Cognac at US$4,000 bumps up against luxury shoppers’ new limits
INTERNATIONAL distillers have for years been concocting niche formulations to justify charging drinkers ever higher prices. Diageo’s Japanese-inspired limited edition of Johnnie Walker Blue, for example, is blended to extract umami flavours and sells for £300 (S$511).
The strategy, borrowed from the luxury goods industry, is called premiumisation, and it has delivered record profits. But drinkers in many countries appear to have had enough of forking out ever-more per bottle, a shift that threatens to upend the business model.
On Friday (Jan 26), Remy Cointreau, whose Remy Martin Louis XIII Cognac sells for US$4,000, warned that US market conditions had worsened over the past year. Retailers are discounting heavily and rising interest rates have cut distributors’ ability to finance new stock.
The post-pandemic recovery in China was slower than expected. And Remy reckons stubborn inflation will limit sales in Europe.
“This year is going to be crunch time for a lot of drinks companies,” said Siobhan Gehin, senior partner at consultancy Roland Berger.
“Premiumisation is still the right strategy but it’s increasingly coming under pressure. Apart from the really high-end customer, even consumers who would have paid a premium are considering their spending because of ongoing pressures on their budgets.”
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Remy’s results don’t bode well for Diageo, which will update investors on Tuesday (Jan 30). In November, its shares plunged 12 per cent after a profit warning blamed on Latin America and the Caribbean. Now the revival of its North America business looks shaky too.
“The US is the most important thing, the biggest source of profit for the company,” said Kevin Dreyer, co-chief investment officer of value at Gabelli Funds, which has a stake in the company worth around £25 million. Covid-era stimulus checks drove spending there, but that has now settled down. “It’s all about getting that business stabilised and growing again,” Dreyer added.
The strategy of premiumisation tapped lucrative trends: a desire to drink less but better, and the rise of the middle class in countries such as China where more expensive whisky signals prosperity. A stock of ageing liquors such as cognac and whisky has constrained supply, buoying prices.
But drinking habits are changing. In Diageo’s last fiscal year, “premium-plus” – spirits costing US$50 or more a bottle – represented 57 per cent of its net sales growth, down from 71 per cent a year earlier.
The shift echoes what is happening in the luxury sector more broadly. LVMH Moet Hennessy Louis Vuitton, whose shares surged on Friday after it reported sales gains for the end of last year, said it does not plan to raise prices further in 2024. Its resilience fuelled investor optimism that the luxury industry can continue to grow even if its pricing power moderates.
Other luxury companies are also showing the limits of consumers’ willingness or ability to keep splashing out more for the same items they have long coveted. Swiss watchmaker Swatch Group’s sales last year fell short of estimates – in part because it was not able to hike prices enough to offset the strength of the Swiss franc.
“You cannot ask the consumer just to pay more because the demand is bigger, or the demand is exceeding what you have,” Swatch chief executive officer Nick Hayek said in an interview this week. “Even rich people are not stupid.”
Diageo is trying to come up with ways of cushioning the impact of consumers buying less expensive drinks. In Latin America, new Johnnie Walker Blonde is priced between Johnnie Walker Black and Johnnie Walker Red. But unlike cosmetics conglomerate L’Oreal, for example, which has fared well in the cost of living crisis, Diageo does not have a budget unit.
Big Booze still has some structural advantages. Drinkers are switching from beer and wine to spirits.
“They have brands that are hundreds of years old that have been through wars and diseases, famine, droughts, prohibition in the US, economic booms, crashes, supply disruption,” said Donny Kranson, portfolio manager at Vontobel Asset Management, of Diageo.
“If management keeps the brands relevant, invests in their capabilities and the strategic stock, the brands will continue to be good for hundreds more years at least.” BLOOMBERG
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