Sales of Luxury Alcohol on the Rise Again in China

By Jason Chow in Paris and Laurie Burkitt in Beijing 

After nearly three years nursing a hangover, China is hitting the bottle again.

Sales of expensive alcohol took a massive hit in China in 2012, when President Xi Jinping took aim at boozy banquets and lavish gift-giving. Now, cognac and wine sales are showing signs of life, indicating that luxury consumption may be on the way back.

Shipments of the French brandy to China jumped 42% in the first nine months of the year, according to industry association BNIC, boosting the fortunes of industry stalwarts such as French luxury giant LVMH Moët Hennessy Louis Vuitton and Rémy Cointreau SA.

The resurgence reveals a pocket of strength among Chinese luxury consumers, who in recent years have determined the fortunes of manufacturers of everything from expensive handbags, to diamond-encrusted watches and pricey bottles of alcohol. LVMH and Burberry Group reported earlier this week continued sluggish demand among Chinese buyers for fashion and accessories due to slowing growth and the summer's stock market crash. But others point out that a rising young consumer class is emerging which has already begun to drive future luxury spending.

"There is a significant change in who's consuming cognac today," said Trevor Stirling, a drinks analyst at Sanford C. Bernstein in London, pointing out that businessmen and bureaucrats who used to shell out $150 per bottle at hostess bars on expense accounts are no longer the main drinkers, victims of the government crackdown on corruption.

Taking their place are young, upper-middle-class drinkers who are spending their own money and opting for lower-priced bottles. While the young drinkers aren't splurging like their predecessors, they represent a much larger group of consumers.

Some are already chasing this demographic: French drinks conglomerate Pernod Ricard SA last year launched its Martell Noblige line, a cognac with a lower price tag than other Martell products that is less offensive in today's Chinese political climate.

"When does the growth of new consumers more than compensate for the loss of the old ones? We're not there yet, but we're getting close," said Mr. Stirling.

Cognac was a popular status symbol during China's most recent boom, a favorite drink served to impress at banquets and a frequent gift bought at duty free shops to be exchanged between businessmen and top bureaucrats.

The drink fell out of favor as the anticorruption campaign took bite and liquor distributors and retailers in China were stuck with large stockpiles of unsold bottles. Mr. Xi, in his message promoting thriftiness was clear: He specifically told officials not to serve drinks with the simple dinners he espoused. That inventory slack has now been sold off, and cognac makers are resuming shipments, showing that the downturn appears to have bottomed out.

Drinks makers are cautiously optimistic. "Mainland China is seeing some real improvement, said Rémy Cointreau Chief Financial Officer Luca Marotta. The company, which makes Remy Martin cognac, said Friday that its volume growth in China in the third-quarter was flat, and the preference was for lower-priced bottles. Chinese liquor wholesalers remained cautious given the uncertain economic outlook, he said.

Earlier in the week, strong cognac sales were the surprise bright spot for LVMH, with 12% more cognac shipped in the third quarter of this year than in the same period a year earlier. Part of the increase was due to stocking-up in anticipation of the busy Golden Week shopping season--a week-long holiday period in early October.

LVMH Chief Financial Officer Jean-Jacques Guiony said there was "a clear sign that the market is bottoming out."

China's wine consumption is expected to jump 10% this year, up from 1.58 billion liters in 2014, according to the EU SME Centre, a research consultancy of the European Union.

Consultants say that younger consumers are picking up the slack in alcohol sales. Much of the interest in wine is driven by the younger generation born under China's one-child policy, who are now entering their 30s, who aren't going for the top-flight grand cru Bordeaux bottles, but for more modestly-priced bottles. Those born since 1980 are expected to contribute to 35% of the country's total consumption by 2020, up from 15% now, according to financial services company Credit Suisse.

Write to Jason Chow at [e-mail] and Laurie Burkitt at [e-mail]

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(END) Dow Jones Newswires

October 16, 2015 10:34 ET (14:34 GMT)

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