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Cognac move proves expensive for Remy

Remy Cointreau saw its earnings collapse in the year to March as it broke ranks with other cognac producers to raise prices. Volume falls as a result of the pricing move slashed profits by more than 50 per cent in the period.

Francois Heriard-Dubreuil, one of Remy's managing directors, said: "In summary, 1996 was a difficult year for us." Net profits tumbled from FFr276m (pounds 35.4m) to FFr 120m in the 12 months ended in March and analysts said the prospects for the current year did not appear much brighter.

"Remy was negative about the prospects for cognac and very prudent in its activities in Asia,'' said Cecile d'Estais, an analyst at Paribas Capital Markets. "That's not very encouraging for their operating profit.''

Remy makes more than half of its cognac sales in Asia, principally in Malaysia, Taiwan and China, where it says it controls more than 50 per cent of the market share.

Analysts focused on a gloomy trading report from the first three months of the current year, showing a 20 per cent fall in sales of cognac despite flat overall group sales. Remy thinks profits will recover this year thanks to growth in its champagne, wine and liqueur volumes and additional distribution contracts. Thanks to the weighting of Remy sales towards the Christmas period, the first quarter only accounts for about a fifth of annual sales.

As well as the decision to raise prices, sales of Remy have also been hit by the strength of the French franc against the dollar and other currencies where Remy does business.

The company predicted a significant drop in financial costs, thanks to debt reduction during the year. Borrowings fell by almost FFr2.5bn during the period, thanks to asset sales, and further reductions were promised.

Speaking at a London press conference, Remy's managers said they aimed to slash its debt further this financial year by disposing of non-core businesses, although they refused to say how much they planned to raise.

"But if I tell you we are going to reduce debt, then we are going to do something," said Marc Heriard-Dubreuil, another managing director at the group.

Sales of Remy Martin fell 13.5 per cent after the decision to raise prices. Remy said, however, that contrary to Chinese statistics, the cognac had not lost market share in that important market. Remy said it was important to raise prices, not only to improve margins but to maintain Remy Martin's image as a luxury product.

Sales of Remy's champagne brands, which include Krug and Piper Heidsieck, rose 3 per cent during the year.

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