Cognac makers look beyond China for growth

Fri Sep 23, 2011 2:32pm EDT

* Cognac makers focus on wider emerging market footprint

* See good growth outside China in other Asian economies

* Industry optimistic for 2011 after record sales in 2010

* Hennessy and Martell brands neck and neck in China

By David Jones

LONDON, Sept 23 (Reuters) - France's cognac industry is looking beyond the fast-growing Chinese market to drive growth into the future with eyes on promising new markets such as Vietnam, Taiwan and Russia as emerging market drinkers get a taste for the French tipple.

China has quickly become the world's biggest cognac market in terms of sales with some cognac groups making up to a third of their profits in the world's most populous country, but now they are looking to other nations to spread the growth.

The big four cognac houses - Hennessy, Remy Martin, Martell and Courvoisier - are already searching out new markets for the 97 percent of the French spirit which is exported each year as they aim to be not over-reliant on just one market.

The industry, based in south-western France, has recovered from the world downturn in 2008 and 2009 with sales now again growing, and industry leaders believe a wider spread of exports will help cushion cognac if the hard times return again.

Cognac consumption rose 8.5 percent to 11.3 million 12-bottle cases in 2010 according to industry magazine Impact, as actual sales rose 30 percent making the industry worth a historic annual high of more than 1.8 billion euros ($2.5 billion).

The industry is small compared to the near 100 million case annual sales of scotch whisky with top brand Johnnie Walker outselling the whole cognac industry, but cognac makers are focused on quality, especially in the emerging market world.

The four big players - which account for over 80 percent of industry volumes - have all seen a recovery led by the expansion into Asian emerging markets and also the move to higher quality and hence higher-priced cognacs from the world's drinkers.

Although the U.S. is still the biggest cognac market by volume it is led by the least expensive Very Special (VS) quality category, while the emerging markets of China and Russia focus on older and hence more expensive ranges such as Very Superior Old Pale (VSOP), Extra Old (XO) and even older cognacs.

The new optimistic mood is reflected by the biggest cognac player Hennessy which sells 4.6 million cases worldwide and is owned 66 percent by the world's largest luxury goods group LVMH and 34 percent by the world's top spirits maker, the Johnnie Walker whisky and Smirnoff vodka group Diageo

"As an industry we are more than cautiously optimistic, demand is strong, very strong in fact, with double digit percentage increases in demand," said Hennessy's international director Andre de Bausset.

However, he is very aware of what happens with over reliance on just one market, as when the industry relied heavily on Japan some 20 years ago and suffered in 1992 when the Japanese market saw a sharp decline.

"After China, Vietnam is starting to emerge, Chinese influenced markets such as Taiwan and Malaysia and other south-eastern Asia markets like Cambodia and Laos are also promising," de Bausset added.

Cognac industry exports to Asia grew volumes over 34 percent in 2010, and Hennessy sells around one quarter of its own volumes in China where it runs neck and neck with Martell for top spot with both having market shares of 30-percent plus.

REMY IN CHINA

For world No 2 cognac maker Remy Martin, which sell around 1.9 million cases a year, China is a key market as around one third of its parent company's earnings come from the country and it is already the group's No 1 market in terms of overall sales.

Remy has big exposure to Asia with half its volume heading there -- and three-quarters of that to China -- with America accounting for 30 percent and Europe the remaining 20 percent.

The cognac maker's owner Remy Cointreau recently sold off its Heidsieck champagnes to focus on cognacs, other spirits and liqueurs and is controlled by the Heriard Dubreuil and Cointreau families which own 57 percent of the company.

"We are not seeing any sign of a slowdown in China with 30 million new middle income consumers entering the market each year," said Remy Martin's Chief Executive Officer Patrick Piana.

"China is a very big piece of Asia, but satellite countries are growing very fast as well," he added. Piana is interested in Vietnam which is seeing strong double-digit percentage growth, India, where Remy set up a subsidiary last year, and Singapore.

At Martell, owned by French spirits giant Pernod Ricard , China is also its biggest market while the company also has eyes on markets in eastern Europe for the brand which sells around 1.9 million cases annually around the world.

Martell is the oldest of the big four houses, found in 1715, and returned to French hands in 2001 when Diageo and Pernod split up the old Seagram's drinks empire in a move which also gave the French group Chivas Regal scotch whisky.

"One of our best markets is Russia and those markets around Russia like Ukraine which are growing at over 10 percent," said Guillaume Buisson, Martell's regional director for Europe and America.

Courvoisier is the smallest of the big four cognac houses selling around 1.2 million cases annually and the least exposed to growing emerging markets. Traditionally, it has had a heavy reliance on the U.S. and UK markets after being owned by the British Simon family throughout most of the 20th century.

The brand currently owned by U.S.-based Fortune Brands since the breakup of Allied Domecq in 2005, is also very reliant on the least expensive VS quality for 60 percent of its volume, and it is this dependence on mature markets and the lower quality VS segment that the group is looking to change.

Courvoisier president and general manager Patrice Pinet said the U.S. and UK accounts for 70 percent of the brand's volume, and although relatively late into emerging markets its cognac sales in key markets such as China and Russia are growing at over 20 percent.

"Russia has been particularly strong for Courvoisier and also Vietnam by reviving the old French connection with the area," he added.

Its owner Fortune is set to spinoff its home and securities business next month and operate as a pure drinks group focusing on key brands such as Jim Beam and Maker's Mark bourbon as well as Courvoisier and renamed itself as Beam as of Oct. 4. But this move has prompted speculation that the group may become a takeover target. ($1 = 0.730 Euros) (Reporting by David Jones)

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