Asian thirst drives demand for 2,500-euro cognac

COGNAC, France Sun Oct 21, 2012 8:14pm IST

A bottle of ''XO'' (extra old) cognac is displayed at the Remy Martin distillery in Cognac, southwestern France, October 8, 2012. REUTERS/Regis Duvignau

A bottle of ''XO'' (extra old) cognac is displayed at the Remy Martin distillery in Cognac, southwestern France, October 8, 2012.

Credit: Reuters/Regis Duvignau

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COGNAC, France (Reuters) - So fine are the hand-made crystal decanters used for Remy Martin's 2,500-euro Louis XIII cognac that workers don silk gloves to fill them with the caramel-coloured liquor, to avoid leaving scratches or smudgy fingerprints.

It is the finishing touch for a deluxe elixir made from a blend of 1,200 kinds of "eau de vie" brandy aged for decades in century-old oak casks cloaked in a black fungus that feeds on the "angels' share" of alcohol evaporating through the wood.

As overall cognac sales have recovered from the 2008/09 downturn, discerning Chinese looking for an aspirational tipple are causing a surge in shipments of Louis XIII and other deluxe spirits.

The trend is good news for Remy Martin, which is much more focused than its rivals on high-end brands, and suggests that a slowdown in China's overall economic growth rate may not dampen the country's appetite for some luxury goods, even if some sectors have sounded warnings.

"The very high end is doing very well and is growing in Asia and all our markets. There is a very strong appetite in Asia for recognised quality," Remy Martin Chief Executive Patrick Piana told Reuters in an interview.

Robust demand for pricey brandies is encouraging parent group Remy Cointreau (RCOP.PA) despite a sharp slowdown in sales growth in the last three months as Asian wholesalers use up stocks built up earlier in the year.

High-end brands were the fastest-growing category of cognac sold in 2011 in volume terms, growing 18.2 percent for XO, or "Extra Old", blends where the youngest eau de vie in the mix has been aged for at least six years.

Rising deluxe sales led to a 16.9 percent jump in the retail value of global cognac shipments in 2011 to $8.5 billion, as volumes rose a lesser 6.5 percent to 12.2 million 9-bottle cases, according to International Wine and Spirits Research.

Analysts are asking whether Asian demand for luxury goods overall will stay strong. But high-end spirits are a bright spot, with wealthy Chinese more likely to postpone big ticket items like a new Jaguar than cut back on the fancy drinks.

"Remy Cointreau has strong organic growth prospects stemming from demand for deluxe cognac in China," said Trevor Stirling, an analyst with research firm Bernstein.

Among the four houses making 97 percent of the cognac France exports each year, Remy Martin has the most premium brands, focused mainly on VSOP and above. The youngest eau de vie in the "Very Superior Old Pale" blend is aged at least four years.

Piana predicted that robust Asian demand would tempt cognac houses to step up new product offerings in the high-end market, which offers tempting profit margins.

"Competition will intensify. I want that to happen because a competitive market is a dynamic market," he said.

The United States is the biggest cognac market by volume but is led by the least expensive VS, or "Very Special", grade where brandy is aged for as little as two years.

China's preference for older qualities from VSOP upwards has made it the top market for high-end cognacs, worth around $3 billion in 2011. Cognac shipments to China rose by 21.7 percent in volume last year but their retail value jumped 34 percent.

VORACIOUS FUNGUS

For China's up-and-coming millionaires, much of the appeal of a rare cognac like Louis XIII, first created in 1874, lies in its complex, almost ritualistic production process.

Remy Martin claims to use the highest-quality grapes grown in the Grande Champagne cognac territory in western France and the youngest eau de vie in the mix is at least 40 years old.

The spirit is aged in specially crafted century-old casks known as "tierçons" made from oak from the forests of the surrounding Limousin region. The voracious black fungus that creeps over the barrels, walls and many nearby buildings feeding off the wafting cognac vapour only adds to the mystique.

The number of buyers of Louis XIII, which sells for an average price of 2,500 euros a bottle, is a closely guarded secret, as are the levels of Remy's eau de vie stocks.

Those wanting to purchase limited-edition aged cognacs, like the three-litre Jeroboam variety, form waiting lists just like fashionistas do for some designer handbags.

Asia accounts for 60 percent of sales at Remy Martin and its top market is China, where it commands the No. 3 spot in volume terms behind Hennessy, owned by LVMH (LVMH.PA) and Diageo (DGE.L), and Martell, owned by Pernod Ricard (PERP.PA).

Chinese businessmen out on the town often mix VSOP with soda, fruit juice or green tea. As they climb the social ladder, they move to XO categories which tend to be drunk during formal dinners and given as gifts for the Chinese New Year.

While the Louis XIII brand is a leader for now in the luxury sector, and has a tight network of dedicated retailers and promotion partners, it faces competition from Richard Hennessy and L'Or de Jean Martell, which are priced around the same level.

To try and stay on top of the growing thirst for prestige products Remy has launched a China-exclusive XO product called Centaure aimed at young, cosmopolitan consumers.

It has also introduced Club de Remy Martin, priced 30 percent above its VSOP, and 1898 Creation Fine Champagne, priced at three times more than its XO, already around 120-160 euros.

(Editing by Catherine Bremer and Giles Elgood)

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