From Bloomberg, January 26:
Producers of the pricey brandy are cutting staff.
The vineyards of Cognac, sprawled across the rolling hills of southwestern France, are typically desolate in January. Once the grapes are harvested every fall and their juice is fermented and distilled to make the region’s namesake spirit, the area goes into hibernation. But this year, there are pockets of activity, with producers uprooting vines, the first coordinated removal since the late 1990s as the industry attempts to reduce production and revive a flagging market.
After years of exuberant demand for Cognac, the industry is nursing a hangover, with shipments last year falling to 141 million bottles, the lowest level since 2009, according to BNIC, a trade group of producers. And consumption will drop about 2% annually through 2029, data tracker IWSR predicts.
“We didn’t see this violent crisis coming,” says Thibaut Delrieu, managing director of Hine, a small brand that laid off more than a third of its workers last year and is pulling vines from about 10% of its 129 hectares. “We haven’t yet hit bottom.”
Cognac producers are being shaken by a pronounced shift away from booze coupled with a cost-of-living squeeze that’s cut demand for luxury goods. Those difficulties have been compounded by rising tariffs in the US and China, which jointly account for more than half of total consumption of Cognac. Taken together, those factors threaten a business valued at €2.2 billion ($2.6 billion) a year for distilling giants Pernod Ricard, LVMH and Rémy Cointreau, and scores of smaller houses. And for France, the sales downturn could quickly become a crisis, as more than 70,000 jobs in the country are tied to the spirit’s production, BNIC estimates.
Cognac is made from a fermented grape juice that’s distilled twice to yield a spirit called eau-de-vie. That’s stored in barrels of oak from nearby forests for at least two years to develop flavor and color—with premium versions aged for a decade or more. Producers typically have enough supplies on hand to cover seven years of demand, but today that stands at a record 11 years, according to BNIC. Storing any more, says Delrieu, would require expanded facilities and more barrels. “The inventory situation is very tricky, because building new cellars is expensive,” he says.
And while the spirit typically improves with age, demand for older—and therefore more expensive—Cognac is unlikely to increase as long as consumers fret about rising prices. “Counterintuitively, that premium stock could lose value over time,” says Pierre-Eric Perrin, a partner at Eight Advisory, a financial consulting firm that works with Cognac makers.
The decline in sales is particularly painful for Hennessy, owned by LVMH Moët Hennessy Louis Vuitton SE. The brand accounts for about half of all shipments, putting it far ahead of Rémy Martin, Martell and Courvoisier, which together make up a third of the market. Although LVMH doesn’t break out numbers by brand, its drinks division accounted for less than 6% of operating profit in the first half of last year, versus 16% for the same period in 2015. The fashion and leather goods unit, by contrast, has seen its contribution to the conglomerate’s profit jump to about three-quarters, from 56% a decade ago. The drinks division might ultimately be spun off to make LVMH more palatable for investors—notably funds from the Persian Gulf—who eschew alcohol companies, according to HSBC.
Hennessy is seeking to goose demand by inventing new cocktails with the brandy. In Cognac, the town of 18,500 at the heart of the region, bright billboards atop Hennessy’s limestone headquarters suggest Cognac-infused berry mojitos and coladas. And a year ago, Bernard Arnault, LVMH’s chief executive officer and controlling shareholder, put former group chief financial officer Jean-Jacques Guiony and Alexandre Arnault (Bernard’s son) in charge of the drinks unit, saying he expected them to need two years to turn the business around. The drinks business in 2025 announced plans to cut head count to 2019 levels amid the drop in demand.
Although the reductions are supposed to come via attrition rather than layoffs, Hennessy employees were upset to learn they won’t be getting a bonus for 2025—which can account for 20% of annual compensation in a good year. Unions are in talks with management to restore at least some of the money, says Matthieu Devers, a labor representative at Hennessy. The downturn was aggravated by the brand’s decision to raise prices following the Covid-19 pandemic, particularly in the US, a move that was “disconnected from reality and backfired with consumers,” Devers says. Hennessy declined to comment....
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