Krug potential

He’s taken on one of Champagne’s most prestigious houses and, despite the rumours, he plans to be there for some time to come. Chris Orr talks to Krug’s managing director, Mark Cornell

WHEN KRUG was bought for a billion French francs in 1999, the informed opinion was that LVMH had lost its grip on reality.  Over US$175m for a Champagne that sold barely 50,000 cases and had less exposure than competitors such as Dom Pérignon and Cristal seemed like an extravagance that the luxury goods house could ill-afford, given the talks of impending recession.

Five years later it still seems a ridiculously large amount to pay for the brand.  Not so, says managing director of Krug, Mark Cornell – formerly MD of Hine – who has been quietly working away in the company’s offices in the rue Coquebert in Reims for the last 18 months.

"Today, Krug is a profitable company, there is no doubt about that.  Certainly profitable enough to justify buying the company for a billion francs.  I think it’s important to see the bigger picture though.  "There are very few businesses, very few brands in the world that have the same opportunities and capabilities to create wealth that a company such as Krug has. 

When one of these companies passes you by – and remember that doesn’t happen every day, hell, every year – then when that happens, if you’re in the business of creating wealth, and shareholder value in the luxury market, you have to take advantage of the opportunity.  You have to snap it up. 

And if that means you have to pay a little more for it on the day in order to secure the purchase, so be it.  If you manage it right, over time it will more than pay for itself. If I were an entrepreneur outside the corporate environment I would be looking for just the same sort of Krugtype opportunity – and I would be prepared to pay over the odds for it.

"And, as I say, Krug makes a profit, a terrific profit. We just need to see whether we can make a bit more, as you would expect LVMH to do."  That’s why Cornell, a relaxed but very quint essential Englishman, has been put in charge of one of Champagne’s most luxurious brands.

Having joined the LVMH corporation more than five years ago, Cornell – a very unstuffy, self-deprecating figure – has seen a relatively rapid rise through the ranks, culminating in his being put in charge of Hine.

The result – a polished up company which was divested from the LVMH portfolio shortly before Cornell took up the opportunity at Krug.  So, was he surprised when his appointment was announced that there were a few nervous ticks appearing among employees at Krug?

"Not entirely," laughs Cornell, "but I can assure you I would not have come to Krug had there been the slightest possibility of it being sold.  Frankly, no one would ever have employed me again.  No one wants a reputation of being the guy that comes in, turns things around, then flogs it and buggers off. It’s hardly confidence inspiring or great for one’s reputation.

So I was very, very specific about this when I agreed to take the job on at Krug. Inevitably, there were some people that probably thought that in the early days, but I think it’s been clearly established now that I am here for the duration.

"Also, remember Hine was an exceptional scenario. Within our portfolio Hennessy is a great brand, but it’s a lot easier to sell a number of Champagnes than it is to sell a number of Cognacs.

Hine had many superb qualities, but it was felt it would be worth more outside the portfolio than it would be inside it.  And, in fairness, we had to do what was in the best interests of the shareholders of Hine.

Had it remained in our portfolio it would always have been the number two Cognac and would probably not have been given the same opportunities and attention that it would as the number one in someone else’s portfolio."

Cornell has, probably wisely, been keeping quite a low profile over the last 18 months, during which he has worked on developing a business plan to effect his earlier comment, ie make the company "a bit more profitable".

"In simple terms, I have inherited the most fantastic cult. Krug is a Champagne that has been predominantly bought and revered by Champagne experts.  My job is to move it on to the next phase and open up the cult to a wider market – to broaden the appeal of the brand.

As I see it, Krug has first-class product values and now we have to build some first class-brand values in order to open up our audience. 

"One of the questions that I am sure is in most people’s minds is how can someone like myself walk into a business like Krug and open it up. ‘Opening it up’ always suggests you want to build volume, which as we know, given the difficulty with the supply of quality grapes, is a challenge.

Besides, Krug is all about product quality and we all know that as soon as you try to produce additional volume you risk damaging quality.  And I guess this was the biggest challenge I had when I first came into the business.

How to build this business, and add growth, but at the same time look after current customers and maintain the quality of the wines and ensure I have the supplies of quality wines that allow me to cope with new growth.

"But, to be honest, the answer to all that is actually very simple. Building a business is not just about building volume.  In fact, far from it.  To build a business like Krug you need to look at other areas.  And there are three areas really.

"First is that we can change our focus – and by that I mean very specifically where we place our product. Krug has, for some time, supplied British Airways first class.  One of the first things I said was well, there’s a whole load of volume that we’re selling at relatively low margins to BA – which I can shift to domestic markets and sell at better margins.

So that’s what we did, and I am sorry to say that it’s no longer possible to be given a glass of Krug on first class British Airways.  "The second is to change the mix of our product.  There’s no doubt that Krug Gande Cuvée will always be the brand – it is Krug.

But we can still keep the focus on Grande Cuvée and sell a bit more vintage and a bit more Clos du Mesnil.  "And then there is price – we’ll be looking for some price improvement too. It’s a sensitive area, but if you have a successful brand, the question of pricing becomes almost irrelevant.

Now don’t get me wrong, I am not looking at the stratospheric pricing that one sees from some other prestige cuvées. But there is room for improvement.  There is a great deal of price elasticity around luxury products, and £75 for one of the greatest wines in the world – I don’t think that is actually an enormous amount  to ask, especially when you look at the prices of some Bordeaux châteaux."

So we’ll be seeing price rises for Krug then? "In a very controlled and sensible environment," says Cornell, for the first time looking cautious in an otherwise relaxed and informal chat. 

But surely changing the product mix and adding to price can’t necessarily produce significant instant growth.  "Instant? No.  But look at this way, hypothetically," explains Cornell, "I’m not looking to double volumes but increase business.

First, I certainly have extra capacity in my current production, which may give me, say, 10% additional business opportunity. Equally my switch from the airline business to domestic business will possibly give me another 10%.

And let’s say a change in the mix of the business gives me another 10%. Well, suddenly that’s 30% growth in the business, and what have I changed? But hopefully I’ve made us a more profitable business; certainly profitable enough to justify us being bought for a billion francs."

So is it really that easy? "Sadly no," chuckles Cornell.  "If only it were.  We need to be very clear about our audience.  I see myself as having two distinct audiences.  There is the current consumer, the connoisseur – and I am certainly not going to leave them in the lurch. Looking after them is paramount.

But I also understand that in order to build the business I need to bring in new consumers. So we’ve spent a lot of time looking at customer segmentation and consumer dynamics.

And consumer dynamics are changing significantly. People are increasingly going for individual empowerment. 

They are  feeling more free and comfortable in expressing themselves and their own individuality – being one of the crowd is no longer enough.  And I think that ties in perfectly with Krug and the Krug brand and product values."

Over the last year Cornell has assembled a team at Krug to take on the new markets he feels are essential for growing the business.  "When I came over in December 2002, Italy was a key market for Krug.

Don’t get me wrong, I love Italy and I love the Italians, but I did think where is the US, where is Japan, where is the UK? However, I quickly realised, what a fantastic opportunity. We have some enormous markets that are still open to doing far more business with us.

"Today, Japan is our number one market. The US is hard on its heels and we’re beginning to see some real growth there, thanks to a terrific team and real focus.  It’s a potentially very, very good market.

And, to be frank, we need to drop some of the barriers to entry for Krug.  Wine is an incredibly intimidating subject for the average consumer.  One of the things that I find at Krug is that through the cult image that has been cultivated – and that has contributed enormously to the brand’s success – it can be seen as enormously intimidating.

It’s a positive thing for those that have a one-to-one relationship with the brand already, but it’s not so positive for the brand Krug as a whole.  There’s a feeling that it says to those who have yet to come to Krug, unless you know as much as I do about this, then stay away my friend.

That’s quite an arrogant stance to take and I think these are the sorts of barriers we are trying to strip down."  He believes the team he now has at Krug will enable him to do this.  "I have recruited a team of fantastic people.

They’re all young and they are all hungry and they can see the difference they can potentially make to the brand and that they can make a major impression on our business. They are all, with the exception of myself, mighty bright," he claims, showing his habit for self-deprecation.

"And you know they are all wonderfully naïve – and I mean that in the best sense. They come with no baggage and they ask questions about everything – many of which have never been asked before and that’s incredibly useful.

The flip side of that, of course, is that they have fantastic people such as Rémi to counsel them and advise them, people who have enormous experience."  Which is an interesting point. Where exactly does all this leave the Krug family? "Well, let me say the Krug family have taken all this in absolutely fantastic spirit.

They could easily have spurned me, but thankfully they haven’t.  They have been incredibly supportive, not just internally, but externally across Champagne as well, and with the press and in global markets.

They’ve welcomed whatever change I and the team can bring and have been very forward thinking. And that is Krug really.  It has been incredibly successful in the past at instigating change.  And I see this next phase as simply a part of the evolution of Krug."

So does this mean he’s officially joined that small group of people who can claim to call themselves "Krugists"? "Well I don’t know about that," exclaims Cornell, "but I know I’ve never been happier."