The learning hardway

The brandy market has suffered decades of decline worldwide but it is finally looking buoyant again, says Nick Faith

COGNAC REMAINS the king of brandies, as it has been since the early 18th century. It is, and has always been, by far and away the most important brandy on the international scene.

Of course, any country which grows grapes also makes brandy from them and, usually, what are called "pomace brandies" or marcs and grappas to the non-specialist.

Nevertheless, most major brandyproducing countries, like South Africa, Australia, Mexico and the United States, sell very little if any brandy outside their borders.

Indeed, Cognac’s dominance was confirmed recently when Gallo, producer of by far the best-selling American brandy, started to market an excellent cognac of its own. And in truth only two brandies, Armagnac from Gascony and Brandy de Jerez, are of any consequence on the world market, though a look at page 28 will confirm that they trail far behind Cognac.

And while fine grappas, the only well-established pomace brandy, are becoming increasingly fashionable, the quantities involved are minimal. 

Over the past 30 years, however, Cognac’s position has looked increasingly wobbly. For a start it has lost a whole generation of drinkers.

This was partly because of its old-fashioned image, but the problem was greatly exacerbated by a classic case of hubris which affected almost everyone involved in the production and sale of the precious stuff.

By 1976, as sales soared worldwide and stocks dropped, the amount of land planted to grapes in the Cognac region rose to reach 110,000 hectares (272,000 acres) making it by far the biggest region devoted purely to white grapes in France. 

As yields, as well as acreage soared, the Cognac tree did not climb high into the sky – instead demand dropped during the hard years of the 1970s and 1980s. 

One of the few brakes on such decline, however, came in the late 1980s when the illusion of eternal prosperity returned thanks to a boom in sales of the more upmarket (ie more profitable) brandies in the Far East.

Sales of brandies of above VSOP nearly trebled in the last five years of the 1980s, at a time when the Far East accounted for 37% of sales in volume terms and 45% of the cash paid.  In the four years from 1989 sales of VS were lower than those of superior qualities.

In the early 1990s VS was responsible for 47.5% of sales, by the turn of the century it was 57%.  The rollercoaster ride in sales was largely due to the darkening of the economic outlook, above all in Japan, during the decade.

In Japan itself, the image suffered because the producers panicked and tried to counter the reduction in sales by discounting, thus greatly diminishing the image of Cognac as a luxury product.

The ride was even bumpier among the "Overseas Chinese", those in Taiwan, Thailand, Singapore, Malaysia and Hong Kong where sales nearly trebled in the last five years of the 1980s, but were down to well below their 1980s’ level by the millennium.

Although the acreage had been reduced in the 1980s and 1990s to 80,000 hectares – thanks to lavish subsidies from European taxpayers – there is still some way to go. 

The region probably needs 10,000ha more to be dug up, despite the increases in sales of alternative products such as vins de pays, the local apéritif Pineau de Charentes and cognac-based liqueurs – some old-established versions such as Cointreau and Grand Marnier and others newly invented like Alizé, a mix of Cognac and passionfruit juice made by the Lafragette family, which has been a roaring success in the United States.

Pride before the fall

But none of this can counterbalance the negative factors which dominated the scene until the last years of the 1990s.  The situation had been greatly exacerbated by the arrogance and, in some instances, mismanagement of the Big Four producers, Hennessy, Martell, Rémy-Martin and Courvoisier, which account for four-fifths of worldwide sales of Cognac. 

During the 1980s and 1990s only Hennessy had continuing effective management.  For some years Rémy was shaken by indebtedness and prolonged family quarrels and it was only when Dominique Hériard-Dubreuil took over the reins from two of her brothers in the late 1990s that the situation was stabilised; until 2000 Courvoisier suffered from the lacklustre management of its parent, Allied-Domecq; while poor Martell, which, alongside Hennessy, had been one of the top two Cognacs since the 1750s, saw its share of the market halve to little over a tenth during a dismal decade under the "management" of Seagram before Pernod-Ricard took over in late 2001.

Fortunately all four are now on-song but still refuse to act together.  To make matters worse, control over the business was steadily being transferred, to Paris (Hennessy, Rémy- Martin), Bristol (Courvoisier) or New York (Martell), transforming the region of Cognac itself into merely a series of production units without the administrative and commercial infrastructure which it had built up over the centuries.

As a result, the top managements have lost contact with their own community – so much so that these days they won’t even support one of the BNIC’s happiest and most long-established initiatives, the festival of Detective and Thriller films.

Unfortunately, too, at a time when the all-conquering Scots were flourishing thanks largely to their willingness to put exact ages and – in the case of single malts – an equally exact provenance on their products, the Cognacais stubbornly stuck to their historic refusal to give dates.

The Cognacais, rightly or wrongly, have always relied exclusively on their brand names. Moreover, in 1962 the Big Four had secured a ban on the sale of single vintage Cognacs which lasted till as late as 1988.

However, above all of these reasons, the Cognacais refused to contemplate the idea of publicising their precious spirit as suitable for mixing.  This was hypocritical since they knew perfectly well that the vast majority of sales in their biggest market, the United States, were to black drinkers in the ghettos of major cities, where the Cognacs were mostly mixed with Coca-Cola.

True survivor

Not surprisingly the combination of increased pressure from the Big Four, anxious to preserve volumes of sales if not profits, and the dramatic drop in margins with the slump in the Far East, led to the disappearance of many of the middle-sized, family controlled firms which had historically provided a solid spine to the region – the worst crash being Hardy, which went broke.

At the same time dozens of brands were absorbed by bigger groups, which tended to abandon them and rely on a single brand.

Despite all these attempts at suicide, Cognac survived – a tribute to the quality of the drink – and recently has even started to flourish, albeit modestly. Better management within the Big Four has helped, though Seagram left Martell in a parlous condition with excessive stocks and a ramshackle production system when they parted company.

Another boost has come from a steady improvement in the overall quality of Cognacs as vines were dug up in the Bons Bois and Bois Ordinaires, the outer circles of the Cognac region, and as the major firms grew ever-choosier in selecting their purchases.

Also helpful has been the emergence of a number of smaller firms, new and old, which realised that to survive they had to provide a more or less unique product to be able to compete.

The most obvious case is Camus, number five in the overall pecking order, which had been resurrected in the three decades until the 1990s as supplier to the booming Duty Free market in the Far East.

The slump in Duty Free, largely created by the reduction in the number of Japanese travellers – and reduction in domestic duty on Cognac – naturally created problems.

But Camus has fought back with such products as Josephine, an agreeable Cognac in a slim elegant bottle with a label copied from the famous Czech artist Mucha, and aimed at the hordes of Japanese "Office ladies" looking for presents for their friends.

And newcomers to the market include Leopold Gourmel, specialising in the fine floral brandies from a particularly favoured corner of the Fins Bois, the socalled Fins Bois de Jarnac.

The long crisis also meant that a number of well-respected grower/distillers, above all in the Grande Champagne, were forced to sell their own brandies because the major firms who had been their regular customers for generations decided to go it alone.

Some, notably Frapin and Ragnaud-Sabourin, had pioneered such sales well before the 1970s.  The arrival of dozens of newcomers not only boosted the sale of fine Cognacs, it also brought the growers closer to the market, from whose whims they had been insulated for so long by the major firms.

Another boost at the top end has been provided by the ability to sell single vintages, provided that they had been kept in doubly-locked cellars with the customs people holding one of the keys.

Unfortunately, the Cognacais have still not got around to providing more exact ages for their ordinary products and do not allow them for old or non singlevintage Cognacs. 

But Gallic ingenuity has come to the rescue, with some producers like Ragnaud-Sabourin and the Tesserons, owners of the best stocks of truly ancient Cognacs in the region – giving the broadest of hints as to the age of their brandies – typically Tesseron’s No 90, which was obviously distilled in 1990, or Lot 53 which was distilled in, you guessed it, 1953 – or adding helpful additional labels tied to the bottle but not forming part of the officially-controlled label.

Market Expansion Key

All these efforts help the image of Cognac but, in sales terms, are inevitably marginal. Of more consequence is the broadening of markets.  While historic markets – above all those in Europe – have remained relatively steady and growth has been dominated by that in the United States.  However, new markets are opening up all the time.

Classic is South Korea where sales more than doubled between 1999 and 2002, making it number 12 in the world, with sales virtually all confined to the superior qualities.

Even more spectacular were those in China, for decades the Great White Hope of the Cognacais, but a market which proved an eternal disappointment. By 1999, sales were down to a mere 100,000 bottles because of a clampdown on the corruption among the Cognac-drinking upper echelons of the Communist party, but it is now 19th in the league table with sales of 1.2m bottles.

This is still minuscule given the size of China’s market, but this is now much more open to foreign products and one in which there are a rapidly growing number of middle-class professionals and businessmen.

The prospects can be seen by what has happened in Russia, where sales trebled since 1999, reaching 2m bottles by 2002. 

More importantly, sales are not confined to the super-rich (and their girlfriends) but have broadened out – significantly two-fifths of sales are of VS, although Russia is now fourth in the league table of average sales price.

US market impact

But far and away the biggest factor in the turnaround has been the acceptance by the producers that Cognac’s market divides into two.   At the top are what the Americans would call "sippin’ Cognacs", ie those of XO and above.

At the other are those suitable for mixing – largely but not exclusively VS – though most VSOPs are perfectly suitable for drinking with ice.

Success has many fathers, but the boost for mixing undoubtedly owes a great deal to the drink’s ruling body, the much-abused BNIC (Bureau National Interprofessionel de Cognac) which has campaigned for Cognac and tonic (not my favourite mixer) but far more to Hennessy which pioneered the idea in the United States in the early 1990s.

Today sales of Cognac in the United States are growing faster than those of any other type of brandy.  The result of Hennessy’s success in the US is that the firm’s VS is by far the biggest seller in the world, probably accounting for over 30% of the total.

Hennessy now enjoys over two-fifths of the world market, a share far greater than any other firm has ever enjoyed.  But Hennessy’s success is narrowly based, and overall sales in other markets have risen a mere 3% in the years from 1999-2002.

Nevertheless, this represents a picture of relative success, ie stabilisation in European markets after a long period of decline.  The only exception is the domestic French market, dominated by pretty appalling, young, cheap Cognacs sold at rock-bottom prices by supermarkets.

In the rest of Europe sales are largely confined to the cheap VS Cognacs which account for 85% of sales in Britain, 90% in Germany, and 93% in Norway.  By contrast, sales in the Far East are virtually entirely made up of VSOP and above.

The result (as shown in the tables right and below right) is that sales in volume terms do not necessarily compare with their value, and thus the profitability of individual markets.

But the most surprising element in the new fashionability of Cognac is its affiliation with Afro- American rock, rap and hip-hop artists.  Hennessy has understood the potential, though the competition is hard on its heels. Indeed the new firm of de Fussigny has even launched a brandy called NYAK, after the way the rap community pronounces Cognac.

Courvoisier’s recovery has been boosted by the way it featured in a hit by Busta Rhymes that reached the top five of the American rap charts last year called simply Pass the Courvoisier:  Give me the Henny, you can give me the Cris You can pass me the Remi, but pass the Courvoisier And yes he is equating the Cognac he drinks – from Hennessy, Rémy-Martin and Courvoisier – with Louis Roederer’s Cristal, the most up-market of Champagnes.

He was not alone.  Puff Daddy and Snoop Doggy Dogg have also serenaded the charms of "gnac".  Stars like these simply cannot be bought. Even if they were willing, their fee would simply break any promotional budget.

Even when these initiatives – and the rap habit on which they are based – have become merely examples of the ephemeral nature of popular cultural fads, Cognac will again have taken its place as a major element in the world spirits business, a place which fashion, and the arrogance of the Cognacais has deprived it for so long.

And since Cognac represents a mere 1% of the world market in spirits there will always be room for it – provided that the producers continue to show the very same entrepreneurial spirit they have demonstrated in the past few years.

Nicholas Faith’s book, Cognac, will be published in April 2004