The End of the Chinese Eldorado for Cognacs?

China's Growing Thirst for French Spirits Amid Trade Tensions

In the bustling and rapidly evolving market of China, French spirits have found a lucrative and enthusiastic audience. With over 1.3 billion inhabitants and a deep-rooted culture that celebrates spirits — led by the potent Baijiu —China stands as a golden opportunity for foreign spirit producers.

The numbers are compelling: as the second-largest importer by value, China imported over 2.6 billion euros worth of foreign spirits in 2023, a figure that has doubled in sales since 2017. Cognac, in particular, has captured the Chinese market, with nearly a quarter of its global sales landing in China, translating to approximately one in every five bottles exported to this market.

Chinese consumers, increasingly drawn to premium, foreign-made spirits, view these products as symbols of luxury and status. Cognac, with its Western allure and image of sophistication, has become a staple among China's burgeoning middle and upper classes, who possess both the financial means and the desire for social distinction. This demographic shift has positioned China as not just a secondary market but a high-quality one, rivaling even the American market for the spirits industry.

Storm Clouds Over European Spirits

However, the landscape is not without its challenges. Recent months have seen mounting trade tensions that could disrupt the European spirits market. Issues began with commercial pressures to limit sales of ASML's advanced machinery, followed by the exclusion of Chinese vehicles from France's ecological bonus. Most recently, the European Commission announced plans to impose anti-subsidy duties on Chinese electric cars, alleging substantial subsidies by the Chinese government.

Beijing's response has been swift and resolute. By January 2023, China had launched an investigation into alleged dumping of European wine spirits on its market, raising the specter of anti-dumping duties that could severely restrict access for European producers. The European wine industry, particularly the producers of Cognac, finds itself caught in the crossfire of this escalating trade conflict.

The Perils of Dependence on China

The stakes are particularly high for Cognac, which has become significantly reliant on the Chinese market. With annual sales exceeding 760 million euros, China is the second-largest market for the Charente region's Cognac industry in both volume and value. Over the past decade, China has evolved into a vital market for growth and quality.

The potential closure of this market would be devastating, posing numerous challenges: decreased sales and profits, economic hardships for producers heavily dependent on Chinese demand, longer inventory turnover times, and a glut of undistilled wine on the market.

Strategic Lessons for Exporters

These trade tensions underscore the necessity for a well-rounded export strategy that accounts for political and regulatory risks. Despite the best insurance and risk assessments, these factors can never be entirely mitigated, especially in distant markets. Thus, integrating these risks into the broader export strategy is imperative.

Diversifying export markets remains the most effective defense against such unpredictable events. Heavy dependence on a single market—especially one with a history of imposing surcharges, as seen with Australian wines—can lead to severe financial repercussions. The key to a resilient export strategy lies in establishing a foothold in multiple growth markets while maintaining constant vigilance and proactive management of political risks.