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COGNAC’S ON-OFF LOVE AFFAIR WITH GREATER CHINA HAS RAMIFICATIONS FAR BEYOND THE BANQUETING HALLS OF BEIJING AND THE KTV BARS OF SHANGHAI. As sales of older expressions surged, prices inevitably escalated and allocations pushed away from traditional western markets and towards the far east.

But, as boom has turned to bust over the past two years, the bullish forecasts of the cognac houses have been wrecked. “Everyone, from cognac producers to luxury goods analysts, agrees the situation has lasted longer than anyone first predicted,” says Loïc Rakotomalala, brand ambassador for Distell-owned Bisquit. “But, with the light at the end of the tunnel too far away to simply ‘hang in there’, producers are seriously starting to alter their business models to recoup lost sales.”

The result? A greater focus on younger expressions (VS shipments were up 3.1% by volume and 1.8% by value in the year to July 2014, according to the BNIC) and increased discounting to drive volumes in a number of markets.

Nonetheless, longer-term trends for cognac show supply failing to meet demand, with prices rising as a result. As the cheapest cognac becomes ever more expensive, what opportunities does this give non-cognac brandy, particularly at premium and super-premium levels?

“In South Africa, a VS cognac of four to seven years old can retail for ZAR350 (roughly US$35), whereas a four- to seven-year-old potstill brandy of similar quality can retail for ZAR180 (US$18),” says Christelle Reade-Jahn, director of the SA Brandy Foundation. “So if stock in Cognac is limited and these producers focus on value, then there is a great gap for South African brandy to offer very competitive quality at an attractive price.”

This is particularly true for Distell, which has a foot in both camps thanks to its ownership of Bisquit and its stable of SA brandy marques, including Klipdrift and Van Ryn’s. The latter in particular is building a growing international reputation through an array of medals and trophies.

“With a rapidly growing middle class in South Africa, there is ever-increasing opportunity for premiumisation,” Reade-Jahn says. “The base for what makes South African brandy special has been clearly established by spirits judges throughout the world – we now need to find the most appropriate ways to add and create value through desire and aspiration. 

“The upward trend in price witnessed in the cognac category will certainly help uplift the higher-tiered premium brandies.”

Others, however, are less convinced of the interchangeability of cognac and brandy. Bardinet’s Isabelle Dubois reckons there is “no activity transfer” between the two as “these are two different categories”, while Matias Llobet, master distiller at Miguel Torres, says: “Logically, with cognac prices rising due to limited stocks, there should be an opportunity for increased sales of value-oriented brandy.

“However, as a premium brandy from Barcelona, Torres is more focused on building our own brand proposition, rather than being a value alternative to cognac.”

It’s a different story for Williams & Humbert in China, where the company’s Gran Duque d’Alba Brandy de Jerez is happy to go toe-to-toe with its cognac rivals. “China is a very important market for Brandy Gran Duque d’Alba as the Chinese consumer demands top-range spirits and quality brandy as a more competitive alternative to cognac,” says Williams & Humbert international marketing manager Gonzalo Medina. 

“The intermediaries are looking for alternatives to cognac at more affordable prices and similar characteristics but, at the same time, quality spirits.”

Agreeing that cognac’s high prices have proven beneficial to brandy, Medina says the Gran Duque d’Alba range is distributed in various Chinese provinces. But there is still work to do. “We still need to make the consumer aware of the quality of this spirit. In this sense, the Brandy de Jerez sector is undergoing a moment of change as we are working to establish strategic lines and reposition the category,” he says.

At Beveland, product and marketing manager Jordi Xifra agrees. “The main point is the history to tell to the consumer, the added value that the product has, the experience of the consumption of the product,” he says. “If you don’t have a strong approach to explain to the consumer, it will be impossible to be close to the consumer.”

However, supplanting cognac in more mature western markets is altogether more difficult, warns Rakotomalala. “On the mature markets, VS cognac cannot be replaced by brandy because the consumer doesn’t compare both cognac and brandy,” he says.

“For example, in the US, the VS market continues to grow. In Europe, because of the price increase and the difficulty to get some stocks, buyers preferred to reduce the number of cognac SKUs without adding any brandy.”

In this environment, argues Rakotomalala, the most logical beneficiaries of pricing and stock issues for cognac aren’t rival brandies at all but other brown spirits and especially scotch, Irish and American whiskies. 

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)