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CHAMPAGNE: OVERVIEW: Could Champagne lose its sparkle?

01 October 2008 By db staff writer

Following Champagne’s decision to revise its appellation and raise prices for the consumer, Fionnuala Synnott considers the impact these contentious changes might have on the category in the post sub-prime climate

The extension of the Champagne appellation has caused a furore, both among the press and consumers. The region has been criticised for cashing in on its success and betraying the historic importance of its terroir but the reality is more complex.

The consensus among the Champenois is that it is too early to quantify the impact this decision will have. In fact, the official decree will only come into action in the first half of next year, leaving ample time for growers to appeal the decision.

The individual grape-producing parcels have yet to be decided. The only thing that seems clear (pending a lengthy appeal period) is that the new vineyards will come from the 40 communes that have already been named by the CIVC. “We won’t know which vineyards will be planted until the experts have decided on the plots”, says Daniel Lorson, communications director at the CIVC. Lorson is referring to the second stage of the process, which will determine the zone de production de raisins. This will start in spring 2009 and is expected to continue until 2015 as it will involve an extensive parcel study.

Lengthy process
Some have questioned the timing of the decision to extend the appellation, inferring that it was taken purely to capitalise on the current demand for Champagne, but, according to Patrick le Brun, president of the SVC, this is not the case. “We asked for the revision for legal and qualitative reasons. The 1927 revision was done on a historical basis but the 1984 revision was done according to technical criterion. Some communes were classified under the 1927 legislation, others under 1984 legislation. There was therefore a legal inconcistency throughout the appellation.” He is adamant that there was no economic motivation behind the revision when the growers asked the INAO for it in 2003. “At that time, 30,000 hectares of the appellation were still unplanted, ie 35 million bottles worth of Champagne. The whole idea behind it is to improve the quality of Champagne”.

But change has been on the horizon for some time. Lorson explains: “Since 1927, there have been many attempts to include new villages in the vine-growing appellation. We realised that if we started to look at each request individually we were going to do a bad job, which might damage Champagne’s reputation for quality consistency.”

For the past 10 years, Patrice Noyelle, managing director of Pol Roger, has been asking his fellow Champenois why they didn’t extend the land under vine. “Some of the new vines are likely to be even better than what we have been using so far. It is strange when something works so well not to make more of it; it’s frustrating not to be able to grow because we don’t have enough grapes. It is foolish to deprive ourselves of the possibility of growing. If it’s well done, it will be a good development and will allow consumers to have access to more wines and enable us to increase our yields.” But, he says, it is important that the revolution is conducted in good conditions. “At Pol Roger, we would never grow our business to the detriment of quality.”

Frédéric Rouzaud, president of Louis Roederer, thinks there is a compelling reason for taking this decision now and not before: “The first classification was carried out with the technical means of the time. Nowadays, we have greater scientific knowledge. We have a better understanding of the terroir, the climate, and the process of producing grapes in order to carry out a better classification of the vineyards.”

The CIVC’s Lorson makes no secret of the fact that the addition will enable the region to increase productivity and go some way to meeting the current (larger) demand for Champagne. He also hopes that it will allow the region to keep up with the global development of sparkling wines. “At the moment, Champagne accounts for only 15% of total global production of sparkling wine. We need to maintain our market share. Some would like to stick to the current situation but it is not just the Grandes Marques [that want change], other smaller producers with three children also want to have more land with all the quality guarantees.” But Rouzaud points out: “I don’t know what the demand for Champagne will be in 2020, but even if we manage to produce 1% more [through the extension of the appellation], it will only be a drop in the ocean compared to the overall demand for Champagne.”

Other critics are concerned that the quality of Champagne produced will somehow be inferior, but, on the contrary, some Champenois see this decision as a way of reinforcing the quality of their wines. “Today, we have more experience of viticulture and oenology. This allows us to better choose really good parcels and plots to produce Champagne. It will increase the quality of Champagne, as it will be made from only the very best parcels,” says Lorson.

Pricing
Another issue that has reared its head in the past year is the rising price of Champagne. Champagne has been subject to the same increase in production costs as other still wines, although, thankfully for the region, demand has never been higher. This has led some retailers and members of the on-trade to criticise the Champenois for taking advantage of this trend and hiking their prices up unreasonably at a difficult time for the trade.

But, according to Lorson, this is not the case. “Champagne enjoyed a long period of price stability from 1990 to 2004. It then resumed a cautious increase initiated by houses’ marketing initiatives to get consumers to trade up, but this was not sufficient. From 2005-2007 the increase in the price of grapes obliged producers to increase their prices above inflation, making it dearer for consumers. Many consumers don’t buy Champagne regularly, which means some will note a big difference from when they last bought a bottle,” says Lorson.

He does, however, admit that this price hike has had consequences on shipment figures. Statistics from the first semester of this year show a decrease of 2.8% (35 million bottles), compared to the same period in 2007, when an increase of 6% was recorded. Champagne’s domestic market is also down 3.2%. According to Lorson, this is mainly due to price positioning in supermarkets. “The premiers prix – the rock bottom prices – have increased more than the prices of branded players. Consumers who buy bottles [at this price] have no loyalty to the category. This is also true for Germany, where an aggressive discount culture prevails.”

But Lorson is not worried, referring to this decline as “a deceleration” following last year’s growth. Rouzaud is also unfazed: “Last year’s year-on-year growth was +5%. The key players agreed to limit growth to 2%, so if it was +5% last year and things are stable this year then we have found the equilibrium that we are seeking.”

But Terence Kenny, export director at Pannier, thinks the most challenging times are yet to come: “As of yet, price increases have not seemed to create major disturbances, but there is always a calm before any storm. 2009 will be the watershed.”

For Vanquish Wine, which supplies Champagne to high-end on-trade venues, this moment has already come. “Obviously we try to maintain stable prices for our clients, but when the prices went up in February, it transferred into higher prices for our clients. But most of our clients swallowed them as they could see that they went up across the board,” says David Elghanayan, director. Most people had stock to last them three to four months; after this was exhausted, they started buying Champagne at the new prices. “We are selling more mid- to high-end luxury products. Moët sales are pretty good and DP is very good.”

At the premium end, he has noticed people moving down a notch from Cristal to Dom Pérignon. Consumers are still buying premium but are more tempered in their spending. “Instead of spending £130 they are spending £60-70. This trend comes from the clients to the venues and then to us.” He has also noted more growth in the “more esoteric” lines from well-known houses such as Laurent-Perrier’s Cuvée Alexandra. “We are selling Krug’s single-vineyard Clos d’Ambonnay for £2,500 a bottle, mainly to Asian private clients.”

Of more concern to the Champenois than the revision of the appellation or pricing is the thorny issue of currency exchange, particularly between the US and Europe. “The value of the US dollar, combined with the general economic situation of the country has affected sales in the US,” says Lorson.

Merchants, in particular, have been hit. “When the euro became so strong, it killed the import business to the UK. We’re selling to people we used to buy from,” says Elghanayan. In the case of Champagne, it has also changed the dynamics of the grey market. “When the US dollar was down to $1.90, the grey market shifted from buying from Europe to buying from the US. Now it’s back up to $2.2 it’s a little less interesting,” notes Elghanayan.

Pol Roger’s Noyelle thinks pricing has more influence in some markets than others, such as France or the US, for instance. But he is not convinced that UK sales will drop. “Are we likely to see a decline in volume in the multiples? Will Tesco and Sainsbury’s see their sales drop? It’s not impossible but I get the impression that stock is moving. Even if consumer morale is low, a good glass of Champagne is always good for cheering people up.”

CHAMPAGNE IN CHINA

> HKSAR and Macau’s decision to abolish duty on wine may have some significance for the Champagne category, even if volumes shipped to the region remain low. According to Jean Berchon, Moët & Chandon’s VP of heritage & corporate communication, although Moët already sells into Hong Kong and Taiwan, it is now more likely to focus on the Chinese market, where it is looking at a long-term future, in addition to Japan, India, Korea and Singapore. “The new situation is a great opportunity to showcase luxury Champagne in a good environment and good conditions but Hong Kong, and, to a lesser degree, Macao, are image cities rather than big-volume cities.” Cécile Bonnefond, Veuve Clicquot president and CEO, also thinks this development is important: “Decisions in Hong Kong and Macau are really positive for Champagne in general and our brands in particular as it allows the consumer to choose what they want to drink. We are more inclined to invest in these markets as prices are more likely to attract new consumers including Chinese non consumers.”

The development has been significant for on-trade specialist Vanquish Wine. “The significance has been huge in Hong Kong, shipping direct is so much easier. We are doing phenomenally in terms of private client sales and are seeing some really big purchases in the US and Asia,” says David Elghanayan.

“We are doing great export sales with very sophisticated, knowledgeable clients. They are very specific about wine and are interested in the quality of the bottle and its provenance.

“On the whole, private clients are going for older vintages. Asia buys the best. Our clients buy phenomenal products for drinking but we also sell to traders.”

In a vast country like China, distribution is key. Daniel Lorson of the CIVC says: “Historically, the big international groups such as LVMH, Pernod Ricard and Rémy-Cointreau have had a kind of advantage over the competition as they already have the distribution in place and are well-established in the country.”

Pol Roger does not have a presence in China because it has not yet fond a good partner with access to a good distribution network. Patrice Noyelle explains: “Hong Kong is the door to China but you still have to have a distribution network in mainland China.

“Beijing is Beijing, not Hong Kong. In China, you have to be able to deliver within 24 hours. If you’re in Hong Kong you cannot guarantee next day delivery. The problem with China is logistics, you have to have warehouses dotted throughout the country.”

According to Terence Kenny, at Pannier, finding a suitable partner is not as easy as one would think. “Many of the Chinese importers have little or no strategy and are just evolving from the ‘wine as a commodity’ mode.

Not that many are ready to market Champagne. There is no sense of going into the Chinese market with a quick sell, low price attitude and I hope this does not happen. Champagne should be positioned high from the outset.”

But, according to Lorson, the Chinese are conscious that for the development of their country, they need to develop their infrastructure and logistics.

He says: “We are working hard with the CIVC office in Beijing to ensure the best possible environment for safe delivery to China. It is in the interests of the Chinese to help protect our distribution because the day they decide to distribute their products, they will need good distribution in Europe. For me, China will be in the top 10 within three years.”

The year ahead
Although this year’s vintage has yet to be harvested (at the time of going to press), there are already reports that the 2008 vintage will be a low-yielding one.

But Patrick Ligeron, export manager at Gosset, is satisfied with the harvest so far, both in quality and volume. “This has been quite a good year with good natural sugar levels around 7-8 degrees. We’ve had light rain but managed to avoid the big storms in August.

“On the whole, there is very little rot and not much botrytis. At first, acidity was high but this has dropped down again. We could do with some sun.”

But it hasn’t been an easy year in the vineyards. “This year has been quite difficult in terms of the vegetal cycle of the plant, we had a difficult viticultural season. But we’ve had a dry summer if not a sunny one and, on the eve of the harvest, the sanitary condition of the vines is very good.” Rouzaud therefore expects yields to be relatively low for the region and concentration and acidity to be good.

Regardless of the size of the harvest, the signs are that the sizeable demand will continue. But this does not mean the Champenois are complacent about the popularity of their wines. As the ripples of the sub-prime crisis are finally felt by consumers there is always a risk that it could affect Champagne sales as it has already in the dollar zone.

Elghanayan, at Vanquish, is prosaic: “If the credit crunch continues, the industry as a whole will see a downshift from Veuve Clicquot to Moët.” But many Champenois believe there is room for growth in the Champagne category, with the exception of the US, where a revival of Champagne sales is unlikely. Pannier’s Kenny is one such believer but with one important caveat: “If everything goes sideways as some doom and gloom soothsayers predict, there is a risk of a paradigm shift where we re-enter the phase of Champagne à deux vitesses.” By this he means a segmentation of the offer where the major international brands are priced high with their perceived value sustaining the “proper” image of Champagne and, at the other end of the spectrum, products sold on little more than price. “In between will be the intermediary brands offering fantastic quality for price but they will be less in demand as they offer neither the prestige bling factor nor a really low price.” This would be a shame for the category as it is often in this part of the market that consumers can find interesting, accessible wines.