Cognac and China

Cognac and China

Figures converted from euros at historical FX rates — see data/company.json.fx_rates for the rate table. Ratios, margins, and multiples are unitless and unchanged.

One region carries the disproportion in this fall. Asia and the Rest of the World is 42% of Pernod Ricard's sales but 46% of its recurring profit, and it absorbed the deepest cut in FY2025 — driven by a −21% collapse in China and a −20% drop at Martell, its cognac house. Most of that shock is a Chinese demand cycle plus a trade dispute that is now resolved on a five-year footing; the cognac franchise beneath it is one of the most structurally protected assets in spirits. Whether Chinese cognac demand itself resets lower is not yet settled.

Where the fall concentrated

Pernod reports profit by region, not by brand, and the regional split locates the damage precisely. In FY2025 the Asia/Rest-of-the-World region generated $5,446m of net sales — 42% of the group — but $1,598m of profit from recurring operations, 46% of the group's $3,467m [1]. Its 29.3% margin is the highest of the three regions, above the Americas (26.9%) and Europe (23.5%). This is where cognac, Chinese demand and Global Travel Retail concentrate, and it is the region that fell hardest.

Source: FY2025 Universal Registration Document, net sales and recurring profit by region [2].

The group does not break out Martell's revenue or profit, so its exact weight is an estimate rather than a disclosure. What can be anchored: Martell sold 1.9 million nine-litre cases in FY2025, and it is one of the four houses — with Hennessy, Rémy Martin and Courvoisier — that together hold roughly 87% of the value of the global cognac market [3]. On volume and typical cognac pricing, Martell is on the order of a tenth of group sales; because cognac carries above-group margins and sits inside the group's most profitable region and channel, its profit weight is higher than its sales weight. The precise figure is undisclosed, but the direction is not in doubt: cognac is a small slice of cases and an outsized slice of profit, and it led the group into the downturn.

The Martell decline came in two stages. In FY2023 the brand still grew net sales +10%, entirely on price/mix (+12 points) as volumes already softened (−3) [4]. FY2024 was a volume event — cases down 11% with pricing still positive (+1) [5]. FY2025 is when both broke at once: net sales −20%, volume −12 and price/mix −8 [6]. That volume-first, then-pricing sequence is the same pattern the Demand Durability chapter found across the group — but sharper at Martell, and with the added twist that its negative price/mix reflects the loss of a specific high-price channel, not only softer demand.

Source: FY2023, FY2024 and FY2025 Sales and Results press releases, Strategic International Brands tables [7]; [8]; [9].

Anatomy of the cognac shock

Two distinct forces hit Martell in FY2025, and they are worth separating because they resolve on different clocks.

The first is Chinese demand. China's organic net sales fell −21% in FY2025 against a "challenging macro-economic environment and continuing weak consumer sentiment" [10], following −10% in FY2024 [11]. Cognac is heavily exposed to the Chinese consumer — gifting, banqueting and the premium on-trade — so a Chinese slowdown lands on Martell harder than on the group.

The second is a trade action. In late 2024 China's authorities opened an anti-dumping probe into cognac (brandy) exports from the European Union [12], and cognac imports into China Duty Free were suspended from December 2024. Global Travel Retail — the airport and border channel where cognac sells at its highest prices — fell −13% for the year, with the company tying the outlook explicitly to "the resolution of the Cognac suspension in China Duty Free" [13]. Losing the duty-free channel is part of why Martell's price/mix turned negative: it is not that Martell cut list prices, but that its highest-price channel was suspended.

Source: FY2024 and FY2025 Sales and Results press releases and Q3 FY2026 sales release [14]; [15]; [16]. Q3 FY26 is the quarter alone; nine-month China was −24%.

One point of management discipline shows up in the numbers and is worth flagging because it flatters the region's profit. Asia/RoW advertising and promotion spend was cut 12.7% organically in FY2025, well ahead of the −3.9% sales decline, which is why the region's recurring profit held to −1.2% organic even as its top line fell [17]. Protecting near-term profit by pulling brand investment is a lever, not a solution; it cannot be repeated indefinitely without eventually costing share.

A trade dispute, now resolved

The binary tail risk in this story — an open-ended tariff on cognac into China — has closed. On 5 July 2025 China's Ministry of Commerce issued its final ruling: definitive anti-dumping duties on EU brandy, effective five years, with dumping margins set between 27.7% and 34.9% (Martell 27.7%, Hennessy 34.9%, Rémy Martin 34.3%) — but the major houses, including Martell, avoided the duties by signing minimum-price undertakings, agreeing to sell at or above a set floor. Thirty-four EU producers were exempted from the duty on that basis (China Ministry of Commerce final ruling, 5 July 2025, as reported by Reuters, Bloomberg and Euronews).

The corpus confirms the mechanism and sizes its cost through the pure-cognac peer. Rémy Cointreau's management describes its guidance as including "the estimated impact from tariffs in the US and price undertakings in China," and puts the total China tariff effect at roughly $6m — a margin drag, not a demand wall [18]. For a house of Martell's scale the order of magnitude is comparable: the price undertaking trims margin at the edge, but it removes the risk of a punitive duty and lets the channel reopen.

And the channel has reopened. In Q3 FY2026 Pernod reported a "sales rebound following the resumption of Cognac sales in China DF," with Martell posting strong double-digit sell-out growth over Chinese New Year, while group volumes returned to +4% [19]. China's reported organic sales were still −7% in the quarter (−24% over nine months), so the underlying market has not recovered — but the specific, self-correcting piece of the shock, the duty-free suspension, is behind the company.

The moat under the shock

The reason the cognac question matters beyond one bad year is that cognac is among the most structurally defended categories in all of spirits, and the 8-to-20-year test asks whether the business will still be earning at scale that far out. On cognac the answer is unusually clear, and it rests on three barriers that a well-funded competitor cannot simply buy.

The first is legal origin. Cognac is an appellation d'origine contrôlée: it can only be made from grapes grown in a defined region of south-west France, from a handful of designated crus [20]. No amount of capital creates new Cognac terroir. Pernod names this itself as an entry constraint on the category: "geographical origin and the need for long-term strategic inventories" [21].

The second is time locked in a barrel. Cognac is a blend of aged eaux-de-vie, and the finest can mature for decades — Rémy Cointreau notes an ageing potential of "more than 100 years for some Grande Champagne eaux-de-vie" [22]. That barrier shows up on Pernod's own balance sheet. Ageing inventories, held mainly for whisky and cognac, are 84% of total inventories [23], against total inventory of about $9.9bn — roughly a quarter of the group's entire asset base tied up in liquid maturing for years. On top of that the group holds $3,114m of forward supply commitments for eaux-de-vie, grapes and base wines [24]. A new entrant would need to start laying down stock today to compete a decade from now.

Source: FY2025 Universal Registration Document — 84% ageing share and $3,114m supply commitments [25]; [26]; total inventory as reported.

The third is concentration. Four houses hold about 83% of global cognac volume and 87% of its value [27]; Martell is one of them. The pure-cognac peer, Rémy Cointreau, runs the same model — cognac is 62% of its sales and over 99% of its international sales, sourced through decades-old exclusive grower partnerships covering the majority of the best crus [28]. This is an oligopoly protected by law, by time and by land. On the eight-to-twenty-year test, the cognac franchise reads as a wide, durable moat — the category will still exist and still be dominated by these houses. That is a genuinely different conclusion from the group-wide pricing question the Demand Durability chapter left open on the broader portfolio.

What could still be permanent

The moat being intact does not make the demand temporary, and the honest bear case sits precisely there. A protected franchise can still see its end-market reset to a structurally lower level, and China is where that risk lives.

Two facts keep the question open. First, Martell is more China-dependent than its diversified stablemates, so its recovery is hostage to the Chinese consumer specifically — and Chinese demand is entangled with a property-driven wealth shock and a shift in gifting and banqueting culture that may not fully reverse. Second, the pure-cognac peer's own commentary is cautious well beyond the trade dispute: Rémy Cointreau describes the Chinese market as "very challenging" and is resetting its commercial organisation there, signs that management is planning for a slow grind rather than a snap-back [29]. If Chinese cognac demand settles a rung lower, Martell's mid-cycle earning power is permanently smaller, regardless of how good the barrels are.

The evidence to date leans toward a cyclical read on cognac with a resolved trade overlay: the duty-free channel is back, the tariff is settled on a five-year framework at modest cost, Martell's Chinese New Year sell-out rebounded, and the underlying franchise is one of the best-protected in the industry. The strongest fact against that read is that China's reported sales were still −7% in the most recent quarter and the pure-play peer sees no near-term inflection [30]. What would decide it is Chinese cognac depletions turning positive on a clean comparison — not the duty-free restocking bounce, but sustained sell-out — over the next few quarters. Until then, the largest single driver of the fall is best described as a deep cyclical trough in a structurally sound category, with a real but unquantified risk that the trough is partly a new floor.