The Brandy Report: Introduction (1/12)

18 February, 2015

Cognac

Cognac is the cherry on top of the category. At about 11m 9-litre cases, the region’s entire output is a third of the size of Emperador. An arresting thought, given how much attention cognac receives. But there must be more to it than smoke, gift boxes, travel retail plinths and mirrors. Separated out brandy is more than 15 times cognac’s superior in volume terms. In value, though, cognac packs a punch. Its £10.2bn retail revenue is 69% of what is produced in the rest of the brandy-making world.  

Volume for show, value for dough is the maxim of cognac. But in chasing value over volume, cognac producers have encountered other problems. There are not many arguments for a volume over value strategy, but cognac’s past few years offers one. By concentrating efforts on selling at the luxury end and not looking to necessarily build volume, cognac brands have narrowed their market and broadened their risk. 

Rémy Martin is the exemplar. When China called, Rémy answered – about 47% of its sales are based in Asia Pacific. But when the XO gurgling stopped – after a crackdown on governmental extravagance – it was Rémy that was left with its finger stuck to the minus key of its keyboard. 

The results you see in table F (taken from The Millionaires Club 2014) show volumes, so just half of the picture. Looking at the most recent results we can see that the first half of 2014 was blighted for Rémy Martin, with a cut of 13.4% to sales value and 6% to volumes. 

The group maintains its strategy of withdrawing Rémy Martin VS from the US market to continue selling older, more premium stocks. But, whatever the value or quality of the product, the group will want to lessen its dependence on the currently de-stocking Chinese market and meet demand in the booming US, Nigeria, central and eastern Europe.  

Rémy Martin was not alone in the Chinese adventure. With Pernod Ricard’s distribution might, Martell was well placed to rise – and slide back down in the market. Looking at the 2013 data, the picture looks calm but a year on and Pernod is citing Martell as a key reason for its top 14 brands being in collective decline. During 2013/2014 the brand dropped back to 1.9m cases with value slipping 9% and volume 6% compared with 2012/2013.

Hennessy has broader shoulders. At more than 5m cases it amounts to about 40% of the cognac industry. With Diageo’s distribution it is the top cognac in strong markets such as the US and Nigeria. With worldwide spread, down-trading in western Europe and China was mitigated and overall declines small at -1.2% for 2013/2014 compared to 2012/2013. “With economic uncertainty prevailing in Europe, business was buoyed by a strong dynamic in the American marketplace,” read brand owner LVMH’s latest full-year report. “In China, sales of higher quality grade cognacs registered the impact of destocking by distribution channels. Hennessy partially offset this by targeting other market segments and capitalising on its rapid progress in the United States.”

LVMH added that “management of its geographic sales coverage” allowed Hennessy to “put its volumes to work for its most buoyant regions and market segments, and to leverage all of its growth prospects”.

So while Rémy Martin sought to channel its efforts into VSOP and China, Hennessy’s strategy of diversifying its cognacs, markets and target clientele, paid off. 

Courvoisier is the fourth and last of the million-case brands from Cognac. Though it has strong ties to ailing Europe, it has managed steady business over the past five years while all around it has crumbled. In 2013 a small dip could be credited to weakness in Asia Pacific, but the brand is strong in the US, the top cognac market, so the growth line has evened out. Beam Suntory is yet to report on 2014, but we can expect a similar story to recent years for the brand – weakness in Asia, stagnation in Europe, strength in the US. 

Elsewhere among the world’s million-case brandies is Dreher in Brazil. Owner Gruppo Campari said its Brazilian business grew 4.9% in the first three-quarters of 2014, thanks to the brand. Its 2014 performance is expected to rally against what has been a flat past five years. 

Brandy is a global category but largely it is local-market dynamics that set the growth agenda. The following pages seek to explore these top market trends and the big brands’ current and future prospects – be it domestic or international.    

The Brandy Report comes in 12 parts. Folllow the links here Category introduction by Hamish Smith (1/12), Brandy in the Philipinnes by Hamish Smith (2/12)Cognac by Nicholas Faith (3/12)Premium brandies by Richard Woodard (4/12)Armagnac by Ian Buxton (5/12)French brandy by Hamish Smith (6/12)Spanish brandies by Dominic Roskrow (7/8)





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