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Cognac at $4,000 bumps up against luxury shoppers’ new limits

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INTERNATIONAL distillers have for years been concocting niche formulations to justify charging drinkers ever higher prices. Diageo Plc’s Japanese-inspired limited edition of Johnnie Walker Blue, for example, is blended to extract umami flavors and sells for £300 ($382).

The strategy, borrowed from the luxury goods industry, is called premiumization, and it’s 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.

Last Friday, Remy Cointreau SA, whose Remy Martin Louis XIII Cognac sells for $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. “Premiumization 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.”

Remy’s results don’t bode well for Diageo, which was set to update investors on Tuesday. In November, its shares plunged 12% after a profit warning blamed on Latin America and the Caribbean. Now the revival of its North America business looks shaky too. (See related story on this page.)

“The US is the most important thing, the biggest source of profit for the company,” said Kevin Dreyer, Co-CIO 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 stabilized and growing again,” Mr. Dreyer added.

The strategy of premiumization tapped into lucrative trends: a desire to drink less but better, and the rise of the middle class in countries like China where more expensive whisky signals prosperity. A stock of aging liquors like cognac and whisky has constrained supply, buoying prices.

But drinking habits are changing. In Diageo’s last fiscal year, “premium-plus” — spirits costing $50 or more a bottle — represented 57% of its net sales growth, down from 71% a year earlier.

The shift echoes what’s happening in the luxury sector more broadly. LVMH Moët Hennessy Louis Vuitton SE, whose shares surged Friday after it reported sales gains for the end of last year, said it doesn’t plan to raise prices further in 2024. Its resilience fueled 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’ve long coveted. Swiss watchmaker Swatch Group AG’s sales last year fell short of estimates — in part because it wasn’t 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’Oréal SA, for example, which has fared well in the cost-of-living crisis, Diageo doesn’t 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

Diageo soothes investors on Latin America woes

LONDON — Shares in Diageo recovered on Tuesday after initially falling 4%, as the world’s top spirits maker reassured investors it was taking steps to fix problems in Latin America and stem declines elsewhere.

The maker of Johnnie Walker whisky and Tanqueray gin just missed analysts’ sales estimates on Tuesday, largely due to a massive decline in Latin America where it is struggling with a buildup of unsold stock.

It also saw a drop in North America — its biggest market, where the company has been losing market share.

“We are not satisfied with these results, and I personally am restless to get this business to perform to its full potential,” Chief Executive Officer Debra Crew, who took the helm in June, told journalists.

The business was resilient, and had a track record of navigating global volatility, she later added in a presentation to investors.

In November, Diageo warned that sales in Latin America and the Caribbean were set to decline by more than 20%. On Tuesday, it reported a 23% drop, and said it expected a further decline of 10% to 20% in the second half.

Unsold stock has built up in Latin America following a slowdown in demand for expensive spirits. Diageo said in November it became aware of the problem at a relatively late stage.

The admission hurt investor confidence and put a spotlight on Crew just months into her tenure, with some shareholders worried about how the business would handle bigger threats, including a decline in market share in North America.

Crew said on Tuesday Diageo was taking steps to prevent problems in Latin America recurring, such as improving data collection and testing new technology to better monitor sales throughout its distribution network.

Latin America only accounts for around 11% of sales but is a high margin business and therefore had a bigger impact on Diageo’s organic operating profit.

That fell 5.4%, more than forecast by analysts. Diageo said it expected a further decline in the second half but at a slower rate. — Reuters