Cognac Lovers Outdrink Hennessy -- WSJ

Booming demand for the liquor tests its biggest producer; rationing in the U.S.

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 28, 2017).

COGNAC, France -- Global demand for cognac is booming, and Hennessy, which controls half of all production of the brown liquor, is scrambling to keep drinkers sated.

Hennessy, part of the Paris-based luxury conglomerate LVMH Moët Hennessy Louis Vuitton SA, is struggling with capacity constraints here in the Cognac region of southwestern France. It can't bottle enough of the stuff, and it is trying to persuade vineyard owners to cultivate more grapes. This year, a springtime frost also hit supply.

LVMH said earlier this month its third-quarter cognac sales volumes fell from a year earlier -- it didn't say by how much -- because Hennessy held back stock to have enough for the holiday season in the U.S. That hit one of LVMH's biggest and most profitable brands. Hennessy sales last year were about EUR1.6 billion ($1.89 billion), according to analyst estimates. That represents only 4.2% of LVMH's overall revenue, but roughly 10% of its operating profit.

Shortages have so far been limited mostly to the U.S., one of the brand's biggest markets.

Liquor distributors have been rationing Hennessy V.S, the low-price cognac that is the brand's top-seller in America. But Hennessy executives say they are cautious about raising prices for fear of angering customers.

Gotham Wines & Liquor on the Upper West Side of Manhattan is out of stock and is waiting for the next allocation from its distributor. Staff "look at the history of client buying and they determine how much Hennessy you get for the month," said Jack Battipaglia, manager of Gotham.

The Pennsylvania Liquor Control Board, which sells liquor across the state, said Hennessy has agreed to boost shipments by 10%, but that isn't enough to keep up with demand.

"That's created out of stock situations for various Hennessy products," said Shawn Kelly, a spokesman for the board.

Last year, cognac makers sold 179 million bottles world-wide, or about EUR2.8 billion in sales, up 6% from the previous year and 17% from five years ago. In North America, sales have doubled over that period.

Cognac can only be made from grapes grown near the Charente river here. The grapes are fermented into wine, then distilled twice into a clear liquid called eau de vie, or water of life. Eau de vie is aged anywhere from two years to more than a century in wooden barrels, giving the cognac its brown color.

An April frost that damaged the grape crop across France put Hennessy under more pressure than other suppliers. That is because its main product is V.S, which is aged for just three years. The frost forced Hennessy to delay shipments immediately in the tightly choreographed production of V.S to help make up for shortfalls anticipated three years from now.

One of Hennessy's key constraints has been bottling capacity. It is investing more than a hundred million euros to boost it, and this month the company opened a new plant that is expected to boost shipments by more than 14%.

At the new facility, bottles rattle along a conveyor belt at a rate of 20,000 an hour, passing through a series of machines where they are filled with cognac, labeled and then packaged in twelve-bottle boxes.

To fill all those bottles, Hennessy executives also need to ensure there are enough grapes.

Despite its size, Hennessy is at the mercy of the region's grape-growing families, which have been in the business for generations. The giant has been trying to persuade skeptical growers to expand grape production, which once stood at 247,000 acres of cultivated land but has fallen to 185,000 acres. Growers are wary, having been forced in the past to uproot vineyards because of oversupply at a time when cognac was in lower demand.

Bernard Peillon, president of Hennessy, said he hoped as part of negotiations next year to persuade growers to plant an additional 5,000 acres. "We are slowly increasing the acreage as long as the business dynamism remains," he said.

Write to Matthew Dalton at Matthew.Dalton@wsj.com

(END) Dow Jones Newswires

October 28, 2017 02:47 ET (06:47 GMT)