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

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 highend 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 costof-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.” —