(FORTUNE Magazine) – COGNAC AND JARNAC, TWIN PRODUCTION CENTERS FOR THE world's most famous eau de vie, are linked by road and river. Despite a summer that saw the region's worst drought in 30 years, the Charente has changed little down through the centuries. It is a sleepy waterway that meanders through fields and vineyards, its placid surface reflecting the imposing façades of the ancient cognac houses of Hennessy, Hine, and Courvoisier. The road is a different matter. Gone are the rows of plane trees that long shaded France's rural roads. Now traffic snarls past furniture showrooms, gas stations, tire and muffler outlets, and DIY stores. Most incongruous of all, given that this is cognac country, is a large building that looks like an aircraft hangar. But a sign outside proclaims a different purpose: It is the home of Grey Goose, the self-styled "Cognac of Vodka" launched eight years ago by octogenarian New York spirits importer Sidney Frank.

Last year Bacardi paid Frank $2 billion for his upstart vodka company, a record for a single drink label. This summer Fortune Brands, the Chicago bourbon-to-golf-balls conglomerate, paid Pernod Ricard $5 billion for Courvoisier and a number of other wine and spirits labels that the French drinks giant had acquired in its takeover of Allied Domecq but couldn't keep for antitrust reasons. Once the purveyor of brandy to the court of Napoleon, and more recently to the emperors of hip hop, Courvoisier was the crown jewel in that transaction. The exact price that it fetched hasn't been disclosed, but even if Fortune Brands got a bargain, it will have to work a lot harder than Bacardi to ensure that its new property delivers.

Blame it on the way the two spirits are produced. Although Grey Goose boasts about its "five-step distillation process," all vodkas are the product of fairly simple chemistry in which grain or potatoes or grapes are fermented to make alcohol that is then concentrated through distillation. The end product is a colorless liquid that, if finished differently, could just as easily be gin. Once cooled, the distillate is filtered and diluted, possibly given a fruit flavor, poured into bottles, and shipped to bars where urban sophisticates will part with eye-popping amounts of money to drink the stuff, either on the rocks or as a cocktail component. Quick and cheap to make yet able to command high prices, vodka is a money machine--and one that is enjoying the best of times, with global sales up 40% between 1999 and 2003 and, according to the International Wine & Spirits Record, expected to grow another 11% by 2008.

As Fortune Brands will discover, cognac is a headache to produce. It can't be made from any old grain or potato but only from grapes grown within a strictly limited area in western France. By law the distillation process is confined to the period between the grape harvest (usually October) and the end of March; for the rest of the year the old-fashioned copper stills stand empty--an exercise in inefficiency that's enough to drive a bean counter to drink. Cash flow takes a hit because cognac, unlike vodka, can't be bottled immediately but has to be aged in expensive, hand-built French oak casks for at least two years before it can be sold as the lowest-quality blend. In practice, most cognac spends much more than the legal minimum in the barrel, not only because it improves with age but also because the big cognac houses, like their champagne counterparts, seek to produce a distinctive and consistent style that requires the blending of many batches and vintages. That in turn requires large stocks, which ties up capital and also sees cognac's liquid assets literally disappear, thanks to an evaporation rate of about 2% a year. The Cognaçais call these lost spirits the "angels' share," and each year those greedy angels take the equivalent of 22 million bottles--nearly twice what was shipped to Britain last year.

Given all that, it's a wonder the cognac houses didn't convert to vodka production years ago. Fortunately for cognac lovers, the Cognaçais remain crazy enough to stick with what they do best. "It's a labor of love as well as a business," says Bruno Lemoine, cellar master at Pernod Ricard's Martell, the oldest of the major cognac houses. That labor of love has gotten the industry through some hard times. It survived a 19th-century phylloxera disaster that wiped out all its vineyards, evaded the looting of its warehouses by German troops during World War II, and recovered from the collapse of sales to Japan, once cognac's largest, most lucrative market. It has even survived the decline of cognac consumption in France, where more whiskey is now downed in a month than cognac in a year.

At a time when Courvoisier is passing from British into American hands, it is perhaps fitting that les Anglo-Saxons are leading a revival that last year enabled cognac to record its best performance in more than a decade. Shipments to Britain increased 7.8%, to just over 13 million bottles, while sales to the U.S. reached an all-time high of 49.3 million bottles, despite the weak dollar. Best of all, although cheaper VS (for Very Special) cognacs still account for the bulk of sales, global demand for the more profitable premium blends such as VSOP (Very Superior Old Pale) and XO (Extra Old) grew by 11%. In Asia, sales of VSOP were up nearly 70%. These top-of-the-line cognacs--all the way up to L'Esprit de Courvoisier, which sells for as much as $5,000 a bottle--are what the industry believes will give the likes of Grey Goose a run for its money. And if the new clientele wants to mix even the finest cognacs with exotic fruit juices and other spirits, then the Cognaçais are not going to be snooty. "It's time for cognac to come down from its pedestal," says Bernard Hine, honorary chairman of the eponymous cognac house founded by his British forebear Thomas Hine in 1817.

With global sales rebounding and this year's grape harvest safely in, the Cognaçais are feeling more upbeat than they have for years. And despite its recent change of ownership, the house of Courvoisier exudes an air as tranquil as the river flowing past its walls. It helps that the folks at Fortune Brands are making the right noises. "We love all of our kids the same," says Tom Flocco, president and CEO of the company's drinks division. But Courvoisier will be a favored offspring, he insists, and cognac "has its best days ahead of it." There's another reason for the optimism: Grey Goose may be flying high, but after centuries of evaporation, the Cognaçais believe they have some even higher fliers on their side--the angels.

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