LVMH Moët Hennessy Louis Vuitton (LVMH), owner of the Hennessy cognac brand, reported their third quarter earnings earlier this week. Total LVMH third quarter 2017 revenues were up 14% from the third quarter of 2016. Fashion and leather goods led the third quarter revenues for the group. Revenues at the wines and spirits (which division that includes Hennessy cognacs) shared the revenue leadership with fashion and leather division in the first half of the year with a 21% increase, fell to a more modest 7% increase in the third quarter.

LVMH noted that while Hennessy cognac revenues were up 9% through the third quarter, revenues attributable to Hennessy cognacs were down in the third quarter due to supply constraints in Hennessy V.S. cognac.

The Hennessy V.S. Shortage

During the first quarter LVMH financial report the company noted that there was a potential Hennessy V.S. shortage brewing. At that time, a Hennessy representative noted “there may be issues of availability in the later part of the year given the consistently strong demand.” The representative further noted that Hennessy V.S. sales had grown 15-20% over the past three-four years. Hennessy’s U.S. sales are primarily driven by its Very Special (V.S.) cognac. The growth rate of sales of Hennessy V.S. is about 30% in the United States. V.S. sales account for well over 80% of Hennessy cognac sales in the United States. It was the growing popularity and sales of Hennessy V.S. that caused LVMH executives to realize that ‘they can’t go further down in inventory.”

LVMH expected that if Hennessy V.S. sales growth continued at the pace of the first quarter, they would experience inventory shortages later this year. While the second quarter traditionally is not a big sales month for spirits, including cognac, a company representative noted in the first half conference call last week that cognac sales did not grow as fast in the second quarter as they had done in the first quarter. The shortage that LVMH had anticipated earlier in 2017, manifested itself in the third quarter with retail outlets around the country reporting low or sold out Hennessy V.S. inventory. This shortage impacted the LMVH wines and spirits division negatively.

The shortage of Hennessy VS is expected to continue indefinitely as the devastating spring frost of 2017 that damaged a large portion of the cognac region’s grape vines, will negatively impact Hennessy VS 2018 and 2019 inventories.