A WISE MAN ONCE SAID: Many small ripples make a great wave. Granted, the exact source of this proverb is unknown (apparently Google doesn’t know everything) but it neatly, if fictitiously, describes trends in the Cognac category. Asia is now Cognac’s largest region by volume and value – so what ripples develop there, for good or for bad, send tidal waves up the Charente. 

Until recently it had been plain sailing – China wanted Cognac, Cognac wanted China. Houses and financial reports are certainly familiar with the buying sprees around Chinese New Year and Mid-Autumn Festival. (Indeed, from the outside, this trend seems almost as serendipitous as the phenomena of American rappers brand-checking Cognac in the 90s, in doing so creating Cognac’s biggest volume market.) 

But now we are starting to see a few cracks appear in Cognac’s good-news story, with year-to-date volumes down 1.8% in China, Asia’s Cognac HQ. First came a clampdown on gifting at governmental banquets. “Banqueting and gifting is a major form of sales in China,” says Claire Richards, Courvoisier’s global senior marketing manager. “If they start to get really tight on that I think it would hurt Cognac.” 

According to many houses, it’s already happening. Cyril Godet of Cognac Godet says the practice of giving away product to opinion leaders has long been commonplace, especially in Russia and China. “There are a million ways to do it. The officials in many countries are the target because it flows down to the people, who think ‘if the Mayor is drinking that Cognac, I will drink it too’.” He added the clampdown would have a “big impact in the long term”. 

2013’s second hiccup also sprang from the mouth of Chinese power. “A new regulation was brought in by the Chinese government looking at how much plasticiser was used in products, which slowed down the shipment data in the last quarter. Some houses spoke about it in their financial results,” says Richards “When bottles are filled, [it’s about] how much of the plastic piping is still present in the liquid or bottle after that process. We didn’t have any problems with our products but every company had to go through a test to gain the documentation.” 

A slightly later than normal Chinese New Year might also have had an impact on 2012-2013 Q4 comparisons, says Caroline Sarrot Lecarpentier, international press and public relations manager at Rémy Martin. 

But does this point to a sustained slowdown? “It was the key selling period when all this happened so that’s going to create a small blip in sales,” says Richards. “If those sorts of trends continue we could start to see a slowdown in China, but I don’t think they are.” Sales in China may be down year to date, but this time last year Cognac was growing in China like ivy. Unfavourable year-on-year comparisons really don’t cover it. Indeed, many argue that, even with volume decline, the impact of these seemingly trivial trends prove China’s influence on the category is too great.

Overreliance is too strong a word, but what happens in Asia matters, especially China (third largest market by volume and value) and its gateway markets of Singapore (second by both measures) and Hong Kong (sixth and fifth respectively).

Allocation of old, in-demand stocks is now the name of the game. At Frapin, China makes up the same portion of sales as the whole of Europe. “We allocate stocks to China carefully, therefore our agents limit sales mainly to the south, Canton province,” says Philippe Manfredini, directeur international at Frapin. “We don’t want to put all our eggs in one basket and want to maintain our sales in other parts of Asia.”

Courvoisier is more renowned for its dealings in the US and UK, but has announced a shift in focus. “Asia is the biggest region and China [including shipments through Singapore and Hong Kong] is the biggest market. That brings about challenges as we need to make sure we can get hold of high-end liquids, which are going through the roof. It’s good from a balance sheet standpoint, but not so good from a liquid standpoint.” Compared to the likes of Pernod’s Martell with its vast distribution, Courvoisier is really only just getting started in Asia. Even now, with the Chinese boom long detonated, 69% of its juice still ends up elsewhere in its VS-shaped bottles.

Most of the big houses will not talk of a strain on supply. Asked if it is frustrating to see VSOP-and-above stocks set aside for Asia, not the UK, Moët Hennessy UK responds: “As the number one Cognac in the world we look at the brand from a global perspective.” Read of that what you will.  

At Rémy Martin double-digit organic growth has been achieved for the fourth consecutive year, an increase of 12.7%. The group’s policy of “moving upmarket” and dealing in “modest volume increases” must be doing the trick and on the surface seems to align the brand with Asia. The key drivers of growth have been attributed to the broad regions of the Americas and Asia, so it’s impossible to know exactly where the catalyst markets really lie. 

The brand’s Lecarpentier is certainly keen to quell talk about being China-centric. “At Rémy Martin we are a global brand and we have many customers around the world. We continue to invest in Europe, which along with Africa and the Middle East is 20%-25% of our [value] sales. The Americas is 26.8%. Demand is big so we try to allocate correctly – we do not give all the Cognac to China.” That said, Lecarpentier says 60.2% of revenues are from Asia, a good chunk of which is down to China.

Perhaps not bound by big-brand pressures, H Mounier, producer of Prince Hubert de Polignac, has a different view. “The speed of access to Cognac in Asia is challenging. If you measure the number of Chinese able to drink more than a glass of Cognac in the 10 years to come, it is frightening,” says Christophe Juarez, the company’s président du directoire. “The globalisation is affecting the scale of our operations at full speed and it is a major issue for old industries like ours. Viticulture is our limit. It will take time to do it the right way. I understand this is a hard message for our Chinese customers, given their 8% GDP growth and their high demand: they have waited so long to have access to our products.”

Cyril Godet of Cognac Godet says the selling of old stocks to China is not only forcing brands away from ‘faithful’ markets but also pushing prices outside of traditional customers’ reach. “I’m not keen on the way it is going,” he says. “The boom is about making money and it will lead us towards a scarcity of old Cognac. We are shooting ourselves in the foot. The big companies are looking at [sales] quarters. That’s valid but Cognac is a product from the ground, it has a limited availability. I feel we have a commercial strategy that is not in line with the agricultural capabilities. In whisky when they grow sales they make more whisky, so it’s sustainable. We are selling our old Cognac. What will happen in 10 years? We will be dry.” The taste of Cognac is also evolving because of Asian palates, says Godet. “Cognacs are becoming woodier, heavier and deeper. There is a funnelling of perception of what Cognac is.” 

Growth of Cognac’s global volumes is at 8.2%, so for now it is still in an extended boom phase. And, while some brands may not like to talk about it, sustained volume growth, must be serviced somehow. Aside from year-to-year variations in harvests, broadly speaking, production in Cognac is as fixed as the region’s demarcated boundaries. Crudely put, unless the average ages of VSOP and XO are being dropped back to their bare minimums (heaven forbid), reserves must be being plundered. The big companies assure us of careful cellar management, but extra stocks have to come from somewhere. 

Martell parent Pernod Ricard’s purchase of winemaker, distiller and wholesaler Le Maine au Bois SAS signals a trend towards category consolidation that is likely to intensify in unison with a clamour for stocks. The announcement that CL World Brands’ Hine is up for sale must have pricked some interest too, though not a lot is known about the brand’s inventory. 

The simple solution is to extend the boundaries but, according to Godet, that will not be ruled on by the EU until 2015 at the earliest, 2018 at the latest. Then the vines have to be planted and matured, the grapes grown, the wine made and the Cognac distilled and aged. If we are headed towards a scarcity of aged Cognacs, there will be no shortcuts to replenish them. Perhaps it is premature for the French proverb: We never know the worth of water till the well is dry.