Cognac in China: reasons for optimism

2019 was a challenging year for Cognac in China as celebrations for the 70th anniversary of the foundation of the People Republic led to stronger supervision of many on-trade outlets. At the same time, the protests in Hong Kong darkened the mood. But any hopes that 2020 would bring respite were soon dashed when the government imposed a lockdown on the city of Wuhan, later broadened to Hubei province and the rest of the country – all roughly coinciding with Chinese New Year, an occasion of importance for Cognac.

As the dominant international spirit in China, Cognac was one of the first beverage categories to bear the brunt of the pandemic. China was the first country to impose movement restrictions to stem the spread of Covid-19, which is believed to have originated in Hubei Province.

With the cancellation of Chinese New Year celebrations and the mass closure of China’s on-trade, things were looking bleak for Cognac in its most important value market at the start of 2020.

The lockdown measures introduced by the Chinese government had a drastic impact on sales in the first quarter of this year. More than any other spirit category, with the exception of perhaps baijiu, Cognac relies on Chinese New Year gifting for a healthy annual sales boost. China is also an on-trade driven market, with little home consumption, and so the partial transfer of on-premise sales to the off-premise, as seen in other markets, is far less significant here. The closure of the on-premise was particularly bad news for VSOP Cognac, the age designation with the highest share in the channel.

As the on-premise tentatively starts to pick up in key Chinese cities, many stakeholders will be wondering what the near future looks like for Cognac. Is there cause for optimism?

Cognac remains an aspirational drink in China, which accounts for 44% of global VSOP-and-above Cognac by volume and 48% by value. It has the highest margins of any imported spirit category in China, and so gets significant investment from brand owners. In the last two decades, Cognac has succeeded in partly displacing baijiu as the drink of choice for mealtime and banqueting occasions in the wealthy southern coastal provinces of Guangdong and Fujian. As such, Cognac’s bounce-back in China will be underpinned by economic growth in these heartland provinces.

According to IWSR’s research director for Asia-Pacific, Tommy Keeling, “it won’t be an easy year for Cognac in China, but nor should we expect a disaster.” The IWSR forecasts that the category will bounce-back in H2, as China’s on-trade resumes in a ‘new normal’ environment. However, it’s worth noting that the types of venues in which consumption of Cognac is most common, such as large clubs, have been slower to reopen than smaller modern bars. Banqueting halls, meanwhile, remain universally closed.

Keeling also notes that the length of the recovery period will be heavily dependent on whether there is a second wave of Covid-19 in China, and whether a vaccine is created. “In the best case scenario, recovery should be fairly swift and the category should be back on track next year,” he says. News in mid-June 2020 about a recurrence of infections in some Beijing neighbourhoods may serve as a warning sign in that context.

Since retailers wanted to make sure their shelves were full ahead of Chinese New Year, there remains a build-up of unsold goods in the market, which will mean a delay in future purchases. “Stock levels are probably higher than usual and might need some time to clear, though I don’t anticipate a lot of discounting, as sellers know they will eventually be able to clear them at full price and will have stopped making new purchases,” Keeling adds.

In fact, rather than having too much stock, China’s key concern when it comes to Cognac is an on-going supply shortage. “Cognac sales are still small compared to baijiu sales at similar price points, so there is plenty of room for demand to grow beyond what the Cognac producers are able to supply,” notes Keeling.

As such, reduced demand during the pandemic may actually have alleviated immediate pressure on supplies. However, in the long-term, demand for Cognac in China is expected to continue to outpace supply. According to IWSR data, Cognac volumes are expected to see a CAGR of 9% from 2020 to 2024. As Keeling says, “reduced sales in 2020 would simply allow for faster growth in coming years”.

When it comes to competition from other international categories, Cognac’s seat appears to be safe in China, despite the intense market disruption and shifting dynamics caused by the pandemic. Single malt Scotch whisky is growing fast in the market, but ‘status’ Cognac is 10 times the value of ‘status’ Scotch. All imported spirits are expected to grow in China in the longer term, but smaller categories with larger off-premise and ecommerce proportions are likely to fare better in the short-term.

Despite previous market turbulence – including government austerity measures introduced in 2012 – China has remained a robust market for Cognac, and this will continue to be the case going forward.  “China’s sheer size will ensure that it remains a critical market for Cognac,” says Keeling. “No other single market will pose a serious challenge for VSOP+ Cognac demand in the foreseeable future.”

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