2007 Cognac/Brandy Report

Given
its consistent, if undramatic, pattern of steady growth over
the last few years, it appears that consumers’ tastes are
moving upscale. Instead of VS and VSOP marques pushing the
depletions meter upward, XO and higher designations are
gaining solid ground and appeal among mainstream consumers
and the trade. This is an interesting trend, especially
given how much stronger the Euro is to the dollar, a
situation that has caused price increases to the lower tiers
of some brands of Cognac and brandy. More inclusion among
the mixed cocktails crowd is another challenge Cognac
marketers are starting to overcome. This helps promote
Cognac in mixed drinks that are more palatable to category
newcomers, and also piques consumer interest to branch out
in new directions and try Cognac neat.

“Overall Martell sales and
share of category grew modestly over the past two years
however, volume and share within the high marques segment is
strong and growing. Martell is now the number two brand in
that segment,” explains Abegail Domond, Martell’s Brand
Director with Pernod-Ricard. “The biggest challenge that
Martell and other Cognacs face is consumers shifting to
other spirits categories (ie, super premium tequilas and
vodkas). Attracting new, younger consumers to Cognac across
all cultural segments requires increased investment. While
VS cognacs can be mixed, the cocktail playing field is
becoming increasingly more cluttered with the influx of new
vodka, rum, gin, and tequila brands – often considered to be
the most mixable of the spirits categories. Some VS products
have benefited from being promoted as an ingredient in mixed
drinks,” she says.

“Our higher marques
business has been on a rocket ship,” says an employee of
Moet Hennessy USA who is familiar with Hennessy Cognac’s
performance. Hennessy VSOP is up about 2O percent this year,
he says. Massachusetts, “Has not seen growth as strong as
some other markets. It’s not the brand, but more competition
with other states and some other mitigating factors,” he
explains. According to some industry insiders, these
“mitigating factors” may include illegal discounting and
sales of competing brands by gray market
merchants.

“Price is not a barrier.
There is a willingness for consumers to treat themselves and
there doesn’t seem to be much of a limit in terms of
pricing,” says Christine Mahoney, Senior Director for
Courvoisier at Beam Global Spirits & Wine. The Cognac
category, up about six percent overall this year over 2OO6,
continues to grow, she says. “In the US it is the upper
marques [VSOP and higher] that are growing, though
the most prominent marque is VS,” she adds. “What we’re
seeing with Courvoisier consumers is that it’s guys in their
mid-2Os and 3Os, active in the nightclub scene. They may be
mixing it with cola and other sodas or just drinking it
neat,” she comments.

“We sell a few brandies
neat or on the rocks. In winter, we get a lot of business.
We have the big three: Remy, Hennessy and Courvoisier, all
in VS, VSOP and XO; along with Delamain Pale and Dry. We had
Hine on the menu for a while, but it didn’t really sell so
well. During the holidays we sell a lot of Louis XIII for
$125 a glass. Businessmen order it to impress clients,” says
Stephen Clark, bartender at Cuff’s in Boston. “We get a
really strong European following, and sell a lot of brandy
and Sprite. A lot of Irish and British clientele drink
that,” he says. The Incredible Hulk, a cocktail made of
Cognac and Hypnotiq is also popular there, he says. Other
Cognac-blended products aren’t even stocked because no one
ever calls for them, Clark says, with the exception of Grand
Marnier, which he says is very popular in colder
weather.

“The category is looking
good. There are a lot more people drinking cognac than
before. A lot of the wine drinkers are moving into spirits
and the Cognacs do quite well. It’s nice to see the growth,”
says Joe Howell, Manager at Federal Wine & Spirits in
Boston. “A lot of 3O-somethings are drinking
Cognac.

So many people are drinking
wines; it’s basically a step up in the wine category, where
the product’s not that strange to them. People are working a
lot longer and harder now and take the few minutes you can
for yourself and appreciate it,” he adds. At Federal, “We do
the Hennessys, Remys, the reglar stuff. I work a lot with
Pierre Ferrand and the Gabriel & Andreau line. There’s a
more elegant side to them. People with palates generally
take to them very well. For less sophisticated drinkers it’s
about what works for them. This is where the Remys and
Hennessys come in. I much prefer to sell a 1914 Ferrand than
a Louis XIII,” he says. “A lot of people are hesitant to get
into some spirits and that’s where a trained staff can come
in,” observes Howell, adding that offering an after-dinner
Cognac adds both to a guest’s enjoyment as well as the
check. “The smaller Cognac houses and producers put a little
more heart and soul into it. It’s not just dollars and
cents,” he notes.

“The strongest growth right
now is with the higher grades, VSOP and above. It’s perfect
for us because we’ve always been the trade-up brand,” says
Steve Hissam, Category Director at Remy Cointreau USA, which
imports Remy Martin. “The VS segment is slowing a little
bit. The core VS drinker is dabbling a little. You’re seeing
Grey Goose and Patron everywhere,” he observes. “People are
really trading up to ultra premium products.” One stark
example of what Hissam calls “that desire for uber luxury”
is Black Pearl, a special edition single barrel bottling of
Remy’s Louis XIII marque imported earlier this year. One
hundred bottles reached the US priced at $8OOO each. All
sold within a week. “Our core consumer will on occasion
trade up, often to 1738, the fastest-growing marque in our
portfolio. It provides people with a bridge from VSOP to
something higher, and a bridge to move up to XO,” he
comments. Many people have assumptions about proper Cognac
etiquette, Hissam suggests. “The challenge with Cognac and
beverage alcohol in general is people feel there need to be
rules to drink it. You have to drink it in a special glass,
only in cold weather, after dinner. That right there
inhibits consumption. If it’s not a formal occasion, people
feel it’s not a Cognac occasion,” he says. When customers
understand Cognac, they feel more comfortable drinking it in
many situations, he continues. One problem is resistance
from some bartenders if someone orders a cocktail mixed with
Cognac. “The hand goes up from the gatekeepers, who ask:
‘Why are you mixing this?'” he says. The solution to this is
highly personalized education about Cognac to both on- and
off-premise accounts. “There is certainly a thirst and
desire to learn more about Cognac,” Hissam notes.

“Cognac hasn’t necessarily
been the first thing consumers think of when they think of
cocktails. We’re really trying to reinforce the cocktail
aspect,” says Yvette Baez-Goss, Brand Director for Hennessy.
The “Flaunt Your Taste” campaign “targets the urbane luxury
aspiring African-American, Hispanic and general market
consumers. The nationwide campaign will feature cable
television and print ads in major glossy general market and
African-American magazines,” she says. A traveling “Art of
Mixing Academy” will invite key bartenders in five major
markets to learn about Hennessy’s cocktail versatility.
“This is the first real attempt at building an ongoing
relationship with them as our trade partners, who for a long
time we ignored as gatekeepers. I hope to train them to
really leverage our consumers who don’t want a mojito or a
cosmopolitan,” she says, adding: “We are no longer playing
in Cognac. Hennessy will become a luxury spirit that will
transcend category.”

Some smaller Cognac houses
have been doing such one-to-one product and category
outreach for a long time. Pierre Ferrand, in particular, was
years ahead of the curve when it established a network of
French-born regional managers who also serve as Cognac
ambassadors, teaching about where it comes from, how it’s
made and numerous other Cognac factoids.

The philosophy of its
importer, Cognac Ferrand USA, has typically been to win over
one account at a time through highly personal attention to
staff training. Partly because of this, and in large measure
because of consistently high quality across all marques,
Pierre Ferrand is among the go-to brands for many accounts
looking for a smaller, quality boutique Cognac house. This
seems to have paid off, as Ferrand’s sales jumped 2O percent
from 2OO5 to 2OO6, which still reflected a modest increase
from 5OOO to 6OOO cases. “We have all the stock standards,
such as Hennessy, Courvoisier and all that,” says Brian
Lamb, owner or Ourglass Wine in Saugus. “But when you get
the more educated customer looking for more handmade
production Cognacs, they’ve definitely been leaning to
Pierre Ferrand,” he remarks.

“I think what we’ve seen
over last couple of years is consumers passing on some of
the bigger brands, looking at the better artisinal
producers, such as Ferrand and Delamain, and seeing if they
can get better quality. We do a lot with Kelt, which has a
round and voluptuous mouth feel and is a nice alternative to
things like Remy,” says Mark Reilly, General Manager at
Marty’s in Newton. “There are certain customers who have
brand loyalty and don’t want to experiment, but I think
people are looking for value, and if you’re sincere they’re
willing to give it a try,” he says. Non-French brandies are
also popular. “We’ve been working for several years with
Spanish brandy, which offers amazing value,” he remarks.
Products such as solera-aged Carlos I and Gran Duque de Alba
cost about $5O and are commensurate with $15O Cognacs,
Reilly states.

“Cognac and brandy, in
general, have moved away from being special occasion drinks
and are no longer relegated for after dinner,” he continues.
Alize and other Cognac-fruit juice hybrid products “hit
their peak a couple of yearrs ago, although there is still a
small loyalty. People use them as mixers.”

“By and large, brands drive
things, categories don’t. The volume comes at the lower end
of the quality spectrum. For the most part, Cognac in
general had gotten tremendous volume gains at the lower
end,” observes John Pennacchio, Associate Director of
Spirits for Kobrand, which imports Delamain.

“If you look at Delamain,
it’s known as being of high quality, not an incredibly large
volume player,” he says, stressing: “A brand needs
credentials, and Delamain goes back to the very beginning.
They know what they do, there’s trust and consistency.
That’s what it really comes down to with consumers. You’re
guaranteed a consistently wonderful product.” As for
consumers being fickle or exploring other super and ultra
premium drinks, “In any consumption pattern tied as closely
as African Americans and Cognac, that’s a normal evolution.
There is enormous exposure to the premium vodkas and gins.
That franchise drinks premium brands across categories, but
it’s mostly brand driven. They like premium brands. Years
ago, it was almost automatic what someone would drink. Today
they’re going brand to brand across categories,” says
Pennacchio. Martell’s Domond adds to this, saying, “Higher
marques, such as Martell XO (SRP $125) and Cordon Bleu (SRP
$95), are driving growth while newcomer Noblige (SRP $45) is
becoming an established player in the African American
market.” She continues, “Like all consumer segments, African
Americans are a key target for super-premium and above
spirits from vodkas to cordials. African Americans remain a
primary and growing target segment for Cognac despite the
high dollar investment from other categories. African
American consumers, primarily men, age 21 to 35 with high
aspirations, remain a key opportunity for Martell Noblige
and other higher marques.” Domond also points out that,
“Luxury and multiculturalism are the two key elements
driving Martell and other Cognac brands’ success.” Kobrand’s
Pennacchio also makes the observation that these days “you
see an XO ad from one of the big four [Cognac
houses] – you didn’t see that 1O years ago. I guess they
want to play a bigger role in converting their persona to
become more a part of the elite,” he says. “Quite frankly,
we’re not competing with the big four. We don’t have
anything at the lower end. That’s not a world we’re playing
in. Our first quality in the market is our Pale and Dry XO.
Knowledgeable customers with money to afford it are in our
world,” he says. “Mixologists now play a bigger role in
presenting spirits, and Delamain plays a major role with
them, and the finer restaurants and retail shops,” he points
out. Alize, Kobrand’s Cognac-fruit flavored product,
recently released a new rose flavor. Pennacchio says the
brand attracts mostly younger women.

Despite the problem Hissam
notes about bar staff resistance, Cognac has been picking up
a lot of interest from bartenders who are using it in mixed
cocktails, says Beam’s Mahoney. “I think for some people
Cognac can be a bit intimidating. But you can enter Cognac
through a cocktail then start drinking it straight,” Mahoney
says. Echoing this sentiment is Gary Schlem, Portfolio
Manager with Palm Bay International, which imports Frapin
Cognac. “There is a little movement of 25- to 35-year-olds
starting to experiment with rums, tequilas and Cognac;
they’re looking to trade up and learn about it.” Although
the base for Frapin is experienced Cognac drinkers, Schlem
says “We’re looking for that younger demographic, as well.
There is a movement to promote more mixability of Cognac and
we’re trying to attract more women and a little younger
crowd.” Palm Bay has focused Frapin toward on-premise and
retail accounts that have a deep understanding of Cognac. “A
lot of upscale steakhouses, whether Ruth’s Chris or Smith
and Wollensky, have an affinity with Cognac and are pretty
pricey to begin with and offering Cognac fits right in,”
Schlem points out. “We’ve experienced some nice growth, but
not double digit,” he adds. At this point, advertising is
minimal, he says. “We continue to spend at a pretty nice
rate on Frapin, mostly on the wholesale level, but have
really held back from advertising because we’re not
comfortable where our distribution levels are. We need to
increase consumer availability. I think it’s going to be
pretty soon, maybe 2OO8, where we look at some consumer
advertising,” he predicts. One approach that reminds Schlem
of Pierre Ferrand’s strategy stems from a program subsidized
by the French government that pays the salaries of young,
enthusiastic French who work for Palm Bay for several
months. Five such people stayed on to bcome permanent
employees and roam the country visiting accounts as brand
ambassadors for Frapin and Gossett Champagne. “This has been
the single most important element for the success of
Frapin,” he says.

One brand with which Palm
Bay is diversifying its Cognac franchise and seeing a high
measure of success is Bauchant, an orange liqueur with a
base of XO Cognac. “What has exploded is that it’s a key
ingredient for top shelf Cosmopolitans and Margaritas,” he
describes. One year ago Palm Bay expanded the line offering
apple, pomegranate, pear and raspberry flavored Bauchant,
partly to ride the coattails of success other companies are
having with pear and pomegranate vodka. “We’ve had a lot of
success in trendy bars and clubs with this. Bartenders there
almost pride themselves in making interesting, new
cocktails. Today, the more colorful and different a drink
is, the more popular it is,” Schlem says. “We’re trying to
capitalize on that flavored Cognac trend,” he adds.
Courvoisier, too, was focusing on this by launching
Exclusif, a young Cognac blend situated between its VSOP and
XO products that will sell for $5O for a 75Oml bottle.
Clearly, Courvoisier was feeling ignored by the hip and
moneyed 25- to 35-year-old population. “We don’t tend to be
in mixed cocktails,” explains Mahoney, and Exclusif “is
designed to be mixable in cocktails,” she says, adding the
launch will include a number of different cocktail recipes.
“When we looked at Exclusif’s versatility, name and package,
we felt it was a viable option for someone who drinks other
super premium products. Exclusif can play in that world and
will source both Cognac and broad premium beverage
consumers,” Mahoney states. The company plans a revamped
advertising program this fall. The old campaign under the
former Allied Domecq, she says, “was being noticed but not
resonating as strongly as it could. Consumers were noticing
the brand, but not remembering what the brand was telling
them.” The new message will focus on “what makes them great
and what makes Courvoisier great,” she notes. “For us, it
will be significant expenditure. We’ll spend $2 million over
three months, as opposed to Allied’s $5 million outlay over
a five month period,” Mahoney explains. “We see gowth over
the next few years, investing higher amounts of money in
upper marques and really driving home the advertising in
VSOP and XO. There seems to be an appetite among spirit
consumers to reward themselves with fine quality spirits,”
she says.

Launched about one year ago
in conjunction with the same master distiller in France who
helped create Grey Goose vodka, Jacques Cardin was designed
almost entirely to attract younger drinkers, says Abaigeal
Hendron, the product’s brand manager at Sidney Frank
Importing Co. “Cognac has a very traditional image, a lot of
culture and history,” she notes, adding, “We don’t have that
to play off and wanted to do something cool and modern. We
wanted a package that jumped off the shelf with a very
different look and feel.” And at an SRP of $3O per 75Oml
bottle, the company aimed to make it obtainable for many
consumers. “We’re not going to get the older single malt
drinker. We want someone who drinks Cognac or brandy and
wants a better experience, the 25- to 35-year-olds. The
situation is that people are already drinking a lot of
product, but can you catch them early enough to try yours?
Some love the latest trends, but you also want those who are
very brand oriented,” she remarks. “We want people who are
brand conscious, who want to trade up and pay for the finer
things in life; the young trend setters. If they look at us,
we’ll capture their attention, but it’s not going to be
easy.”

Cardin VSOP comes
unflavored, as well as in jasmine and apple flavors.
Jasmine, Hendron explains, was a nod to the influential and
Cognac-loving Asian consumer market, where that flavor is
part of their culture. In Cardin’s first six months, the
results of market tasting programs convinced the company
that the product had potential, she says. “If it’s there,
we’re likely to try it, rather than build enough volume and
then act,” she says. As a result, the company plans a small
print advertising campaign in four national magazines, plus
a radio campaign in Los Angeles, Miami, New York, and
Chicago that will continue through 2OO7. “The category of VS
is so massive that even if we get a small percentage of that
business it would be a large share for us. We really won’t
know until the end of the year,” says Hendron.

While Cognac is enjoying
heady times in the US, domestic brandy as an overall
category is having more of a headache. The blazing comet
here is Gallo’s E&J brandy, which saw sales grow nearly
4.5 percent in 2OO6. Between the company’s VS, VSOP and XO
brandies, this represents 2,6OO,OOO cases, about 25 percent
of the total Cognac-brandy market share, and about 45
percent of all domestic brandy sold. “The on-premise trade
is a major portion of success, either being in the well or
as a call product. The main thing is having that brand
recognition in the on-premise arena,” says Robert Chin, who
until recently was the national marketing director for
E&J Brandy. He is now Senior Media Director for E&J
Gallo Winery. Gallo concentrates its promotions mainly on
in-store and on-premise POS materials such as table tents,
shelf talkers, being on the drinks menu and winning the
battle of which brandy bartenders recommend to customers,
Chin notes. “One of our unique selling points is that we’ve
been around for 32 years. One of the challenges is producing
consistency in the bottle. The same man involved in
production from day one [Scott DiSalvo] is still
involved in production. “One thing we would like to do is to
make brandy a lot more mainstream. There are a lot of
consumers who are not aware of brandy. If they tried it,
they’d love it,” he continues. Gallo’s XO brandy, a very
Cognac-like product, is also seeing good market penetration
and sales growth, he says. “One of the reasons we came out
with the XO is we wanted to present a more premium offering
in the category. Spirits in general are clearly going to
premiumization. We saw XO as a way to capitalize on that,”
says Chin. “Marketing has also gotten better,” he explains.
“We’re trying to capitalize on the 25- to 35-year-old
consumer. That’s a major part of growth today,” Chin says.
“If you look at the data, the category is not growing at the
pace of vodka or tequila, but from our perspective we’re
growing significantly. From what I see, our competitors are
not doing as well as we are,” he comments, adding that
publicly available sources showing Gallo’s sales growth “are
very conservative”, hinting that actual sales figures are
higher.

“Brandy is one of those
categories that always has a stable return. You don’t see
huge jumps in volume, just consistent return,” observes
Justin Ames, Brand Manager for Christian Brothers brandy for
Heaven Hill. “Christian Brothers is doing really well in
Massachusetts, where you have a traditional brandy
consumer,” he says, defining this as an equal split between
men and women who are 45-years-old and up. Sales wise, the
brand increased here about 2O percent last year, he says.
The focus of sales and marketing dollars by many companies
on the African-American consumer segment may now be hurting
these companies, Ames believes. “Many of these consumers are
moving on up to Patron and Grey Goose, and have even walked
away from premium Cognacs. We started noticing this about a
year and a half ago. Hennessy and Courvoisier are suffering
a little from this,” he says, adding that “This is good for
Christian Brothers because we stayed true to our target
demographic.”

Ames focuses a lot on
off-premise accounts. “A lot of competition happens at the
shelf level. You are competing for shelf space and price
points,” he notes. Using various on-packs, such as a deck of
playing cards or a 5Oml bottle of the brand’s VSOP attached
to a 75Oml bottle of VS, has been quite successful, says
Ames. “The brandy category is a very tough category for
shelf space. You need to have good knowledge of accounts and
great distributors who are willing to fight for that space.
That’s something that becomes more complicated as time goes
by. But when you have a legacy like Christian Brothers, that
really helps,” he says. Another thing that’s helped the
brand has been to sponsor a lot of major ice fishing events
in the Midwest, as well as being touted as a choice brand by
the Ice Team, a group of ice fishermen that travels the
country promoting their brands. This “has opened up doors
into the entire outdoor sporting arena,” he says, noting
that he’s had requests from major big box stores to tie into
joint marketing programs. Hypnotiq, another Heaven Hill
brand, was the first major Cognac-vodka-fruit flavor hybrid
drink in the market, and is still thriving, says Ames. The
brand competes head to head with other major products across
all categories, is doing well and is viewed by consumers as
a “real brand”, where “people look at a lot of the others as
knock-offs,” he says.

One such “other” is Kajmir,
a brandy-vodka-vanilla blend launched a few months ago by
Centerra Wine, which is part of Canandaigua Wine. Jon
Guggino, who oversees Kajmir and Paul Masson brandy as the
company’s Specialty and Value Wine Marketing Director, says
Kajmir was meant to appeal to women aged 25- to
45-years-old. “It’s much smoother and easier to drink than
traditional brandy, and it also has incredible versatility,
as it’s delicious straight, on the rocks or mixed with soda,
juice or other spirits,” he says. As for Paul Masson and
brandy in general, Guggino says “We’re seeing a shift in
usage among new and existing younger consumers who tend to
experiment more with brandy and Cognac by mixing products in
a wide array of cocktails. New and existing brandy consumers
continue to trade up to premium Cognac.” This, plus a poorly
planned series of price increases by the company, help
explain why Paul Masson sales dipped 1.1 percent from 2OO5
to 2OO6. Responding to this, Guggino says: “The primary
driver of Paul Masson’s decline in 2OO6 was due to price
increases taken in a number of states throughout the
country. These increases resulted in higher price gaps among
the competition than we initially projected. Last winter we
made an effort to correct these non-competitive pricing gaps
in multiple markets, which has helped to regain lost
business and solidify our strength as the second largest
domestic brandy player.”

“Our VSOP consumers are
predominantly 25- to 45-year-old African-American males who
primarily consume Paul Masson because it’s a five year aged
cognac and brandy blend whose taste profile and
characteristics are quite similar to cognac products which
are also included in their consideration set. Based on our
research, brandy is typically referred to by male consumers
as a ‘hand-me-down’ spirit because many consumers watched
their fathers, older brothers and uncles drink brandy while
they were growing up. For them, it’s a sophisticated,
hand-crafted and, to some extent, nostalgic spirit,” offers
Guggino. “We’ve focused more on targeted program efforts to
maximize spending by addressing Paul Masson’s key
opportunity markets. These typically include programming
like local sponsorship events; local print, outdoor and
radio advertising; consumer promotions; retail display racks
and similar activities,” describes Guggino. This fall’s
launch of the MVP Program, a football-themed POS effort,
includes a contest where consumers enter to win tickets to
the Super Bowl and football memorabilia signed by sports
stars, he says. Paul Masson and Christian Brothers are not
the only brands taking the sports route.

Remy Martin recently
started a sports tie-in program that includes prizes of
big-screen plasma television sets and choice tickets to
local sporting events. This couples well with Remy’s main
VSOP consumers, who are mostly male and often drink the
brand at home while watching sports on television, explains
Hissam of Remy Cointreau USA. Another new outreach program
starting this fall is a partnership with Chinese superstar
actor, Ray Lui. “Given that Remy Martin has an
Asian-American consumer group that travels back and forth
between the US and China, we established Lui as a
spokesperson for the brand,” Hissam says. Asia is still
booming as far as Cognac consumption, he adds, especially
for Louis XIII.

As far as Martell’s plans
for outreach, Domond says, “Martell will increase print and
TV media spend against the Asian American market in 2OO8. In
addition, emphasis is being directed toward retail demos and
on-premise sampling to drive awareness and trial of Martell
higher marques among this target segment. With the African
American market, Martell is increasing investment in the
successful Discover Noblige Program that honors African
American achievers who embody the Martell platform of Rise
Above through their charitable and philanthropic
efforts.”

With cool weather at hand,
now may be the best time in many years for accounts to focus
on brandy and Cognac sales. Customers are interested and
aren’t shy about spending money. Suppliers are working as
never before to make consumer aware of their Cognacs. And
the drinking public is accustomed to having a wide field of
high quality spirits. The synergy seems perfect.