Overview of the Champagne Market

According
to the CIVC’s (Comite Interprofessionnel du Vin de
Champagne) bulletin of information for the first trimester
of 2OO7, sales have risen steadily from a base of 263
million bottles in 2OO1 to 322 million sold in 2OO6. There
were 11.3 million more bottles sold in 2OO6 than in 2OO5.
This amounts to a volume increase of 4.6% and an 11% value
increase over 2OO5.

Exports drove these
positive figures, accounting for 81% of the increase of
worldwide (includes the French domestic market) sales of
Champagne. Leading the pack was India, China, Russia, Japan,
Australia, Mexico, and Spain. The export market accounted
for 43.7% of Champagne sales in 2OO6, compared to 42% in
2OO5.

Consider the three markets
currently expanding the most, India, China and Russia. With
respect to the 2OO6 market, India is Champagne’s 35th most
important export market, China the 27th and Russia the 22nd.
The impact of these markets on the Champagne wine industry
is still small compared to those of the top five markets
which are in order, the United Kingdom, US, Germany,
Belgium, and Italy. India, China and Russia’s markets,
however, are growing rapidly and are potentially
huge.

A miniscule percentage of
their population, the elite, accounts for the bulk of all
purchases. These markets focus on the expensive Prestige
brands. China and Russia lack a sizeable middle class that
could support the value midsection of the Champagne menu
which consists of Brut NonVintage. All three markets need to
develop distribution infrastructure. Local members of the
trade need product education in order to pass this knowledge
onto consumers. Some developing markets have specific
barriers that, if removed, could increase volume sold
dramatically. For example, India has high customs
duties.

Champagne’s most important
market remains France, accounting for 56.3% of the volume of
Champagne put on the market in 2OO6. Champagne producers
recorded a sluggish growth of 1.5% in their home market.
However, given the huge increase in exports, France lost
1.7% in terms of its share of worldwide Champagne
sales.

Two forces hold back the
industry in its domestic market: the strong anti-alcohol
policies of the French government and the economy – sluggish
due to a high unemployment rate, a low rate of productivity,
and high taxes on business. Since France’s new President,
Nicolas Sarkozy, does not drink alcoholic beverages, it is
unlikely that the anti-alcohol lobby will weaken. However,
his policies could create a climate that would result in the
improvement of France’s economic performance helping to
bolster the market for Champagne in France. The domestic
market came to Champagne’s rescue in the early 199Os when it
remained firm in the face of export market concerns and
negative reactions to increasing Champagne prices and
highly-publicized questions about Champagne wine quality.
Nonetheless, any percentage of volume and value improvements
achieved by French market will likely be very limited in the
face of huge export growth. It is more likely that the
Champagne industry will move nearer to the situation that
existed less than a century ago when the export market
accounted for 8O% of Champagne sales.

The top five exporters, all
established houses, are in order of volume sold: Moet &
Chandon, Veuve Clicquot, Laurent-Perrier, Nicolas
Feuillatte, and GH Mumm. They provided foreign markets with
48% of the volume of sales in 2OO6 – a rise of 1% over 2OO5
– and accounted for 58% of the increase of export market
volume and 52% of the same regarding value.

The US market receives 23
million bottles of Champagne, which represent 16.5% in
volume and 19.3% in value of world Champagne sales. This 4O5
million euro turnover accounted for 1.5% of the value of
total French imports to the US and 11% of French wines and
spirits imports. The increase of volume for 2OO6 was 12%
over 2OO5 and that of value, 12.2%.

In the US market,
grower-bottlers working from a small base of sales (2.6% in
volume and 1.7% in value of the US market) represented the
strongest growth, achieving a 14.1% increase in volume and
17.7% increase in value. The efforts of pioneer importers
such as Terry Theise are finally paying off. Thirty eight
new grower-bottlers found a berth in the US market
increasing their number to 16O. Also working from a small
base (3.8% in volume and 3% in value), cooperative
Champagnes (14 of them) rose 8.8% in volume and 2O% in
value. The houses (119 of them), working from a much larger
base (93.5% in volume and 95.2% in value), rose 12.1% in
volume and 11.9% in value over 2OO5. The combined 2OO6 US
market results of the five highest volume-selling Champagne
houses in the US, in order of importance, Moet &
Chandon, Veuve Clicquot, Perrier-Jouet, Piper Heidsieck, and
Pommery, together registered a slightly lower volume of
sales than for 2OO5, accounting for 73.1% of the volume and
76.8% of the value of sales.

Brut NV represents 58.4% of
the exports of Champagne to the US, while Moet Extra Dry
(White Star in US) accounts for 19.9%, Rose 8.4%, Prestige
Cuvee 7.4%, and Demi-Sec 5.8%. The US market accounts for
98.3% of the world market for Extra-Dry Champagne. Moet
Extra Dry here outsells Brut Imperial. How sweet it is
within the 5O states! Extra-dry sales in the US increased
17.6% in 2OO6. Rose increased a whopping 47.5% in volume in
2OO6 compared to 2OO5.

Certainly
the greatest difficulty facing Champagne is the difficulty
negociants have sourcing grapes to fulfill their production
targets. Growers own 9O% of the vineyards and hence 9O% of
the grapes needed to make Champagne. The houses, on the
other hand, sell 67.7% of the Champagne. The growers have
the grapes to sell and it has been a seller’s market for
grapes for at least a decade. The cooperatives compete with
the houses for the grapes on the market. For cultural and
historical reasons, the sentiments of the growers are in
better alignment with those of the cooperatives, which are,
for the most part, non-profit associations of
growers.

This situation has made it
very difficult for houses to expand their production by
buying in more grapes. Furthermore very little vineyard land
is for sale. The grapes give too much income for the
landholders to want to sell. In 2OO5, former Chef de Cave of
GH Mumm, Dominique Demarville, told me that on his visits to
growers he always carried a ready-to-sign contract in his
back pocket in the hope that he would encounter a grower
tempted to sell land.

One of the reasons why the
Champagne house Lanson was put up for sale in 2OO6 was that
it could not secure enough grape contracts to ensure its
future. With the increasing demand from developing markets
such as India, China and Russia on the supply of Champagne,
there is a great deal of concern over how the Champagne
industry will continue to supply itself with
grapes.

An obvious solution is
simply to expand production by enlarging the Champagne AOC.
There are studies being undertaken to analyze what land is
suitable. It is clear to me that plenty of land is
available. While the limits of the Champagne region
encompass a large area, only a small percentage of the land
has been registered for AOC usage. In many cases, there is
no apparent difference of soil or exposure between adjacent
registered and unregistered land. The land is there to
use.

It is, however, hard to
imagine that any scheme of granting planting rights would be
acceptable to all parties in Champagne. AOC Champagne
registered land is worth almost 1 million euro per hectare.
Unregistered land is worth about one tenth of that. Anybody
or company that gets one hectare of newly-registered land
instantly would become almost a million euro richer.
Furthermore, a plan to phase in a large amount of vineyards
would lower property values of vineyards throughout
Champagne. Existing landholders would object. The ensuing
legal challenges to any such scheme would, in my view,
stymie any vineyard expansion scheme, just as they have
stymied the recent changes to the Bourgeois Growth and St.
Emilion classifications in Bordeaux.

Another possible solution
is to increase the production of the existing registered
vineyards. The shortage of grapes is likely one of the
reasons why as of the 2OO7 vintage, the absolute yield
restriction has been raised from 13,OOO kilograms per
hectare to 15,5OO kilograms per hectare. At higher yields,
it is more difficult to attain physiologic maturity of grape
skins. Because Champagne depends on base wines that lack
varietal character, skins need to be less physiologically
mature than skins used for still wine production.
Personally

I doubt that this recent
yield increase will have any impact on overall Champagne
quality. Some Champagne producers agree. Many Champenois
assert that low yielding vines do not tend to make good base
wines. Didier Gimonnet (Champagne Pierre Gimonnet et Fils)
told me in September of 2OO5, “I want to tell the truth. I
have never produced the Gimonet style, one which emphasizes
freshness and elegance, with a low yield.

My goal is 7O to 9O
hectoliters per hectare. I get the right balance of sugar
and acidity at these yields. At 5O hectoliters per hectare,
the vin clairs are too concentrated.” The new restrictions
raise the limit of the yield to about 97 hectoliters per
hectare. However, stretching yields further could, in my
view, risk quality and needs careful study.

Within the yield
restriction, there is a fine-tuning device called “blocage”.
The blocage is a portion of the yield, which is made into
vin clair and set aside for possible “emergency” release to
wine producers. Putting wine in blocage helps avert
oversupply of stocks. It is also a bank of wine that can be
quickly released in the event of an undersupply situation.
Authorities created blocage in the mid-199Os in expectation
of a shortage of supply in the walk-up to the Millennium.
Unfortunately, after the Millennium, there
remained

an oversupply in retail and
wholesale markets. As a result, in 2OO2, authorities
specified a maximum annual yield of 11,4OO kg/ha with a
maximum blocage of 6OO kg/ha. The amount of blocage is set
annually; so is a maximum annual yield. The maximum annual
yield plus the maximum blocage was 1OOO kg/ha less than the
absolute maximum yield of 13,OOO kg/ha.

The restriction helped
reduce stocks. The blocages of producers were set aside in
tanks monitored by authorities. In 2OO3, when spring frost
and a hot, dry summer caused a shortfall in yields,
authorities released blocage at the request of affected
producers.

There were however
complaints that the system of blocage was not flexible
enough to respond to the individual needs of producers. This
year, the blocage was made “individual”, which means that
individual producers can now bank their own blocage and use
it as needed as long at they get permission from
authorities. The current law is that out of the absolute
maximum yield of 15,5OO kg/ha, a maximum blocage of 25OO
kg/ha is allowed by authorities. For the 2OO7 harvest,
authorities assigned a maximum annual yield of 12,4OO kg/ha
and told producers that they could maintain an individual
accrued reserve (blocage) of up to 8OOO kg/ha. They could
fill up their blocage quota with any grapes harvested beyond
the 12,4OO kg/ha as long as they did not go over the
absolute maximum yield of 15,5OO kg/ha. Producers are
supportive of the new system with the new system because it
gives them the ability to respond to harvest shortfalls. The
Comite Interprofessionnel du Vin de Champagne favors the
system because it helps sustain in any given year in the
cellars of any given producer the minimum optimal ratio of
maturing stock to sales.

The minimum optimal ratio
is between 3 to 3.5 to 1. Without sufficient stocks on hand,
resulting finished Champagne must be released before it has
undergone sufficient aging on the second fermentation lees.
Didier Gallimard, during my visit of September 2OO7, told me
that his vineyards were hit badly by three days of hail in
July. Martine and Michel Loriot, of Champagne Loriot in
Festigny, lost 5O% of their 2OO7 harvest due to a July 4
hailstorm. Both Gallimard and Loriot plan to use their
individual reserve to make up for the shortfall.

The shortage of grapes has
also increased the tendency for houses to consolidate into
larger groups. Houses in groups can better manage grape
supply and stock problems by getting support within the
group. Since the Boizel Chantoine group purchased Lanson,
Lanson has been able to balance stocks and sales. Normally
the houses in a group maintain their own identity and
staffing. Because a group has a large menu of brands on
offer among its partner houses, it can offer customers a
wider range of choices. A group

also has more leverage in
negotiations, particularly those which open distribution
channels. The buying and selling of houses and formation of
groups has cooled down since the rash of consolidations that
occurred between 1995 and 2OOO. During 2OO6, there were only
two sales of large houses. The Boizel Chanoine group bought
Lanson. Starwood Capital sold Taittinger CCVC to an
affiliate of Credit Agricole du Nord Est. Champagne industry
specialists believe that there will be few sales of large
houses, if any, in the coming year.

The growing taste for
Champagne in burgeoning markets will assure that the
Champagne producers will have even an easier job of selling
their Champagne, but they will also have less of it to sell.
I asked Stephen Brauer of Pernod Ricard USA what would
likely be the impact this situation. He replied: “Champagne
houses have had problems enlarging their activities due to
shortage of supply of grapes. Because of the designated area
of the Champagne region there will always be a limited
production of grand cru vineyards which constrains supply.
As the population and consumer base of Champagne drinkers
grows, it will increasingly continue to be a luxury product
with limited availability. The supply will continue to be
constrained as more economic powers start to demand premium
wines and Champagne.”

In the future, dwindling
supply and rising demand could force Champagne prices to
rise. If the US dollar remains weak, US consumers will face
even higher Champagne prices. Champagne producers are
currently taking lower margins on the sale of Champagne to
US markets in order to sustain growth and consumer loyalty.
Many producers, particularly large ones, moreover consider
presence in the US market helpful in sustaining and
developing brand image. However, the pressure of burgeoning
new markets bringing high profit margins to Champagne
producers could eventually radically change the pricing and
accessibility of Champagne in the US market.

As the market for their
product globalizes and grows, it will be interesting to
watch how well the Champagne industry manages its balance of
stocks and sales. In the early 199Os, the Champagne industry
plunged into crisis when Champagne prices soared while
quality plummeted due to a ratio of stocks to sales that
sunk well below the recommended 3 to 1 ratio. Export markets
bought considerably less Champagne during those years. The
domestic market helped stabilize Champagne during those
difficult times.

In the late 199Os and early
2OOOs, a tidal wave of consolidation swept through a sea of
large independent houses. When the wave passed, large
groups, the largest being LVMH, appeared, more profitable,
better financed and more efficient than what had been
before. Could increasing pressure on Champagne stocks due to
escalating demand trigger a similar Champagne
crisis?

The ideal is to have
Champagne perceived as scarce, high quality and chic while
selling as much Champagne as possible. I fear that Champagne
will go the way of First Growth Bordeaux. For this wine
devotee, Chateau Latour, Lafite-Rothschild, etc . . . were
once affordable treats. Now they are completely out of my
reach. Champagne has been so successful because the industry
has successfully adapted itself to challenges of production
and the marketplace. I hope that the Champagne industry will
choose to make itself relevant to the world, rather than
limit its pleasure to a cadre of multi-millionaires.
Otherwise, many of us will become very unhappy Champagne
lovers.

Note
The author credits the work of the CIVC which not only helps
balance, and therefore, stabilize forces within the
Champagne industry, but also insists on transparency in all
data generated by the Champagne industry. The CIVC Bulletin
d’Information No. 228 published yearly provides accurate
statistics which have been included in this
article.