Asia's Financial Ills Spill Into Cognac Market
As Austerity Dries Up Formerly Booming Sales
By Peter Stein
12/19/1997
The Wall Street Journal
Page B9A
(Copyright (c) 1997, Dow Jones & Company, Inc.)
HONG KONG -- Just when Asians could use a stiff drink, they are shunning the bottle -- at least, the one containing
cognac.
Devalued currencies and plunging stock prices from South Korea to Thailand are slamming sales of the amber
French brandy that for years symbolized Asian excess. That is gloomy news for the world's cognac kings -- LVMH
Moet Hennessy Louis Vuitton SA, Seagram Co. and Remy Cointreau SA, all of which stand to suffer from Asia's
new austerity.
Already, the pain is spreading through the restaurants, karaoke bars and liquor distributors that cognac sales long
enriched. Daniel Yong, one of the biggest liquor distributors in the Malaysian capital of Kuala Lumpur, says his
sales are off by nearly a third. "In the last few months," he notes, "there has been a lot of beer" being sold to
customers who once might have bought cognac.
Not long ago, visions of perennial Asian sales growth cheered cognac makers, whose sales generate nearly $1.9
billion a year in revenue world-wide. Cognac toasts capped official banquets in China and weddings in Hong Kong.
A personal stash of cognac at a nightclub became a de rigueur status symbol for Rolex-toting Taiwanese and
Mercedes-loving Malaysians.
Cognac became the touchstone of a rich era: In 1989, Asians drank less than a third of the world's cognac; three
years later, they were downing more than half of it. And Asians shelled out for the quality goods. On average,
Taiwanese -- who prefer high-priced, so-called XO cognacs -- pay $34 for a bottle, three times the average paid by
their fellow tipplers in the U.S.
Today, the snifters gather dust in locales such as the New Tonnochy nightclub in Hong Kong. Pulsating electric
lights reflect off the frosted-glass decor. On stage, three Filipino dancers gyrate to the strains of Barry Manilow's
"Copacabana." But at the tables where customers ought to be chugging cognac, bored Chinese waitresses wedged
into bright red dresses smoke cigarettes and sip weak tea.
The problems have been fermenting for years. First came the recession in Japan. Cognac consumption there
collapsed as corporate bean counters scrutinized salarymen's bills for weeknight drinking bouts. And as the value of
investors' stock portfolios shrank with each passing week, so did their purchases of luxuries like cognac. From the
beginning of 1990 to the end of 1996, the Nikkei fell 50%. Over the same period, Japanese imports of cognac
dropped 36% to 1.4 million nine-liter cases, according to Impact International, a publication that tracks the drinks
industry.
So the industry looked toward China, where breakneck economic growth averaging 10% a year created excellent
cognac conditions. By 1994, cognac shipments to Hong Kong -- the gateway to China's liquor market -- totaled
$438.2 million in value, making it by far the world's biggest cognac importer.
But four years ago, Beijing suddenly dried up bank credit in a bid to slow the economy and brake inflation. As
reined-in real-estate speculators cut back on the brandy binges, the cognac industry's China hopes began to
evaporate. By 1996, cognac shipments to Hong Kong had sunk 30% in value from their 1994 peak.
Cognac vendors are coy about how bad the Asian problem is likely to get. Seagram's new president for Asia-Pacific,
Ramesh Vangal, calls it "premature" to make sales forecasts.
Remy Cointreau and LVMH, which earns nearly a third of its operating profit from cognac, both declined to
comment for this article. The prices of their Paris-listed stocks, though, speak volumes: Shares of both have sunk
about 35% since early July.
As if everything else weren't bad enough, cognac is suffering from another, subtler problem in Asia. For many of the
region's hip, affluent youth, cognac is uncool. In Thailand, "cognac has become more of daddy's drink," says a
Bangkok-based cognac distributor. In response, cognac companies are trying to court a younger crowd: Hennessy,
for instance, is promoting a dance band called "The Spicey Girls" at several trendy Hong Kong clubs that serve
newfangled cognac-based cocktails.
Corking the way to cognac's resurgence, though, is its undistilled cousin. Wine, especially red wine, is filling more
and more Asian decanters at cognac's expense. In China, imports of French wine last year jumped fivefold from
1995.
"Taiwan is crazy for red wine," says Cathy Yang, advertising account manager for the Hennessy brand at Leo
Burnett's Taiwan office. "Young people think cognac makes you fat and that red wine is good for you."
--Chen May Yee and Fara Warner contributed to this article.