Rémy Cointreau: why brandy is dandy
Lockdowns are proving less painful for the cognac business than first feared
Anything that curbs travel, gift-giving and celebrations is bad for cognac sales. Half-year operating profits have fallen more than a fifth at Rémy Cointreau. But investors have kept up the party spirit despite the pandemic. Shares in the French drinks business are up 35 per cent this year.
The business is on course for a strong recovery in the second half. In China, where Rémy’s sales started growing again at the end of June, demand for spirits is now back to pre-pandemic levels. Elsewhere, lockdowns are proving less painful for the business than first feared.
Americans, who account for 53 per cent of sales, have been drinking more through the crisis. They have not switched to cheaper drinks in the way they did in the global financial crisis. Money saved on travel and going out is paying for treats at home. People have had time on their hands to learn about recherché brands.
Rémy may not keep all those customers when normality returns. But with cognac accounting for just 7 per cent of the US spirits market, up from 6 per cent pre-coronavirus, there is scope to occupy more space in the nation’s cocktail cabinets.
Grounds for caution remain. Even with mass vaccinations on the horizon, Rémy does not expects travel traffic to get back to 2019 levels for a year or two. It could yet get caught up in a US-France tariff war.
The shares are pricey, trading at 55 times forward earnings, or double rivals Pernod Ricard and Diageo. There is some support to the valuation from the ageing contents of its cellars — worth at least €5.4bn, about 70 per cent of its market value, says UBS.
Moreover, the company expects profitability to rise steeply over the next decade. The high barriers to entry in cognac help, since the top producers have 92 per cent of the market. Rémy can justify its pricey valuation, but only by flexing its enviable pricing power.