Rémy's Shelf Life Has Its Limits

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The world's supply of cognac is running low. Paying a high price for the stock of specialist distiller Rémy Cointreau may leave a sour taste.
 The French company makes leading cognac brand Rémy Martin. The liquor has been a strong seller in the U.S. and China.
 The shortage was evident in results from Rémy Martin's larger rival Hennessy last month. Majority-owned and managed by Parisian luxury group LVMH Moët Hennessy Louis Vuitton, Hennessy dominates the U.S. cognac market with almost two-thirds of bottles sold.
 The brand's unit sales fell year over year in the third quarter. Americans' thirst for cognac remains as strong as ever, but Hennessy no longer has sufficient liquor to slake it. Part of that is because LVMH would rather hold on to the stuff and sell it later in China, where consumers pay roughly three times the U.S. price per bottle.
 Production can't be ramped up quickly. Cognac needs at least two years of aging. Better farming and new vines can increase supply by only 3% to 4% a year, according to the industry trade body. Two poor grape harvests haven't helped.
 These problems aren't so material for luxury behemoth LVMH. Adjusting for a minority stake held by liquor giant Diageo, Hennessy and a few much smaller spirits brands accounted for just 8% of the diversified luxury group's operating profit last year. Diageo's exposure is lower still, at about 5% of pretax profit. It is a different story for Rémy Martin. The No. 2 U.S. brand accounts for roughly three-quarters of parent Rémy Cointreau's operating profit.
 So far, Hennessy's U.S. troubles have benefited its rival by opening up more shelf space. Rémy Martin specializes in more expensive aged cognacs, so it won't feel today's supply problems for a few years. Its more limited scale—it accounted for 13% of bottles sold globally last year, compared with almost half for Hennessy, according to data provider IWSR—also affords it greater flexibility.
 Rémy Cointreau's shares have jumped to highs as the Hennessy shortage and Chinese recovery have hit home. They now trade at 34 times earnings, an even bigger premium to peers than usual.
 Rémy Martin needs to prove it will remain immune to the constraints troubling its rival even as it posts similarly strong growth. The more market share it steals from a straitjacketed Hennessy, the more likely it will face its own supply issues down the road. The temptation to raise prices will be strong, but the question is whether consumers will stomach it; cognac is already expensive compared with similar brown liquors.
 Rémy Cointreau investors may need to sober up.  
—Stephen Wilmot

Hennessy's troubles will help Rémy in the short term.

Fruits of the Vine

Market share of cognac houses by bottles sold and sales

Sources: IWSR; Bernstein




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