Cautious Champagne harvest reflects demand

The harvest in Champagne began yesterday with the yield being limitedto 9,700 kilos per hectare, 6% below last year’s level and whopping 30% below the maximum the CIVC permits.

The restriction has been imposed to protect quality, with excess wines being placed into reserve until demand convinces the authorities that they should be released.

Demand, however, is far from strong. Trade rumours earlier this year suggested that sales in the UK, the largest export market, were about 40% down due to the effects of the recession while those who could afford the wine of celebration rejected ostentatious consumption during tough times.

Cuvées de luxe such as Dom Pérignon have been hard hit. Globally it is predicted that total Champagne sales this year will be about 260m bottles compared with the bumper 339m in 2007, before the financial crisis unfolded in the major consuming countries.

Given that demand had risen rapidly before 2007, producers might welcome the opportunity to replenish stocks; the problem is that many now already have about four year’s supply in their cellars compared with the more normal three years. While the extra bottle age is generally good for quality, the cost of financing the additional stocks is considerable and some houses also need space to accommodate the wines now being harvested.

The big international names have the resources to ride out the recession – indeed some quietly welcome its positive effects on their stocks and the fact that desirable parcels of vineyards may become available as their owners struggle – but the pressure on cashflow is mounting for those with less financial muscle. That is why we are seeing predictions of £10 Champagne on the supermarket shelves this Christmas.

There are trade reports of at least one major UK chain being offered own-label Champagne at €7.90 a bottle ex-cellars, with the vendor admitting that he would accept €7.80. At that price it is doubtful that the producer would cover his costs from the 2007 harvest (the non-vintage wines currently available).

Before Christmas last year some supermarkets cleared their shelves of Champagne in favour of other sparkling wines, such was the lack of demand at a time of perceived austerity. Now, at least, the fact that they are negotiating for supplies for this year implies a confidence in being able to shift it – and profitably at €7.80 ex-cellars. The £10 bottle would not be a loss leader.

And the fact that returns on Champagne have been subdued has resurrected the rumour that Diageo wants to buy the 66% of Moët Hennessy it does not own, if only LVMH were willing to sell at a sensible price – about £10 billion has been mooted. But that would depend on whether Bernard Arnault saw scope to invest the proceeds for higher long-term returns in other sectors of the luxury goods market.

Diageo does not deny interest but both sides refuse to comment further. The question won’t go away, but nor is it likely to be resolved in the foreseeable future.

Finance on Friday, 11.09.09