China

For Cognac Makers, the Chinese Party is Over


French cognac makers won’t be toasting the Chinese New Year. After several years of double-digit growth, cognac sales in China have tanked as President Xi Jinping clamps down on conspicuous consumption.

Shares in Rémy Cointreau (RCO:FP), maker of Rémy Martin cognac, plunged nearly 10 percent on Nov. 26 after the company said it expected a “substantial double-digit decline” in profits because of weak Chinese sales.

The Chinese New Year, which falls on Jan. 31 in 2014, ordinarily would bring a sales windfall, with Communist Party leaders hosting cognac-soaked banquets and giving each other bottles costing $200 and up. But, Rémy Chief Executive Officer Frédéric Pflanz told Bloomberg Television, “We don’t necessarily expect a bettering of the situation” for the next few months. Chinese distributors are sitting on large, unsold stocks and aren’t placing new orders, he said.

In issuing its profit warning, Rémy said it remained confident of long-term growth in China. “We know [sales] will come back one day,” Pflanz said.

But analyst Jonathan Fyfe of Mirabaud Securities in London says that lavish entertaining and gift-giving by the Chinese elite “is gone, and it isn’t going to come back.” Such practices, now frowned upon by Xi, accounted for about 25 percent of cognac sales in China, Fyfe says.

LVMH Moët Hennessy Louis Vuitton (MC:FP), the maker of Hennessy cognac, and Pernod Ricard (RI:FP), which makes Martell cognac, also have reported slowing Chinese sales. But Rémy, which draws 60 per cent of its revenues from cognac, is more vulnerable than the two other companies, which have diversified portfolios of drinks and other products.

Until this year, China had been the top import market by value for cognac, a form of twice-distilled brandy produced in western France.

Matlack is a Paris correspondent for Bloomberg Businessweek.

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Companies Mentioned

  • RCO:FP
    (Remy Cointreau SA)
    • $59.61 EUR
    • 0.86
    • 1.44%
  • MC:FP
    (LVMH Moet Hennessy Louis Vuitton SA)
    • $129.65 EUR
    • 1.15
    • 0.89%
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