LONDON, June 19 (Reuters) - The global cognac market may be on the slide with the worldwide economic downturn as shipments continue to contract, but the four big cognac houses are upbeat that the good times are just around the corner.
These four — Hennessy, Remy Martin, Martell and Courvoisier — have suffered falling sales volumes in 2008 and into this year, but have been successful in moving cognac drinkers towards more expensive tipples as they prepare for the recovery.
Any drive for growth is likely to come from abroad as over 96 percent of cognac is exported, but it often struggles for shelf space with larger spirits with the French drinking more scotch whisky than the world does of cognac.
Only grapes grown in the Cognac region of south western France can be distilled to make the spirit, which limits production and makes its worldwide market only three-quarters the size of the biggest brand of scotch whisky, Johnnie Walker.
Cognac shipments tumbled 6.2 percent in 2008 and in the 12-months to end-April 2009 the volume fall sharpened to 13 percent as wholesalers and retailers cut their stock levels to cope with the spreading recession around the globe. This came after 3 percent annual growth over the last 10 years.
The French 1.6 billion euro ($2.2 billion) cognac industry shipped 148.2 million bottles in 2008 and the way 2009 has started this year might well be lower again, but the four main houses — which account for 80 percent of the industry — are still upbeat.
“We think the cognac market will drop a little through the rest of 2009, but we hope it will pickup in 2010 when hopefully world economies start to recover,” said Courvoisier president and managing director Jean-Marc Olivier.
Courvoisier sold 1.2 million 12-bottle cases in 2008 making it the smallest of the big four houses. It was bought by U.S.-based Fortune Brands Inc FO.N in 2005 in the joint breakup with Pernod Ricard of Britain’s Allied Domecq.
The brand has been hit by the market decline in its two main markets of the United States and Britain, but also by troubles in the once fast-growing market of Russia while it has been a relatively late entry into the surging Chinese market.
With cognac exports of paramount importance, the French industry relies on its biggest markets such as the U.S., Singapore, China, Britain and Germany for growth, with the domestic French market only in sixth place.
Although the U.S. is by far the biggest cognac market with 47.7 million bottles sold it is dominated by the least expensive Very Special (VS) quality, while Singapore and China are almost exclusively higher quality and hence of higher profitability.
This means that although volumes declined last year, the value of sales rose 0.3 percent, and for the last two years the industry has sold more higher quality cognacs than the standard VS for the first time in its history.
Pernod (PERP.PA), the world’s second biggest spirits group behind Diageo (DGE.L), has suffered from industry destocking and its sales of its wines and spirits in the first-quarter of 2009, including its Martell cognac, fell an underlying 13 percent.
“We think the worst of the destocking is behind us, and when confidence returns the recovery will be fast,” said Jean-Etienne Gourgues, commercial director for Pernod’s cognac and champagne business.
Martell is the world’s third-biggest cognac selling 1.5 million cases in 2008 and returned to French hands when Pernod and Diageo split up the old Seagram drinks empire in 2001.
Gourgues said Pernod is increasing its focus on older more expensive cognacs and last year launched its top of the range L’Or de Jean Martell costing $3,600 a bottle and celebrating the founder of the oldest of the four big houses, who started the business back in 1715.
The industry has historically seen growth from two-year old VS cognacs mainly to the U.S., but recently growth has come from four-year old Very Superior Old Pale (VSOP) and six-year old Extra Old (XO) cognacs, largely in eastern Asia.
Remy Martin is one house that has focused on the higher quality end with 70 percent of its cognacs being VSOP, and although the U.S. market is still Remy’s biggest by volume, the stronger demand has come from further east.
“I am not as pessimistic as some because historically the cognac cycle lasts around 24-30 months,” said Vicent Gere, director of Remy’s cognacs and estates.
Number two brand Remy Martin sold 1.9 million cases in 2008, and as part of Remy Cointreau (RCOP.PA) is the only one of the big four still family controlled — by the Heriard Dubreuils who married into the original Remy Martin family.
Despite its focus on premium blends, Remy’s cognac profits fell 20 percent in its year to end-March on sales down 13.6 percent as price rises did not offset volume falls in the U.S. and Russia, although Chinese sales rose over 10 percent.
The biggest cognac house Hennessy has suffered heavily from the downturn with its owner Moet Hennessy seeing underlying first-quarter wine and spirit sales down 22 percent, and although this decline includes other spirits and wines it demonstrated how serious destocking was earlier this year.
Hennessy sold 4.5 million cases in 2008 making it by far the biggest cognac brand, and like the others, Maurice Hennessy brand ambassador and member of the founding family which started the company back in 1765, is upbeat on the industry.
“We think there will be a term or two of declines, but it will bounce back. The difference between a hotel and cognac is that if you don’t sell a room it is gone but with cognac we can always sell it next year,” Hennessy said.
Moet Hennessy is 66 percent owned by LVMH (LVMH.PA) and some 34 percent owned by Diageo, the maker of Johnnie Walker scotch. (Reporting by David Jones)