Remy Cointreau too concentrated in cognac, investors say

By Emma Rumney

LONDON (Reuters) - Remy Cointreau investors say the company needs to diversify further as its reliance on cognac sales in the United States and China leaves it among the worst-hit by a global spirits downturn.

The maker of Remy Martin cognac has already signalled it wants to grow sales in other markets and invest in its portfolio of other drinks, including Cointreau liqueur and The Botanist gin.

The company makes some 70% of sales from cognac, with the vast majority of those in the U.S. and Chinese markets. Its performance has been hurt by destocking in the United States. Meanwhile, China's recovery from the pandemic has also been slower than hoped.

Three Remy investors told Reuters it had become increasingly important for the company to diversify its business from cognac to cushion the blow when its major markets falter.

"The risk is that they are just so exposed to cognac," said Fred Mahon, fund manager at Remy investor Church House, adding while Remy does hold other brands its portfolio lacks exposure to popular spirits such as tequila.

"We'd like to see more acquisitions, more diversification," Mahon continued, adding however this has to be done well and Remy should focus on smaller, quality targets.

Remy's shares hit their lowest level since 2016 on Wednesday after its first-quarter sales missed estimates.

All spirits makers are enduring a sharp slowdown in growth following a post-pandemic boom. But Remy's rivals like Pernod Ricard's and Diageo's operations are more balanced across different products and markets.

LONG ROAD

As well as a sluggish economy, cognac makers like Remy face the threat of tariffs from Beijing amid an EU-China trade dispute.

Persistent declines in Remy's U.S. cognac sales have led some investors like Nicolas Brault, associate director at Banque Hottinguer, another Remy investor, to wonder if cognac has fallen out of favour with its base of American drinkers.

"Is there a future for cognac in the U.S.?" he said. "That's the number one uncertainty."

He agreed Remy needs to diversify, but said ultimately cognac will remain the company's main product, on which its fortunes turn.

Chief Financial Officer Luca Marotta said on Wednesday Remy would invest a lot over the medium term to increase the size of its non-cognac business.

Remy CEO Eric Vallat meanwhile has said the company would look to grow sales in other nations, including in Europe and Africa.

The U.S. and China are the world's largest spirits markets, so any global player needs a strong business there, investors say. But Remy has to think about diversification given the challenges it faces, said Joseph Gabelli, a portfolio manager at Remy investor Gabelli Funds.

"I say that with full knowledge that it will be a long road," he continued, adding building up Remy's sales from other products and geographies will take time.

(Reporting by Emma Rumney; Editing by Matt Scuffham and David Evans)