Campari, which is set to acquire Courvoisier Cognac for US$1.2 billion, is facing one of its first headwinds of the year after the Chinese government launched an anti-dumping investigation into French brandy imports.
The Italian drinks company has lost more than 3% of its market value in the last week, with rivals Pernod Ricard (-6.6%) and Rémy Cointreau (-15.1%) also suffering share price falls.
China initiated the inquiry into imports as trade tensions between Beijing and Brussels continue to intensify.
The Chinese commerce ministry launched the investigation in response to complaints from domestic manufacturers, focusing on brandy imported from the EU, mainly France.
This move comes after the European Commission’s president Ursula von der Leyen launched an anti-subsidy investigation into Chinese electric vehicle imports.
“Global markets are now flooded with cheaper Chinese electric cars,” she had said in back in September.
The French cognac industry association, BNIC, pledged full cooperation with Chinese authorities, expressing confidence that French products adhere to regulations.
Pernod Ricard revealed that the case, brought forward by an anonymous Chinese producer, seeks a substantial increase in import duties on brandy, from about 5% to 16%, aiming to level the playing field.
Although the increase in the levy would be sharp it would still be behind countries like Brazil (20%), Vietnam (24%), and Thailand (60%).
Experts weigh in
Analysts at JP Morgan believe the likelihood and timeline for a potential tariff is “unclear at this stage” but is scheduled to take twelve months, although this could increase to 18 months if required.
JP Morgan said: “Given the potentially retaliatory nature of the investigation by China against the EU, the outcome is likely to hinge on political negotiations.”
The US bank believes that Remy Cointreau and Pernod Ricard are the most exposed, with 30% and 20% of their profits coming from China respectively.
Diageo PLC (LSE:DGE), which is down a little under 3% this week, and Campari are also at risk, the bank said.
JP Morgan concluded: “We remain cautious on EU Spirits as we see further earnings cuts… which should weigh on sentiment for the sector, and therefore would not be stepping on the weakness here.”