China's Anti-Vice Crackdown Threatens Global Cognac Industry

China's anti-vice raids and the nation's crackdown on karaoke and hostess bars, part of a larger official anti-extravagance drive, have hit the global cognac industry.

Beijing's crackdown on prostitution, drugs and betting – which began in February in the southern city of Dongguan, dubbed the factory of the world – has affected Rémy Cointreau, Pernod Ricard and LVMH's sales.

In China, high-end drinks are ordered by rich businessmen at venues where female companionship is also available.

However, the government clampdown has forced over 2,400 such venues to down shutters, impacting cognac sales in the process. The three French firms command a 95% share of China's cognac market, reported the Financial Times.

Last week, Remy said global sales of cognac fell 32% in the final quarter of 2013, after a 30% drop in sales in the third quarter.

Remy, in its 17 April earnings statement, said it "was adversely affected throughout the financial year by the Chinese government's anti-extravagance policy, which had a negative impact on the consumption of premium spirits".

Earlier, a Pernod analyst presentation in Asia underscored the growing impact of China's anti-corruption campaigns, including what it called "recent action underscore "on karaoke bars or KTVs.

Pernod said about 20% of its China business goes through karaoke bars and that year-to-date sales through the KTV channel were in a "double-digit decline".

A recent Bernstein Research note said the so-called "yellow" sector remains "the most profitable channel for the cognac houses" in China.

"This latest clampdown is significant for the cognac sector because...it started in southern China where cognac consumption is highest...and it is focused on private consumption and business entertainment, which is much more oriented towards western-style spirits and especially high-end cognac," drinks analyst Trevor Stirling and Nicole Thain wrote in the Bernstein note.

Dongguan Raids

In February, more than 6,000 police officers initiated anti-vice raids in Dongguan and arrested about 1,000 people on prostitution and related charges. Those arrested were linked to businesses like hotels, massage parlours and karaoke bars. Taxi drivers and retailers also figured among the arrests.

The official Xinhua news agency estimated that raids could result in around 50bn yuan ($8bn, £4.8bn, €5.8bn) in losses for businesses in the city.

Dongguan was an agricultural backwater town until the late 1980s, and evolved into one of the world's most important manufacturing hubs in line with China's economic boom.

Cognac sales in China totalled over 27 million litres in 2012, according to Euromonitor, more than double the level of 2007.