Martell’s $3,600 Cognac Sells Out as Chinese Splurge (Update1)

June 18 (Bloomberg) -- Pernod Ricard SA’s Martell says Chinese buyers cleaned the cognac house out of L’Or at $3,600 per bottle, suggesting some of Asia’s richest consumers are shrugging off the financial crisis.

L’Or, French for “gold,” was introduced in China at the end of last year, and some of the blend’s brandies date from 1871. It has a hand-worked, gilt-trimmed crystal bottle, as well as a Chinese waiting list for several years’ upcoming vintages.

“If you want to be taken seriously in Asia, you really need this kind of product,” Jean-Etienne Gourgues, Pernod’s commercial director for cognac and champagne, said last week at Martell’s chateau. “It gives your brand the necessary cachet.”

Distillers are relying on the Chinese as the economy shrinks in the U.S., where wholesalers are cutting their inventories of spirits and a 1990s hip-hop fad for cognac has withered. At rival LVMH Moet Hennessy Louis Vuitton SA, China has surpassed the U.S. as the company’s biggest cognac market.

The founder of LVMH’s Hennessy, an Irish mercenary granted land by the French king, started distilling his namesake cognac more than 240 years ago and won over aristocratic European drinkers, according to the company’s Web site.

Eight Generations

Eight generations later, Maurice Hennessy says China overtook the U.S. as the brand’s biggest source of revenue and profit in 2008. The family business merged with champagne house Moet & Chandon in 1971, and combined with Louis Vuitton fashions in 1987 to form LVMH, controlled by billionaire Bernard Arnault.

“Asian consumers are extremely status-conscious,” Maurice Hennessy said last week at Chateau Bagnolet, one of his family’s estates in Cognac, the southwest France region where the amber- hued brandy is made. “They demand only the best quality.”

Sales in China will grow faster than 10 percent in 2009, Hennessy said during a lunch at his estate. Asia is more profitable than the U.S. because the region’s consumers buy only the aged, more expensive VSOP and XO categories, he said.

Ultra-expensive bottles “don’t contribute significantly to overall earnings, but it’s a good, and necessary, investment into the brand’s image,” said Joao Valli, an analyst at Sanford C. Bernstein in London. Cognac producers run the risk that a Chinese slowdown will spread to the richest businessmen, as “cognac is disproportionately expensive to everything else on the Chinese market,” he said.

American Mixer

U.S. cognac sales are down more than 20 percent since the start of 2009, according to Hennessy and Remy Martin, the two biggest brands on the market. Hennessy cognac saw a 21 percent decline in volume in the first quarter, which included growth in China, its second-biggest source of revenue. In 2008, U.S. cognac sales fell 13 percent by volume, according to Distilled Spirits Council of the United States spokesman Frank Coleman.

In the U.S., where cognac is mostly used as a mixer in cocktails, drinkers are switching to cheaper brands, Coleman said, adding that total U.S. spirit sales in the country will probably be little changed in 2009 after 2 percent growth in 2008. The sales drop may stop by the end of the year as U.S. retailers replenish inventories, the cognac makers said.

Cognac shipments to the Americas region slid 18 percent in the past 12 months, according to trade group Bureau National Interprofessionnel du Cognac. Total shipments fell 14 percent.

By contrast, Pernod’s Gourgues says Martell hasn’t been so hurt by the U.S. troubles, since it sells primarily in Asia. The brand’s revenue increased 13 percent in the nine months through March. Sales of Hennessy and Remy Martin, which sell most of their cognac by volume in the U.S., fell during the period.

L’Or was Martell’s answer to ultra-premium products from the other big three cognac houses. Hennessy’s Richard costs about $2,500 and is blended from brandies aged 40 to 200 years. Remy Martin’s most exclusive bottle, Louis XIII, sells for about $2,000. Both brands have decanters made by French crystal producer Baccarat.

“We lacked an ultra-luxury bottle in our portfolio, and L’Or really filled that gap,” Gourgues said.