Pity France’s cognac-makers

Cognac producers have at least one thing to toast in July. After a months-long dumping investigation into European brandy, the Chinese government announced that 34 producers—including the three biggest, LVMH, Pernod Ricard and Remy Cointreau—had agreed to minimum prices, and so would be exempt from new duties. A 35% tariff for the next five years will apply only to a dribble of producers.

Cognac, Europe’s premier brandy appellation, is important to France. “Cognac is very symbolic,” says Guilhem Grosperrin, whose family business, Cognac Grosperrin, sells high-end bottles. It is also lucrative. Cognac producers make around €3bn ($3.5bn) in sales a year. The industry is far more reliant on overseas markets than other French products, such as wine or cheese; fully 97% of cognac is sipped abroad. Bureau National Interprofessionnel du Cognac (BNIC), the industry body, counts some 4,360 winegrowers and distillers in the region, which is around a 90-minute drive from Bordeaux.

Lately, however, cognac producers have found themselves in low spirits. China has been one source of trouble. Its government’s investigation into European brandy was widely seen as retaliation for an EU probe into Chinese electric vehicles. Between October, when China applied provisional anti-dumping tariffs, and May, cognac shipments to the country fell by 38% compared with the same period a year earlier, according to BNIC. As the organisation’s head, Florent Morillon, put it, the industry has been a “hostage” in the trade dispute.

Cognac’s China troubles are not over yet. Producers are still to reveal exactly what minimum prices they have agreed on. These will squeeze profit margins. China has also recently raised the import tax on brandy and whisky from 5% to 10%. Analysts at Bernstein, a broker, reckon that Pernod Ricard will still take a hit from these measures of around €50m a year. That is better than the €140m they estimate it would have cost had anti-dumping tariffs been applied. But it is still equivalent to about 3% of the firm’s net profit in its most recent financial year. It hasn’t helped that, amid an economic slowdown, China’s rich are spending less on all sorts of luxury items, from handbags to high-end booze.

Then there is America, the biggest market of all for cognac. There, too, the drink is caught up in a trade spat. EU negotiators are thrashing out a deal that will allow America to slap higher tariffs on some goods from the bloc in return for sparing others. Cognac-makers are hoping to come out unscathed. But President Donald Trump, who is eager to protect American whisky producers, may not acquiesce. Earlier this year he threatened to introduce tariffs as high as 200% on wine and spirits from the EU.

An even greater worry for cognac producers is what is happening with demand for their tipple in America. Data from Nielsen, an analytics firm, and Citigroup, a bank, suggests sales of cognac in the country dropped almost 12%, year on year, in the four weeks to mid-June.

The slump partly reflects the general strain on consumers’ wallets. But it is also the result of longer-term trends. Youngsters are boozing less than their parents and grandparents. The share of Americans aged between 18 and 34 who say they think drinking even in moderation is bad for health reached 65% last year, up from 34% in 2018, according to Gallup, a pollster. And when they do treat themselves to a tipple, it is increasingly unlikely to be cognac. Whereas in the 1990s rappers including 2Pac and Master P name-dropped Hennessy in their lyrics, more recent hits by Nicki Minaj and Drake have been peppered with mentions of Casamigos and other tequila brands. For cognac houses, it’s a sad song. ■