Hennessy still exploring bottling Cognac in China to mitigate tariff challenges

LVMH's Hennessy, a renowned producer of premium Cognac, has been exploring a strategic pilot project to bottle its popular VSOP and XO lines directly in China, aiming to produce an estimated 600,000 cases annually for the domestic market.

The move is seen as a response to recent Chinese tariffs on European Cognacs, imposed following the European Union’s tariffs on Chinese electric vehicles, and also in response to a significant 26% decline in value in Chinese imports of French cognacs between January and October 2024. Although plans have been put on hold, the need to adapt remains essential.

With China being the second-largest export market for Cognac, valued at $1.7 billion in exports last year, Hennessy’s local bottling initiative is designed to not only address tariff-related challenges but also unlock significant cost and operational efficiencies.

Local bottling: a key advantage

Henri Berthe, CEO of Rockwood Bottling, a French-owned glass and ceramic bottling plant in China, highlights several benefits of local production:

• Tariff avoidance: By importing bulk spirits and bottling them in a Chinese Economic Processing Zone (free trade zone), Cognac producers can bypass steep tariffs on finished products.
• Cost savings: Bottling in China reduces expenses by leveraging Chinese-made glass and packaging materials, yielding savings of up to 20%.
• Market agility: Bottling within China enables producers to maintain ready-to-ship inventory, improving responsiveness to market demand.

These advantages make local bottling an increasingly attractive option not only for French Cognac producers but also for American Bourbon distilleries, as they face potential retaliatory tariffs from China amid ongoing geopolitical tensions.

With over 23 years of experience in Asia, Berthe highlights that obtaining authorization to bottle bulk cognac and brandy within a Chinese free trade zone could not only offset the impact of high tariffs but also achieve cost savings of 15–20% through local bottling and the use of Chinese-made extra flint glass bottles. Chinese authorities support domestic bottling by offering French producers a 50% tax reduction and significant dry packaging savings. Additionally, maintaining ready-to-ship inventory in China enhances operational flexibility and responsiveness to market demands.

Adapting to evolving market trends

The Chinese spirits and liquor market is increasingly becoming a hotspot for global players due to growing consumer demand for premium and diverse alcoholic beverages. Diageo, with its $120 million Yuntuo Single Malt Whisky Distillery in Yunnan Province, is leading the charge by establishing local production, reflecting confidence in China's potential as both a market and a production hub. Similarly, Pernod Ricard, another major player, has invested approximately $140 million in a whisky distillery in Sichuan Province and recently launched its first locally produced whisky, The Chuan.

These investments signify a broader trend of multinational companies adapting their strategies to the Chinese market by producing closer to their target consumers and capitalizing on a rising middle class with evolving tastes. The whisky category alone is expected to grow from $2.3 billion in 2022 to $6.7 billion by 2027, representing over 20% annual growth, far outpacing global averages.

Hennessy’s exploration of local bottling is in line with this broader industry shift toward proximity to consumers and cost-effective solutions. While the plan is currently paused following strikes from workers in France and ongoing discussions between French President Emmanuel Macron and Chinese President Xi Jinping during the G20 summit last week, the concept highlights the industry's need to adapt to both global and local market dynamics.