Cognac priced at US$4,000 hits new frontiers for buyers…

Bloomberg – International distillers have been crafting specialty formulas for years to justify ever-higher prices. For example, Diageo Plc's Japanese-inspired limited edition Johnnie Walker Blue It is blended to extract umami flavours, and retails for £300 ($382).

This strategy, borrowed from the luxury goods industry, is called “differentiation,” and it has delivered record profits. But it seems that consumers in many countries are tired of paying more and more for each bottle. It is a change that threatens to turn the business model upside down.

On Friday, Remy Cointreau SA, which sells Remy Martin Louis XIII cognac for $4,000, warned that U.S. market conditions have worsened over the past year. Retailers are making deep discounts and increasing interest rates It reduced the ability of distributors to finance new inventory.

China's recovery from the epidemic has been slower than expected. Remy believes that persistent inflation will limit sales in Europe.

“This year will be the moment of truth for many beverage companies.” says Siobhan Gehin, senior partner at Roland Berger Consulting. “Premium personalization remains the right strategy, but it is under increasing pressure. Aside from premium customers, even consumers who would have paid a higher price are reconsidering their spending due to ongoing pressures on their budgets.

Remy's results do not bode well for Diageo, which will present its report to investors on Tuesday. In November, its shares fell 12% after a profit warning attributed to Latin America and the Caribbean. Now, the recovery of its North American business is also faltering.

“It's the most important thing, the biggest source of profits for the company,” says Kevin Dryer, co-chief value officer at Gabelli Funds, which has a stake in the company worth about £25 million (US$31.7 million). Covid-era stimulus spending there, but that has since declined.“It's about this business stabilizing and growing again,” Dreyer added.

The preference strategy has capitalized on profitable trends: the desire to drink less but better, and the rise of the middle class in countries like China, where rising whiskey prices are seen as a sign of prosperity. Stocks of older spirits such as Cognac and whiskey are in limited supply, driving up prices.

But consumer habits are changing. In Diageo's last financial year, morale was “excellent”. (which costs $50 or more per bottle) These products accounted for 57% of its net sales growth, compared to 71% in the previous year.

This change reflects what is happening in the luxury sector in general. LVMH Moët Hennessy Louis Vuitton SE, whose shares rose on Friday after announcing a surge in sales late last year, said it does not plan to raise prices further in 2024. Its resistance has fueled investor optimism that the luxury apparel industry can continue to grow even if it strengthens. Pricing is moderate.

Other luxury goods companies also show the limits of consumers' willingness or ability to continue spending more on the same items they've always wanted. Swiss watch company Swatch Group AG's sales beat estimates last yearThis is partly due to its inability to raise prices enough to offset the strength of the Swiss franc.

“You can't ask the consumer to pay more because the demand is greater, or because the demand exceeds what they have.” Nick Hayek, Swatch CEO, said in an interview this week. “Even the rich are not stupid.”

Diageo is trying to find ways to cushion consumers who buy less expensive drinks. In Latin America, the new Johnnie Walker Blonde is priced midway between Johnnie Walker Black and Johnnie Walker Red, but unlike the L'Oréal SA cosmetics range, for example, Who did well in the high cost of living crisisDiageo does not have an economic unit.

Big Booze still has some structural advantages. Consumers are shifting from beer and wine to spirits. “They have centuries-old brands that have suffered from wars, disease, famines, droughts, embargoes in the United States, economic booms, depressions, and supply disruptions.”Donnie Cranson, portfolio manager at Vontobel Asset Management, says of Diageo. “If management maintains the importance of brands, and invests in their capabilities and strategic inventory, the brands will remain good for at least the next hundreds of years.”

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