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The Cognac Category - Everything you need to know - just-drinks Spirits Essentials

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All data has been sourced from just-drinks' joint report with The IWSR, Global Cognac Insights

As part of our Spirits Essentials series, just-drinks and The IWSR present a comprehensive guide to the Cognac category. Sourced from the joint Global Cognac Insights report, published in November, we look at both market and category trends for Cognac globally, the performance of the key brands, as well as the challenges facing Cognac going forward.

Heres all you need to know about the Cognac segment, in just-drinks latest Spirits Essentials coverage

Here's all you need to know about the Cognac segment, in just-drinks' latest Spirits Essentials coverage

1. Introduction

Cognac enjoyed a landmark year in 2015, with global volumes hitting a new high of 13m cases, up 3.9% on 2014 and representing an acceleration of the category's recent rate of growth. The US drove this momentum, accounting for just over 4.5m cases of sales and recording a double-digit surge on 2014. Elsewhere, Cognac's performance was more mixed.

In value terms, the global Cognac market declined marginally to just over US$10.2bn in 2015, impacted by the continued austerity programme in China and the devaluation of the Russian rouble. However, China remains the biggest market by value.

Hennessy is the pre-eminent Cognac brand with a 40%-plus value share of the global market, with Martell, Rémy Martin and Courvoisier making up the sector's 'big four'. Together, they account for nearly 90% of sales by value.

Supply constraints are continuing, but the pressure is shifting to younger spirit thanks to the dynamic growth in the US and the evolving situation in China.



Our business has also been boosted by the recent trend that American consumers are moving back to brown spirits and craft. You could argue that there is no better crafted brown spirit than Hennessy.

Jim Clerkin, president & CEO, Moët Hennessy USA



2. Today's Market Trends

The Americas

The US strengthened its position as Cognac's top market by volume in 2015, surfing the brown spirits renaissance and more than holding its own against fierce competition from single malt Scotch whisky and upscale Bourbon.

While all brands benefited from this upsurge, Hennessy dominates with a near-60% share of the Cognac market, nearly 2m cases ahead of Rémy Martin. The brand has benefited from a strong focus on the VS segment (72% of all Cognac sales, but slowly declining as premiumisation occurs) and its effective multi-cultural marketing strategy.

Cognac's ethnic division in the US - Click here for a just-drinks focus

Europe

Europe offers a mixed picture to Cognac producers, with only the UK giving unqualified grounds for optimism. The country returned to solid growth in 2015, buoyed by sales increases across all qualities, but particularly VSOP and XO.

Germany also returned to growth as VS/XXX stocks were rebuilt, but Cognac has an image problem here and underlying trends are less positive. Similarly, the category continues to struggle in its home market of France, and is battling long-term decline in Belgium.

Trends in Nordic markets are also largely negative as health-conscious consumers migrate into beer or wine, but there is some evidence of growth among high-end products.

Asia-Pacific

The Cognaçais are adjusting to China's 'new normal', which means less reliance on business entertainment and gifting, and a more traditional model of personal consumption. Declines are beginning to bottom out, despite continued gloom for XO.

There are also some signs of optimism in Japan – once a leading market, but in freefall for 20 years. Trends in China also influenced the markets in Taiwan and Vietnam: a flattening of growth in the former, but a boost to sales in the latter.

CIS

Like many imported categories, Cognac sales were hit in 2015 by Russia's unstable exchange rates, sending volumes down 8%, with market leader Hennessy similarly affected.

Cognac remains a prestige name for Russian consumers, but the market has become more competitive with the advent of malt whiskies, and more direct competition from good-quality brandies produced in Armenia and other neighbouring states.

Africa/Middle East

Cognac experienced another year of double-digit growth in South Africa in 2015, but the slowing of the dramatic sales increases recorded over recent years reflected the country's economic slowdown and declines in consumer confidence.

Travel Retail

One of the bedrocks of the Global Travel Retail spirits category, Cognac has long punched above its weight in the channel, especially since the market in Asia-Pacific has exploded in recent years. 

However, the collapse of the Russian Rouble and continued austerity measures in China have stifled growth over the past few years, with only Hennessy and Martell among the top five brands continuing to record sales increases in 2015.

3. Tomorrow's Market Trends

Cognac's immediate future broadly reflects current trends, with solid growth set to continue to 2021, but individual markets experiencing contrasting fortunes. Of its top 20 destinations, ten are predicted to grow, nine to shrink and one (the Netherlands) to remain static.

That said, all of Cognac's top four markets - the US, China, Global Travel Retail and the UK – are earmarked for growth. Further down the market rankings, both South Africa and Nigeria are expected to record strong sales increases over the next five years.

But, save the UK, the picture across Europe is gloomy: no other European market in the top 20 Cognac destinations is expected to grow, with Germany, France, Norway, Finland and Ireland all expected to decline.

4. Key Brands Performance

LVMH Moët Hennessy's Hennessy

Matching 7.7% volume and value sales increases consolidated Hennessy's position as the leading Cognac brand by some distance in 2015, thanks in no small measure to its dominant position in the dynamic US market. China has proven more problematic in the recent past, and continued declines there are having a knock-on effect on travel retail volumes, which nonetheless recorded a small increase in 2015.

Momentum is also coming from Africa, where emerging black middle-class consumers see Hennessy as a desirable, aspirational product.

Pernod Ricard's Martell

Martell's bias towards China was a boon in the boom days, but has become something of a millstone with the onset of anti-extravagance measures. Now, Pernod is renewing its focus on the VS segment and the US market as a result.

But, while new products such as Martell Blue Swift are aimed at the Bourbon consumer, Pernod is simultaneously shifting its strategy in China, with increased investment beginning to bear fruit there.

Rémy Cointreau's Rémy Martin

Hit hard by the downturn in China, Rémy Martin staged a partial recovery in 2015, with sales rising by 8%, both locally in China and globally. Strong growth in the US has also helped to boost its fortunes. It remains a highly profitable brand for its focus on VSOP-and-above products, with Louis XIII sitting at the peak of the pricing pyramid.

The company is currently trying to broaden this flagship expression's appeal both demographically and geographically.

Beam Suntory's Courvoisier

Courvoisier endured a difficult 2015, with sales down by nearly 6% thanks to a steep decline in Global Travel Retail, the brand's third-largest market. This more than offset solid gains in the UK and a slight sales increase in the US.

Courvoisier remains skewed towards the VS segment (74% of volumes), but the company has been trying to change this, with mixed results. Current efforts rest on a repositioning of the brand and increased new product activity.

Others

Fifth-ranked Camus is dwarfed by the 'big four' at just under 150,000 cases. Its recent strong focus on China has evolved into an increasingly-diverse strategy aimed at expanding its presence in the US.

Distell's Bisquit – the South African company bought the brand in 2008 – was originally aimed at Russia and China, but that strategy has had to broaden, thanks to the economic conditions in the former and the austerity measures in the latter.

5. Category Trends

The end of the boom in China has engendered a shift in the focus of Cognac brand owners. Previously, they were fighting over – and paying ever higher prices for – shrinking amounts of older eaux-de-vie, whereas now much investment has been rerouted to younger spirit.

In China itself, the slump in gifting and banquets has ushered in a new consumer - one from the rapidly-growing middle class, and who is more likely to consume VSOP Cognac with a meal. Optimism is founded on Cognac's long history in China, and the large tracts of the country still untapped.

The changes have forced many companies to renew their focus on Western consumers in markets including the UK and, especially, the US. Here, many are eschewing the Hennessy approach of targeting ethnic minorities and aiming at a broader demographic.

6. Category Challenges

The success of the US and partial recovery in China should not be allowed to disguise the fact that Cognac's main markets are experiencing mixed fortunes at the moment. Europe in particular – outside the UK – is proving challenging right now.

Arguably, the important Russian market is more difficult than China at the moment, with Cognac beset by volatile exchange rates, economic fragility and competition from rival brandy categories in the CIS. This may take some time to turn around.

All of that said, the impact of China on revenues remains huge. Cognac racked up US$4bn in sales in the country in 2012 but, with the onset of the Government's austerity campaign, that figure fell to just over $3bn in 2015, impacting the profitability of the entire category.

In turn, this has had a knock-on effect on Global Travel Retail. In recent times, Cognac has been increasingly reliant on Asia-Pacific to generate revenues in the channel, but the downturn in gifting by travelling Chinese businessmen has hit this business hard.



Baijiu, premium Cognac, Scotch and fine wines have been hit as, quite simply, there are now fewer banquets, especially in southern China. Cognac is one of the main categories at the banquet table and, with fewer banquets, it follows that you have less consumption.

Cyril Camus, president & CEO, Camus



7. Category Innovations

Recognising that some Cognac branding and packaging has been too generic in recent years, some houses - Courvoisier, for instance - are trying to carve out a more distinctive brand identity for themselves. At the same time, brands are more obviously chasing the consumers of rival spirits categories. Courvoisier Artisan Edition, a GTR exclusive launched last year, is designed to appeal to single malt Scotch fans and uses craft-oriented language.

New launches at VS level in China remain negligible, despite the much-publicised market downturn there. Hennessy Classivm remains the only VS product of any scale in the country, but consumers still regard VS as lower-quality, preferring to trade up to VSOP.

8. What the Industry Says

Trends

Gilles Bogaert, MD, finance & operations, Pernod Ricard - "We have increased our investment in young eaux-de-vie to be able to adapt our strategy to the globalisation of Martell. This globalisation means that we are going to grow more VS and VSOP in some new prioritised markets like the US, Africa or Eastern Europe."

Jim Clerkin, president & CEO, Moët Hennessy USA - "2008, 2009 and even the early part of 2010 was a challenging period for Hennessy. For all our qualities in the US, we were struggling. We took a number of measures in the middle of 2010 to turn it around. That really set us up for where we find the brand today."

Innovation

François Bazini, VP international marketing, Courvoisier - "With our renewed focus on premiumisation, we need to recognise that global luxury consumers have converging aspirations for luxury. They reject brands that pretend to be something they're not, or simply claim to be 'old'. They expect modern brands with values, history and provenance."

Cyril Camus, president & CEO, Camus - "We have been buying vineyards and it allows us to do more limited releases. There is really no limit to how many expressions you can have as long as they reflect something really interesting and unusual."

China

César Giron, CEO, Martell Mumm Perrier-Jouët - "There is a new normal in China. The performance is different according to the channel: Modern channels, such as family KTV, are doing better than traditional channels."

Cyril Camus, Camus - "Some companies are beginning to recognise that the issues in China are going to take longer than expected to resolve. They are probably paying the price for not reacting earlier."

Gilles Bogaert, Pernod - "While the profit margin of China has reduced, it is still above the group average. We are confident that we can keep a very good margin in China, because we want to focus more on premium brands."

The US

Cyril Camus - "We have the right positioning in the US. We are not seeking to appeal to any specific demographic [such as African Americans]. We are trying to have broader appeal, mostly at the VSOP-and-above level." 

Jim Clerkin, Moët Hennessy USA - "We have a New York-based multicultural team who understand and connect with multicultural Millennials. We really try hard to understand the needs of all our consumers and then we tailor our programmes accordingly."

All data has been sourced from just-drinks' joint report with The IWSR, Global Cognac Insights


Sectors: Spirits

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