Cognac: Changing China

Cognac’s fall from grace amid China’s anti-austerity measures looks to now be in reverse. Richard Woodard reports

China, cognac’s post-millennial promised land, has taken on a distinctly dystopian feel since the Beijing government rediscovered its communist principles and enforced an anti-extravagance crackdown at the end of 2012. Rumours of its demise as a market worthy of the attention and investment of the cognaçais have been exaggerated to the point of caricature, but it is a very different China that is emerging now.

“We see a clear shift from the most expensive expressions to the less expensive ones, with XO and above suffering, and younger categories growing, with the emergence of a market for VS,” observes Philippe Jouhaud, sales and marketing director at Bacardi-owned Château de Cognac, owner of Otard and D’Ussé. “Likewise, consumption occasions are changing – less gifting, less traditional on-trade, while modern on-trade is doing well. We are shifting from a situation where the consumers might not have been the buyers, to a situation where consumers and buyers are the
same people.”

This last point, beyond the downtrading, is the most significant change impacting the market today. In the past, Europe’s crystal manufacturers were rushed off their feet making luxury decanters for a never-ending succession of über-luxurious expressions with stratospheric price-tags. But how much of it ended up in someone’s glass?

“Quite a few were [consumed], because that was part of the extravagance in China – they wouldn’t hesitate to open such a bottle,” says Anne Blois, commercial director, Asia Pacific, at Camus. 

“But I’m sure there are still quite a few in some cabinets somewhere.”

“The demand has changed,” adds Olivier Hidier, export director at Cognac Deau, a relative newcomer to the market, and until now better known for distilling and maturing eaux-de-vie for the likes of Hennessy and Martell at its facility in Les Moisans. 

“Now we are working in a normal market, there is no speculation and we are really building up and growing.

“Generally, cognac is selling less and to different customers. Every case sold in the Chinese market is a case that is going to be consumed, not simply offered and stored somewhere we don’t know.”

Quantifying the effect of these changes on sales is a more complex matter, but the scent of recovery is definitely in the air. 

Rémy Martin – arguably the most severely impacted of the ‘big four’ cognac houses by the China downturn – said in April that sales had rebounded in the six months to the end of March, rising 15% organically and led by a resurgence in Greater China. 

Unthinkable change

That said, the US has become its largest market – something that would have been unthinkable a year or two ago.

Speaking at the end of March, Pierre Coppéré, chairman and CEO of Pernod Ricard Asia, told investors that “the China challenge is being addressed”, although his optimism was decidedly cautious. No surprise given that the “improvement” amounted to a single-digit sales increase for the whole business around Chinese New Year – albeit one led by cognac.

Among Tier 1 and 2 cities, Martell Chinese New Year sales rose 13%, and were up 5% in the year to date. With anti-extravagance, however, the mix has changed, with XO-and-above suffering and improving trends for new offerings Martell Noblige and Distinction.

The picture is also shifting when it comes to sales channels. The old days of KTV lounges are numbered – for Pernod’s whole business in China, they account for 15% of trade now, down from 20% a year ago, while bars and the off-trade are “growing nicely”, says Coppéré, representing 70% of trade.

But it would be misleading to describe China as a market entirely transformed by recent events. “It’s still consumed very much in the on-trade and outside the home,” says Blois. “People don’t consume too much at home, more in bars, private lounges and clubs.”

For the most part, China has a limited culture of at-home consumption and entertainment, partly because the middle and upper middle classes typically live in apartments that are much smaller than their equivalents in Europe or the US. “Home is private and for the family,” says Blois. “That’s going to be changing though. People will buy a bottle and drink it at home with their friends – it’s on the edge of happening.”

Off-trade upsurge

For the time being, the upsurge in off-trade sales is mainly explained by the phenomenon of people buying cognac in a shop, then bringing it to the restaurant to share over a meal with friends, says Coppéré.

Geographically, too, little has changed for cognac. Its stronghold remains the south and Guangdong province in particular, while the north and Beijing, beyond small pockets of growth, remain more focused on white spirits – baijiu and, to a lesser extent, vodka. 

Blois reckons it’s “very hard to change the habits” of the provinces beyond these areas, where local spirits continue to dominate. “We are not going to revolutionise the way China drinks,” she concludes.

Deau has recently opened an office in Zhuhai, on the border with Macau, reflecting the company’s conviction that China, however it may have changed, will remain a core cognac market. 

“We really believe in it,” says Hidier. “It’s a cognac market for generations, so it’s not going to stop just because for two years sales have dropped. We need some distance from what has happened to really understand what the Chinese market for cognac is.”

Perhaps even more significant in the longer term are the shifting consumer attitudes in China today. “I think people are getting more health conscious and more open to other products,” says Blois. “They are thinking: ‘Why should I get drunk every time I drink cognac?’ And people want to know the story behind the brand. Before, it was just the brand; now it’s the lifestyle behind the brand.”

New environment

In this new environment, having Cyril Camus based in Shanghai for much of the year – and speaking fluent Mandarin – is a particular boon for the company. “It humanises our brand and allows us to get closer to the trade,” says Blois.

These evolving trends could be good news for smaller players in a market still dominated by the big four houses of Hennessy, Martell, Rémy and, to a lesser extent, Courvoisier. 

Hidier is grateful for the work the big brands do in terms of opening up markets, but believes there is a growing opportunity for “alternative” marques such as Deau to carve out a niche for themselves.

That said, the kind of stranglehold on the market currently grasped by the big houses can lead all too easily to complacency and inertia. 

While there are signs of increased product innovation in cognac, it’s as nothing compared to the dynamism and creativity displayed by certain rival spirits categories. 

“I think it’s very difficult to make a revolution in the world of cognac,” says Hidier. “When you look at the rum category and the whisky category, we have a lot to think about to renew ourselves.” For the moment, however, the cognaçais are simply grateful that the Chinese market has stabilised after a decidedly difficult two-and-a-half years.

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