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“standfirst”>The frenetic deal-making seen in the last five years of the pub sector shows no sign of abating – but will Karen Jones get an exit the money men like? By Matt Guarente
In contrast to almost all other wine producing areas of the world, Champagne stands on very firm ground as the fifth year of the new millennium draws to a close. The sorry state of most other French appellation wines is well documented as younger consumers fail to be excited by their style and presentation. But even in the fast expanding new world wine sector, overproduction and underpricing, fuelled by the hugely competitive global players and the staggering amount of promotional retail offers, make it extremely difficult for wine producing companies to make enough money to continue to make the necessary investments for the future. As for Champagne, demand is good, prices are firm and supply is about perfect.
Purists in the Champagne industry may still bemoan the fact that a sizeable chunk of bottles with the Champagne appellation are sold at prices that do nothing to create or build value, but these bottles carry no recognisable brand name and consumers remain wary when purchasing them. Adding value is the marketing tool that most Champagne brand owners have applied so effectively since the postmillennium “blues”, and how well this seems to have worked.
Champagne’s success has, quite simply, been built on its unique quality. There are no shortcuts to achieve this and maintaining this quality is an expensive business. Consumers will pay prices they perceive to be fair but no more. Building brand loyalty is the key to success, particularly in the all-important export markets. The Champagne production area is at its limit and the equilibrium between the grape growers, cooperatives and the producing houses is essential if the necessary sharing of the prime product (grapes) is to be carried out in the most satisfactory way.
The fear factor
Nothing works better – as many political leaders know to their benefit – than the fear factor. This is the trump card that has united the industry in Champagne in recent times and while memories may have become less sharp over the last 15 years, there are enough wise heads who recall, only too vividly, the horror days of the early 1990s when greed unbalanced the trade to devastating effect. Greed from the growers who demanded unrealistic prices for their grapes, and greed from the producing houses who tried to cut corners and raise prices to unacceptable levels, combined to create havoc for Champagne. It took five long years to get out of the ensuing mess, but during that time some excellent quality measures were put into place that have served the industry so well in the last decade.
Today, the quality of Champagne is better than it has ever been. The “them and us” conflict (the growers versus the producers) has been sensibly resolved – for the time being, at least – and there is a general unity within the Champagne business. The result is an allimportant balance in Champagne, without which the industry cannot thrive.
Take a look at the sales/stock balance, for example. It is acknowledged that Champagne ideally needs three and a half years’ of stocks to support annual current sales. At the eve of the 2005 harvest, actual stocks of Champagne in the cellars amounted to just under 1,000 million bottles with the equivalent of a further 100 million bottles lying in tanks as the qualitative reserve. Global sales of Champagne are currently stable at around 300 million bottles so the ratio of stocks (not including the reserves) to current annual demand is around 3.3 years. And this position gets marginally better when the 2005 vintage is put into the calculations. This year’s harvest will reach the maximum limits (allowed under OIV rules) of 13,000 kilos of grapes per hectare of vines. 11,500 kilos of juice will be allowed to go directly into the cellars for next year’s cuvées, while a further 1,500 kilos will be processed and kept in reserve as still wines in tank. This transforms into the equivalent of 311m bottles for immediate use for the Champagne trade, and a further 40m bottles that will be kept as reserve stock. By the eve of the 2006 harvest in Champagne next summer, this will mean that there will be around 1,010m bottles in stock (a ratio of 3.4 years’ stock at current consumption) with a potential total of 140m bottles in reserve for a rainy day – equivalent to almost half a normal crop of grapes. Not far short of the perfect scenario, in fact.
Healthy harvest
What is more, the 2005 crop has been harvested in relatively good conditions (about five days ahead of the norm which is always a good sign), and initial analysis is showing an average alcoholic content of around 10 degrees with good acidity to match. The gods have, once again, smiled down on the Champagne region providing a vintage of seemingly high quality that will more than cover the annual depletions of the Champagne business.
The other great preoccupation in the Champagne business is managing the balance of sales between the home market in France and the more volatile markets overseas. Before the crisis years and the crash in sales in the early 1990s export markets had been slowly increasing their share of the total Champagne shipments, reaching just under 38% of Champagne sales in the campaign year 1989/1990. The French market, so dominant in the early 1980s when 70% of total sales were consumed in France, again became the lynchpin on which Champagne demand recovered in those difficult years of 1991, 1992, 1993 and 1994. In that latter year, export sales had dropped to a mere 76m bottles, while sales in France amounted to some 152m bottles.
With world sales of Champagne hovering at just under 300m bottles, the latest estimates are that exports are continuing to grow while demand for Champagne in France is static or in slight decline. It seems likely that Champagne sales in the international markets will top 126m bottles this year, while shipments to the home market will drop back to just under 171m bottles. This gives the prestigious export markets more than a 42% share of the total Champagne market – their highest performance for many a long year.
The UK market has always been special for Champagne and its performance in the post millennium years has been spectacular. Historically the premier export market for Champagne (although it has twice been challenged and knocked off the top spot during the last two decades by both Germany and the United States), the UK now accounts for almost 30% of all exports of Champagne. A realistic target of 40m bottles should soon be in reach, a highly impressive performance indeed, considering that sales had fallen below 14m bottles in the crisis year of 1991.
Grape prices
It is perhaps the growing dependence on the vibrant export markets for Champagne that has aided the relatively difficult path in deciding a fair price for grapes and their distribution in the trade during these last two potentially difficult years as the old “contract” between growers and producers expired. The export business is largely in the hands of the producing houses with the wine growers’ own Champagnes accounting for just 3.8% of the total overseas sales of Champagne. Although veering very much towards a free market, in line with the guidelines from Brussels on the importance of free competition for the consumer’s protection, growers and the producing houses nevertheless have had many consultative meetings to come to a fair price for grapes and an adequate supply of them to the producing houses. The wisdom and experience of Yves Bénard, president of the Union des Maisons de Champagne, and the youthful dynamism of the newly elected spokesperson of the growers Patrick Le Brun, president of the Syndicat General des Vignerons, seem to have steered a potentially highly dangerous situation into a workable compromise. An agreed release of reserve wines in early spring – equivalent to 27m bottles – gave some much needed “oxygen” to some producers in time for the preparation of their cuvées, and the “observed” price of grapes for this year’s harvest was agreed at between €4.2 and €5.2 per kilo, depending on the site and the quality of the vineyard.
Future prospects
For many years, the main topic for discussion whenever sales are reaching the limits of production is whether to extend the region and, if so, how to put this into practice. At this moment an independent review is currently in place to assess the idea, based entirely on soil analysis, climate and terroir, and the first findings of this report are expected to be discussed sometime next year. Now that another bumper crop of grapes has been safely gathered into the Champagne cellars, the need for any extension plans for the Champagne region becomes less urgent. Indeed, there is a feeling that the probability of further terrorist attacks – the London bombings, for example, have already had a negative effect on the on-trade business in July and August – and the natural hurricane disaster in New Orleans, which has adversely effected oil prices and the US economy, are two reasons why a global slowdown for luxury goods may occur. As mentioned earlier, the balance in Champagne is almost perfect and is the envy of all other wine regions of the world, so much caution is needed when planning any tinkering with the limits of Champagne production..