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To coincide with the release of just-drinks latest Spirits Essentials coverage, Richard Woodard considers the dangers facing the Cognac segment if it continues to operate solely at the extremes of China and the US.

Is Cognac struggling to claim the middle ground?

Is Cognac struggling to claim the middle ground?

It was back in 2012, when the craze for luxury Cognac in China was at its zenith. Within months, the Communist powers reasserted their authority, halting the extravagant gifting of Lafite and Louis XIII to Government officials, calling time on banquets more reminiscent of the dying days of the Roman Empire than the land of Mao-Tse-Tung.

Prior to that, Cognac was in the land of milk and honey. I recall standing in one of Hennessy's many riverside cellars in the town of Cognac, the Richard Hennessy casks with their elaborate chalk calligraphy almost within reach. But, something else had piqued my interest. Our guide – as befits an employee of LVMH, a perfectly coiffed and tailored, trim figure – had mentioned in passing a product I'd never heard of: Hennessy Classivm (the affected, Roman 'v' is really a 'u'), only sold in China.

With most Cognacs, you know where you are: VS, VSOP, XO. Even the Richard Hennessys and Louis XIIIs of this world proclaim their price tag through their perfume bottle packaging. But Classivm seemed to be neither fish nor fowl. "Where does it sit in the range?" I asked, genuinely curious. Our guide was evasive.

I persisted: "Is it a VSOP?" (As far as I knew, nobody was selling anything below that in China at that time.) 

"No."

"Is it cheaper than your VSOP, then?"

"No… It is not cheaper. We never use that word. It is… less expensive."

Four-and-a-half years later, Hennessy Classivm, for all the apparent embarrassment of our guide, looks to some like a shrewd piece of NPD. The luxury Cognac boom in China has imploded, down-trading is everywhere and an emerging middle class with an eye for a bargain has replaced businessmen and officials spending someone else's money.

And yet, Classivm hasn't quite taken off as well as Hennessy might have hoped, even as the company watched sales of XO continue to nosedive. The VS segment in China fell back noticeably in 2015, as the just-drinks/IWSR Global Cognac Insights report makes clear.

Why? Simply because VS is still regarded as bargain-basement in China. This is a market where, until recently, even VSOP was seen as the Cognac equivalent of a mid-week bottle of something from the supermarket, versus the weekend bottle of XO. For now, at least, even relatively cash-strapped consumers in the country are reluctant to lower themselves to buying VS – in any case, the price gap to VSOP is so small that they're happy to cough up the extra cash.

But, why should Hennessy care? The company is riding a wave in the promised land of the US, where 15% growth in 2015 consolidated its market leadership, leaving it some 2m cases ahead of its nearest rival and able to spend $13.8m on advertising alone.

Fifteen years ago, the mantra within the Cognac segment was "God bless America"; the growth there was making up for the category's frailties elsewhere. Since then, we've had the boom in China and a subsequent slowdown but, although sales have grown overall, little has changed.

I can almost see my well turned-out friend at Hennessy shrugging and asking: "So, what's the problem?" Cognac had a record year in 2015, supply is limited and – barring any anti-French measures from incoming President Trump – the US is still looking good.

To an extent, I agree with him. There are signs of the VS-driven US market discovering higher-value expressions, and of broader demographics beyond Hennessy's Afro-American core beginning to explore the category. In China, the inflated bubble of increasingly absurdly priced cuvées has subsided, replaced by a more sober, 'real' market based on actual consumption, rather than showmanship.

But, even a 13m-case category (still tiny compared to Scotch, whisky or vodka) needs more than two properly functioning markets in the world. Europe is a wasteland where only the UK shows solid promise - and, post-Brexit, who knows where that's heading?

While Russia loves Cognac, its economy is a basket case. Meanwhile, Africa is growing fast, but consumer confidence is low in South Africa, while Nigeria's mood flips up and down in line with the oil price.

Cognac's success over the past two decades has relied on one or other of its two key markets to step up when the other has faltered. If both plateau, or even recede at the same time, it might begin to destabilise the whole category. After all, China's slump sparked panic at Martell and Rémy.

It's easy to think of Cognac as the spirits equivalent of Champagne. Not just its Frenchness, but its exclusivity; the decades-long cultivation of luxury, the alchemical ability to persuade consumers to spend more money on the product, safe in the knowledge that they are securing something special. But, some time ago, Champagne learned – painfully – that you need to spread the risk by spreading the love among as many markets as your supply base will allow. So now, even if Belgium and Germany recede in significance for the Champenois, here come Japan and Australia to take their place.

Looking at the world's Cognac markets, you can't say the same. The category remains over-reliant on just two (admittedly huge) countries – one of them fixated on its lowest-value expression, the other until recently unsustainably obsessed with ostentatious luxury.

That leaves brand owners with twin challenges: to make China and the US just a little bit more like each other; and to rebuild credibility and sales in the neglected markets in the middle, and especially in western and northern Europe.

They may just regret it otherwise – and, in future, look back on 2015 as a tantalising golden age now frustratingly beyond their reach.


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