Will the Champagne bubble burst?
Published: (26-02-2008)
Author: David Williams
Champagne really suffered during the 1991 recession , but producers reckon they can see off a downturn should it happen again. David Willliams wonders if their confidence is well-founded or sheer folly.
Reasons to be cheerful
Part 1: We've never had it so good
Patrice Noyelle, the urbane managing director of Champagne Pol Roger, comes across as a practical kind of chap. Having spent the better part of four decades in the wine trade - first in Burgundy including a spell as head of negociant Mommessin,) and then, for the past 10 years, as head of Pol Roger - he's seen his share of economic ups and downs. His experiences have made him something of a realist and he generally steers clear of the rhetorical flourishes and tendency to hyperbole that are the lingua franca in this charmed enclave of the French wine world.
When it comes to Champagne's current situation, however, even Noyelle, in his sardonic way, is unable to contain himself. "I can only compare it to crude oil," he says. "In 35 years in the wine business I have never seen anything like it. I spend whole weekends managing allocations. We are in a situation of shortage, we really are, and when you are in a situation of shortage the prices do not go down."
Champagne, to put it a different kind of crudely, has never had it so good. Trade body CIVC says that, collectively, the region's producers sold a little under 339 million bottles of Champagne around the world during 2007. T hat's a rise of 17 million bottles, or 5.3 per cent, on 2006, which, as it happens, was a record-breaking year for the region, eclipsing the previous record of 320 million bottles in 1999, after a period of solid growth every year since 2001. What's more, the industry has done all this at astonishingly high retail prices - more than £17 a bottle on average in the UK, and rising.
It's not simply the increasing demand that draws Noyelle into his comparison with the oil barons. Supply, too, is restricted. Champagne is about to hit its equivalent of Peak Oil - the period when the world's oil resources reach their maximum, after which the rate of production goes into terminal decline. According to most estimates, Peak Champagne will occur some time in the beginning of the next decade, when the region's total production reaches 380 million bottles. The estimates are based on the current size of the appellation (34,000 ha), the current rates of planting, the current maximum permitted yields (15,000kg per ha) and the current rate of growth in consumption in global markets (just over 2 per cent a year on average for the past couple of years).
Of course, nobody's suggesting that Champagne is going to go into terminal decline some time arou nd 2012. But current conditions mean Champagne is in a unique position in the wine world: demand for all its products is outstripping supply and producers are in a position to, if not entirely dictate terms, then certainly put forward a powerful case in negotiations with retailers. As Lanson's European export director, Olivier de la Giraudière, says: "There is an increase in the cost of raw materials because of a shortage of raw materials, but we can't erase it by our will. And although we have to be careful, it's only natural in this situation that there tends to be a bit of arrogance."
Part 2: everyone, simply everyone, is drinking Champagne
Quite apart from their palpable delight in the size of their sales figures, the Champenois believe they have another ace up their sleeves to ward off any evil economic spirits - one they didn't have last time the markets went haywire. They argue the growth in sales this time around isn't limited to a hard core of people drinking more Champagne on the same kinds of occasions they always have done (ie posh people drinking more at more parties), but that Champagne's appeal is broader and more ingrained than ever before.
As Stephen Leroux, sales and marketing director at Champagne Bollinger, says : "In the past 10 years, in countries like the UK, the kind of people who drink Champagne has changed, or rather, more people have started drinking Champagne who didn't before. It used to be a very small percentage of the population drinking it, but now it's very widespread. And people drink it at different times: they don't just drink it on special occasions, even though it is still very much the drink for special occasions. I mean, you don't celebrate with Prosecco, do you?"
The shift in habits in mature markets is only part of the story, however. Arguably more significant for Champagne's long-term health has been its penetration of emerging markets, particularly the BRIC economies of Brazil, Russia, India and China. According to the CIVC, the Russian market grew by an incredible 46 per cent during 2007, topping a million bottles for the first time in the process. China, meanwhile, grew 30 per cent and India 19 per cent - and the feeling in Champagne is that this is just the beginning.
Says Leroux: "They've only just started drinking Champagne in China and India. Between them they have 40 per cent of the world's population . What's going to happen when they really start drinking it?"
to be fearful ...
Part 1: Remember 1991? And what about 2000?
When it comes to judging the economic weather and its effects on their product, the Champenois haven't always been the most reliable . Indeed, for many involved in the Champagne trade in Britain, the current heady atmosphere is less a sign of good health, more a reminder of past hubris.
The last time the world economy went into recession, in 1990/91, the Champagne trade took a pretty big hit. According to Simon Leschallas, UK director of Bollinger : "It was pretty serious. We lost something like 45 per cent of our sales. It was very much a luxury drink back then, and it was associated with that." De la Giraudière agrees: "We got carried away, thinking everything would be OK. It took us seven years to get back to where we were: we realised people didn't have two throats after all."
Few in the UK trade will forget the fiasco that surrounded Champagne sales at the millennium, either. The Champenois were still celebrating reaching record shipments of 320 million bottles in anticipation of the biggest party anywhere ever, as the hype had it, when it dawned on them that nothing like as many people had celebrated with fizz as they had thought. The result: massive overstocks in all their main markets which took years to clear, usually with the expedient of huge discounts . Shipments dipped to just 263 million bottles for 2001.
When you present this body of evidence to most of the big houses, they dismiss your concerns with an airy "but things are diff erent now", pointing, as we've seen, to their emerging markets. And the lack of concern about the macro-economy is evident in the fact that almost all the big houses have put up or are planning to put up their prices significantly, including, for the second time in 12 months, the dominant player by some distance, LVMH. The owner of, among others, Moët, Ruinart, Veuve Clicquot and Krug, had already put prices up by 5 per cent across its portfolio last year in response to rising costs of production and exchange rate pressure, and announced further increases earlier this month.
Not everyone in Champagne is unconcerned by the global credit crunch. Among the more measured analysers of Champagne's current status is Champagne Jacquart sales and marketing director, Christophe Lagrange. "Champagne sales depend on the psychology of a country and its economic conditions," he says. "It's simple: if people don't feel they have enough money, they won't buy Champagne. Champagne is a limited appellation, and experienced buyers know that every 10 years there'll be an increase in Champagne along with the evolution of the economy - and then a fall as the economy evolves downwards. If we're not careful we'll have the same situation every 10 years. We must try to avoid big increases and decreases in price." Whether the majority of his peers are listening, however, is a moot point.
Part 2: Discounting in a shortage? What's that about?
It's one thing when medium-sized producers such as Pol Roger and Bollinger talk about allocation - you kind of expect them to have always been sold that way. But when larger players such as Pernod Ricard's Mumm claim to be allocating in all their markets, the shortage must be hitting hard, right?
Maybe, but there are several thousand reasons to at least suspect that the Champagne drought isn't quite as severe as the Champenois would have us believe. If you haven't got any wine, why are you selling it off on promotion? This was the question that sprang to this writer's mind when Woolworth's came out with its £5 Champagne last year. It's also one that arises every time a retailer makes another impressive offer. As I write, with Valentine's Day approaching, there are half-price deals on Duval-Leroy if you buy two bottles at Majestic and Sainsbury's own-label Antoine Clevecy is as cheap as £10.49 a bottle if you buy a case online.
La Giraudière admits it's a strange state of affairs, but suggests it is out of suppliers' hands. "I agree it's a paradox, but Champagne is used by retailers to generate footfall, and you can't say no to Tesco." Champagne Mu mm European director, Christophe Regi, takes a slightly different tack. "OK, so 70 per cent of wine is sold on promotion and we are trying to do less activity, because we will have a problem of stock. But promotions aren't all about generating volume. You need them to generate interest ."
But Noyelle, at least, is suspicious. "Pol Roger is an exception, in my opinion. We are in a shortage - we have been on allocation for three years. We don't have enough wine to promote. Some of our customers are promoting, but they're promoting on their margin. It's only a gut feel, but I suspect the bulk of producers still have enough wine. The price of Champagne is still not where it ought to be. Too much Champagne is still being sold too cheaply. You have volume growth higher than value because there is still too much cheap Champagne. And this is dangerous; it's hiding the problems of price."
So what can we expect?
It's still not certain there will be a global economic downturn, no matter how gloomy the forecasts may be, or how frequently articles such as this try to convince us there will be one. It's also true that Champagne is in a much better position than it was last time , thanks largely to the growth of new markets. But there are already signs the Champenois need to at least temper their optimism a little. Shipments to their largest market - the UK - may still be bouyant, with promotion-driven sales over Christmas doing particuarly well. But there are causes for concern in the next two biggest markets: the US and Germany, both of which are down in volume. De la Giraudière says: "We have to be very vigilant and careful. We have a precious jewel in our hands, but we have to make sure it stays that way."