By Emma Romney
LONDON (Reuters) – Remy Cointreau needs to diversify its investments further because its reliance on cognac sales in the United States and China makes it among the hardest hit by the global spirits price slump, investors say.
Cognac maker Rémy Martin has already indicated it wants to boost sales in other markets and invest in its portfolio of other drinks, including Cointreau and Botaniste gin.
The company produces about 70% of its cognac sales, the vast majority of which go to the US and Chinese markets. The company’s performance has been hurt by a reduction in inventories in the US. At the same time, China’s recovery from the pandemic has been slower than expected.
Three Remy investors told Reuters it has become increasingly important for the company to diversify its Cognac business to soften the blow when its core markets falter.
“The risk is that they are too exposed to cognac,” said Fred Mahon, fund manager at Remy Church House, adding that while Remy owns other brands, its portfolio lacks exposure to popular spirits like tequila.
“We want to see more acquisitions and more diversification,” Mahon continued, adding that it has to be done well and Remy should focus on smaller, higher-quality targets.
Remy shares fell to their lowest level since 2016 on Wednesday after its first-quarter sales missed expectations.
All spirits makers are experiencing a sharp slowdown in growth after the post-pandemic boom. But Remy’s competitors like Pernod Ricard (EPA:) and Diego (LON:) operations are more balanced across different products and markets.
A long way
In addition to the economic downturn, cognac makers like Remy face the threat of tariffs from Beijing amid a trade dispute between the European Union and China.
The continued decline in sales of Remy Cognac in the United States has led some investors, such as Nicolas Brault, associate director at Hottinger Bank, another Remy investor, to wonder whether Cognac has lost popularity among its base of U.S. cognac drinkers.
“Is there a future for cognac in the United States?” he said. “That’s the first mystery.”
He agreed that Remy needed to diversify, but said that Cognac would ultimately remain the company’s flagship product, on which its fortunes depended.
Remy CFO Luca Marotta said on Wednesday that the company will invest heavily in the medium term to increase the volume of its non-cognac business.
For his part, Remy CEO Eric Vallat said the company will seek to increase sales in other countries, including Europe and Africa.
Investors say the United States and China are the world’s largest spirits markets, so any global player needs a strong business there. But Joseph Gabelli, portfolio manager at Gabelli Funds, an investor in Remy, said Remy should consider diversifying given the challenges it faces.
“I say this fully aware that it will be a long road,” he continued, adding that building Remy’s sales from other products and geographies will take time.