Why is China good for one Cognac producer, and bad for another? - Comment

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Considering the disparity of performances from Cognac brand owners in China, I've been looking at what's really happening within the country, and have been talking to some brands about their varying strategies and view of future prospects.

First, let's look at the numbers. According to trade association industry body the Bureau National Interprofessionnel du Cognac (BNIC), a corner may have been turned.

"After a year of mixed results in 2014," says spokesperson Laurine Caute, "the demand for Cognac in the Far East, South-East Asia (South Korea, Hong Kong, Malaysia, Singapore, Taiwan, Thailand ), China and Japan is on the up. We're seeing signs of recovery, with volume and value to the region both up by 8.4%, with more than 50.6m bottles shipped in 2015. We have also seen an increase in demand for VSOP from China (70% of VSOP shipments are made to China)."

As this graph illustrates, Chinese volumes peaked in 2012 at around 25m bottles. But then, after consistent, rapid growth since the Millennium, sales fell away, with some 10m bottles lost in just two years.

But now, a strong recovery seems to be underway: The Chinese market is evolving positively and, although sales in the XO category are still in decline, the younger qualities of VS and VSOP are behind the increase.

Caute has a simple explanation for the recovery: "Chinese consumers know Cognac better and now they drink it," she says, noting that, previously, XO and older Cognacs were frequently used as gifts – something that has been hard hit by the Chinese authorities' anti-corruption drives.

For Hine, global brand ambassador Per Even Allaire echoes that thought. "Globally, Chinese demand is moving away from the XO-and-above categories to more affordable and less 'ostentatious' alternatives," he says. "We are already seeing a progression of the younger products within our range. Without wanting to put aside everything that has been done up to now, we may try to refocus a little towards the younger generation of consumers with cognacs such as H by HINE. Although consumers are moving towards less expensive products, many are rapidly getting quality focused. "

Allaire is keen to stress the role of education and training across the category, however: "I believe that for a consumer to truly enjoy a spirit, he needs to understand it and this person will not understand it if it is not explained to him/her."

Education and brand knowledge, albeit at a trade level, is also seen as critical by Charles Braastad of Delamain, for whom China is very much a 'top ten' market. "What we want is to convince sommeliers, fine store buyers and barmen in good hotels of the quality of our old Cognacs," he says. "We have to build this base of precious ambassadors who are going to help us to reach the final customers."

As for strategy, that's simple. "We are working in China the way we work in every other country," he maintains. "We offer the same old Grande Champagne Cognac range as in the rest of the world. Delamain is a family-owned Cognac house and produces in a year what the big ones make in few days, so we have no marketing budget to spend and certainly can't (and don't want) to finance karaoke clubs, where the big volume is poured."

For Pernod Ricard, which owns the Martell brand, CEO Alex Ricard is pragmatic to the point of caution, a view shared by the group's head of Martell Mumm Perrier-Jouët, César Giron. "Cognac has a special place in the heart of the Chinese," says Giron. "Although the market has been affected by the macro-economic slowdown and measures against conspicuous consumption, we are confident that the situation will stabilise in the near future.

"We strongly believe in China's potential for growth in the long term, due to the very low penetration of the category and the strong appeal of Martell. The 'mass affluent class' and the number of high net-worth individuals are increasing, bringing opportunities for increased sales, so we will continue to pursue a strategy of premiumisation and recruitment of new consumers, mostly through Martell Noblige. Imported spirits currently represent less than 1% of the Chinese market," Giron notes, "so there remains a lot of opportunity for growth."

But, as Hine's Allaire warns: "More than ever, it is important to understand the subtleties of this gigantic market, the different evolutions of demand from one city to another and not look at China as one single market."

It seems that, in the southern provinces where the vast majority of Cognac volumes are consumed, not much has changed in recent years, where a volume market driven by consumption in karaoke bars and nightclubs may still be found. Those consumers focus largely on brands, paying little attention to what lies behind them. In trend-setting markets like Hong Kong and Singapore, however, a rapid evolution of consumer knowledge appears to be craving more than just brand values - an interest in how the product is made and where it comes from, speaking to the need for greater market education.

Thus, summarises Allaire: "The Chinese market is intriguing as it is evolving rapidly in certain places and yet remains unchanged and very traditional in others."

Like Giron, Eric Vallat, CEO of Remy Martin, emphasises the 1% share of total spirit sales in the country for imported spirits, adding: "China remains at the heart of our strategy," he says. "We expect 16m households to enter the middle class every year in the years to come. Cognac as a category is very strong and resilient in China where the appetite for our products remains."

Is it too early to call a recovery? The Chinese New Year has certainly lifted spirits along with volumes, but caution remains the watchword.

Time, it seems, is the answer. As Braastad observes: "It will take time before we built brand recognition [for] Delamain… but we have time.

"There is never any hurry, here in the Jarnac cellars."

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