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LUXURY: Cognac – Expensive taste

20 December 2007 By db staff writer

Consumer demand for luxury goods and growing disposable income in the emerging markets has led to impressive growth in premium Cognac. Fionnuala Synnott reports

Although vodka is more popular than ever among consumers, the attention of the on-trade is increasingly focused on spirits with a less neutral flavour profile.

Cognac appears to be benefiting from this trend, with shipments at the end of August this year reaching their highest level since the creation of the appellation in 1936. Latest figures from the Bureau National Interprofessionnel du Cognac (BNIC) show an overall growth of 9.3% for the category. But the real story lies in Cognac’s premium expressions, which have gone from strength to strength.

According to the BNIC, from 1 September 2006 to 31 August 2007, shipments of VSOP Cognac increased by 14.1%, while shipments of older categories (XO and above) rose by 16.4%. By contrast, VS and three-star shipments only increased by 4.4% in the same period. This suggests that the Cognaçais have succeeded where others have failed and have managed to get consumers to trade up.

Growth drivers
The increase in premium Cognac consumption has been fuelled by global demand for luxury goods combined with growing disposable income in the BRIC economies, particularly China and Russia. Patrick Ligeron, European export manager for Cognac Frapin, explains: “People are drinking less volume and drinking better quality. The current trend for all things premium has been very important for Cognac, particularly VSOP styles.” Linda Sooprayen, brand manager for Rémy Martin, agrees: “Our research indicates that the growth is coming from people wanting to trade up. Cognac can be a confusing category but the more educated they become, the more consumers want to trade up and experience the premium end of the market.”

Supply issues

Given the growing demand for Cognac and the Cognaçais’ decision to reduce yields when the market was depressed, the rumour that some brands are experiencing eaux-de-vie shortages comes as no shock. Emporia Brands’ Rackham explains: “About 10 years ago, when the Cognaçais were overproducing, a new contract was made with the growers to reduce the yield from 10 hectolitres per hectare to 8hl per ha. This has led to a shortage of Cognac in the past few years. In future, there will be massive changes in the supply base and those brands that haven’t created a luxury position for themselves will find it difficult.” Frapin’s Ligeron adds: “Supply can be quite difficult to find because of the previous policy applied. We produce exclusively from our own vineyard, which gives us a certain freedom, but a shortage of supply will have an impact on the category as a whole and prices will rise.”

The BNIC’s Durand says: “Producing Cognac is a long process. We must produce today what we’ll sell in two, five, 10 years or more. To work out our level of production, we use a tool called the QNV (Quantité Normalement Vinifiée = hectolitres of pure alcohol per hectare), which helps us to fix the yield we need.” Durand points out that Cognac is perhaps the only AOC that sells what it produces. He adds: “Last year, we had a QNV of 8.35 hl of pure alcohol per ha. In 2007, the real QNV will be approximately 8.8hl/ha representing an increase of +5.4% against 2006. We needed more because shipments increased at the end of August by +7.4%. This situation is due to this year’s bad harvest. Assuming the weather is OK next year we’ll produce more. The production potential of our vineyards (calculated on an average of the past five years) is a QNV of 11.92, i.e. +35% vs this year’s production.”

Steady consumption (+3.5%) in Cognac’s largest market – the US – as well as dramatic growth in Asia (+16.4%, albeit from a low base) and Europe (+9.7%, with growth being driven by the Russian market) (BNIC 1.09.06 to 31.08.07) has also made the category more dynamic. Charles Braastad, owner and master blender of Delamain Cognac, says: “The US is still the biggest market but last year more people drank Cognac in Moscow than in New York. Contrary to what people may think, people in Moscow are not just buying premium Cognac because it is expensive – these are very educated people, who know what they are paying for.”

Chris Seale, head of marketing for Cognac at Pernod Ricard, which owns Martell, thinks that people see Cognac as a luxury category with French provenance and quality credentials. He adds: “Cognac’s variety has also stimulated interest from consumers. It can act as a base for a cocktail or a long drink or be served neat after dinner.”

The perfect serve
In fact, according to Jérôme Durand, marketing and communications director of the BNIC, record shipments in 2007 are indicative of a change in how people are consuming Cognac. “Outside France, Cognac is primarily enjoyed as an apéritif and is benefiting from the current cocktail craze. We estimate that, today, 70% to 80% of Cognacs are enjoyed as apéritifs.”

US consumers have been mixing Cognac for many years. Rémy Martin’s Sooprayen comments: “In the US, Cognac consumers tend to be younger, largely due to the influence hip-hop culture has had on the category. Consumers, therefore, often tend to mix their Cognac”.

Meanwhile, in Asia, people tend to drink Cognac neat or over ice throughout dinner (usually XO) and super-premium afterwards. Pernod’s Seale says: “The big difference, particularly in the Far East, is that bottle sales of premium spirits are more common because people tend to drink Cognac neat or over ice. In Russia, bottle sales are also more prevalent.”

James Rackham, chairman of Emporia Brands, which distributes Camus Cognac in the UK, says: “In Russia and the Far East, Cognac is a status product as it is in the US. In the UK, Cognac has a deluxe profile but it doesn’t have the same status as premium vodka. UK consumers know Cognac already so it’s difficult to market it as something new and fashionable. Cognac’s marketing strategy has to be more adult in a mature market like the UK.”

This perhaps explains why the category is not growing at the same pace in the UK as it is in other export markets. According to Nielsen, both value and volume sales in the on-trade are down 6% and 8% respectively, while volume and value sales are up by 11% and 8% in the off-trade (MAT 30.09.07).

Francois Le Grelle, managing director for Hine Vintage Cognacs, claims that the category’s decline in the UK on-trade is mainly attributable to the importance of VS Cognac, sales of which have dropped in the pub sector. He explains: “Sadly the UK on-trade is still dominated by VS, which is not a sipping Cognac. However, VSOP is enjoying the steepest growth in the on-trade at the moment. This is largely coming from the style bar sector where it is being mixed, but also the white table cloth environment where it is drunk on its own after dinner.”

The premium end of the UK market is indeed looking healthier. VSOP sales have risen around 21.5% overall (Nielsen, MAT 30.09.07). In addition, on-trade sales of QSS and XO styles are up 33% in volume and 28% in value while off-trade QSS and XO sales are up a staggering 290% in volume and 120% in value.

Off-trade
According to Le Grelle, Cognac also has a long way to go in the UK off-trade: “Volume is generated by VS and the multiple off-trade seems to be a battleground for big brands looking to command market share. Unfortunately, many consumers are being encouraged to buy down to a price and shop for the biggest discount rather than being encouraged to buy up to quality.”

Mixing Cognac

Chris Seale, head of marketing for Cognac at Pernod Ricard, says: “Brown spirits have been talked down in the last decade but Cognac is bucking the trend. Innovation has been fundamental in reviving interest in the category.”

In recent years, many producers have tried to attract new consumers to the category by launching a Cognac that is intended as a cocktail base. “H” by Hine Vintage Cognacs is one such offering. Francois Le Grelle, MD, explains: “In 2004, Hine believed there was an opportunity for an addition to their range, for a more floral style of Cognac which would make a perfect cocktail base. Of course it had to be a VSOP in quality, and the packaging and flavour profile were developed to appeal to bartenders and younger consumers in their 20s.” Camus also introduced a new blend a year ago because it found that “people are looking for a fruitier style”.

Rémy Martin has recently launched a new product – Coeur de Cognac – after investigating what was stopping new consumers from buying into the category. Brand manager Linda Sooprayen explains: “Cognac’s image is a barrier for new consumers. Cognac is seen as old-fashioned and tired and maybe a little boring.” Others haven’t taken to the taste of the category. “Consumers found traditional Cognac spicy and full of heat.” According to Sooprayen, the Cognac has been specifically designed “to break all the rules” and appeal to non-Cognac drinkers. “It is fruity and succulent – everything that Cognac doesn’t describe itself as.”

he BNIC is also getting in on the act. At the end of January next year, it will host an “International Cognac Summit” with top mixologists and journalists in order to try and come up with a classic Cognac-based cocktail.

Fortunately, many UK department stores and specialist and independent retailers are offering their customers a growing range of Cognacs at XO level and above. Duty-free also remains an important sales channel for premium Cognac. Hennessy’s brand director Mark Harvey says: “Duty-free adds to spirits’ premium image as it offers unique display and education opportunities to a broad consumer base, often at a time when they can leisurely walk through the aisles and become aware of a new product offering.” Courvoisier’s brand ambassador Pierre Szersnovicz agrees: “Duty-free is good for building a premium position. It’s a good market for us, and for Cognac in general, particularly XO. It’s where people have money and time to spend.”

Premium image
The Cognaçais agree that educating consumers is vital if the category is to continue its current growth spurt. Seale at Pernod Ricard says: “Education needs to form part of the growth strategy for the category as improved knowledge is underwriting the growth of premium products.” The BNIC, meanwhile, is developing an interactive encyclopaedia for consumers detailing the history of the spirit. This will be available next year.

Delamain’s Braastad says: “Cognac has the sort of rich and long history that other categories dream of. Cognac companies don’t spend enough time educating consumers, they just do it the easy way through advertising, promotions and packaging.”
But at least there is a certain homogeneity to the marketing used by different brands. Emporia Brands’ Rackham comments: “Producers have focused on the quality and provenance of Cognac and have built a premium image while broadening the market base and reducing the age of entry-level consumers.”

This strategy, coupled with the global trends alread mentioned, means the tide is turning for Cognac. Frapin’s Ligeron describes the current growth of the category as “the beginning of the rebirth” of Cognac. But the BNIC’s Durand thinks that luxury Cognac has yet to realise its full potential: “China has grown by nearly 30% in the past 12 months, while in Russia, premium Cognac sales have gone up 50% in the past 12 months. These are two of the most dynamic markets for Cognac and they still have a lot of potential. India and Brazil will also open up.” Regarding the UK market, Rackham says: “Every spirit goes through cycles. Cognac’s cycle for the UK is yet to come.”

Rémy Martin’s Sooprayen thinks future growth opportunities lie in getting existing consumers to buy more Cognac and encouraging consumers, who are already buying premium spirits, to buy into the category for the first time. “Traditionally, consumers buy a bottle of Cognac once or twice a year.We want to encourage them to treat themselves more often, like they do with Champagne.” The brand has also tried to attract new consumers by launching a more readily accessible spirit (see box below).

Martell’s Seale sums up: “At the moment, there is a real interest in premium goods. Quality is first and foremost on people’s minds and consumers are looking for heritage and provenance. With fantastic stories to tell, Cognac is in a perfect position to grow its market.”