive and selective policy of partnerships and alliances using a model implemented in August 1999 with the establishment of the Maxxium BV" is one of its core strategic objectives.

The lack of acquisitive growth means that Rémy Cointreau has become something of a niche player, operating in the Cognac/brandy, Champagne and liqueurs sectors but less active in white spirits. However, as a brand marketer within its market niches the company has an uncanny ability to anticipate consumer trends, for example launching Rémy Red in advance of the cocktail trend.

As of April 2004, Europe was Rémy Cointreau's biggest source of value sales (46.8%), but the Asia-Pacific region has seen its share of turnover rise to 13.7%, thanks in no small part to the growth of Cognac in China. Rémy Cointreau is particularly well placed to take advantage of growing Cognac sales in China. "Sales of cognac in China are forecast to rise at a double-digit rate per annum over the medium term," says Canadean, "indicating that this may be Rémy Cointreau's most rewarding category/market combination."

In October 2005, Goldman Sachs initiated coverage of Rémy Cointreau, stating in a note to clients, that the company's flagship Cognac brand was particularly attractive, with strong exposure to the higher growth and margin markets of the US and Asia.

Having undergone such a comprehensive overhaul under Dominique Hériard Dubreuil and with a return to growth in fiscal 2005, Canadean suggests it is difficult to identify the company's weaknesses.

"Since 2000, when it acquired Bols NV, Rémy Cointreau has sought to consolidate, rather than expand, its assets," says Canadean. "This strategy may go against general industry trends, but it has enabled the company to focus on strengthening its existing portfolio. The success of this tactic is aptly illustrated by Rémy Cointreau's Champagne and wines portfolio, which has been narrowed down to just four brand ranges, yet whose operating profits have tripled in two years."

Certain weaknesses have been tackled. For example, the company's over-reliance on Cointreau within the liqueurs category was addressed by the introduction of Passoã in selected European markets. Canadean argues that the company's greatest challenge is to boost sales in the euro zone, which captured just 34% of turnover in 2004, thereby lessening its exposure to fluctuating exchange rates which have adversely affected the company's bottom line in the past.

Nevertheless, in spite of the turnaround overseen by Hériard Dubreuil, the lack of strong brand growth in 2005 has led some to question the group's consolidation-focused strategy.

Last month, the company reported a rise in first half sales from continuing operations from €386.9m to €397.6m. However, the growth came primarily from partner brands, while sales of the group's own key brands were largely flat. Cognac brands grew only 0.7% to 153.9m, with liqueurs and spirits sales rising by just 0.5% to €135m. In Champagne, sales grew 1.7% to €48.7m.

Dominique Hériard Dubreuil has stated that family ambitions and share ownership must not be allowed to block future developments at Rémy Cointreau. However, Canadean questions whether family ownership and influence may yet be diluted as a result of partnerships within the industry.

As it stands, the company continues to strengthen its portfolio primarily through innovation and targeted advertising. "Dominique Hériard Dubreuil is credited with having turned the company around," says Canadean. "She has stated that family ownership must not impede Rémy Cointreau's progress. Rémy Cointreau's aim is to grow its brands, the quality and rarity of which should be easily distinguishable."

To achieve this goal, says Canadean, the company is pursuing four strategic objectives: increasing its advertising investment; developing innovative and targeted products, in anticipation of changing consumer tastes; building its distribution network; and forging joint venture partnerships, partly to lower selling costs.

Sectors: Spirits, Wine

Companies: Cointreau, Lucas Bols

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