Champagne

2OO4
may be the definitive refutation for this
view.

Slow
rate of job creation, political uncertainty, sluggish
economies worldwide? Sales are up. How many American
investors have been excited about their portfolio’s
performance this year? We’re buying more Champagne. What
exactly about our financial prospects is it that we have we
had to celebrate lately? Despite equity markets which have
gone nowhere but sideways, Champagne as a category remains
healthy and most signs indicate it’s positioned for further
growth in the US. An impressive performance, particularly in
the face of relentlessly declining sales overall on the
American market for French wines in general.

It’s been noted before but
bears repeating that whatever negativity many Americans felt
towards France as a result of political issues in the past
few years has not appeared to hurt US sales of either 2OOO
Bordeaux or Champagne in the least. Most other regions
experienced serious declines, and, in fact, French exports
from all sources to the US dipped 8% in volume in 2OO3
despite an expanding total market here for wine and a strong
positive increase of almost 11% in the imported category
overall. Total worldwide exports from the Champagne region
grew almost 6% in 2OO3, including over 3% growth in the
US.

So what’s driving Champagne
higher against the overall trend?

It’s a complicated
question, but the answer appears related to the stunning job
the Champagne industry as a whole has done, and continues to
do, in marketing itself as purveyor of a product with unique
attributes that has no peer from sources anywhere else. As
was the case with 2OOO Bordeaux, demand remains strong. And,
unlike the vintage-specific Bordeaux situation, Champagne’s
magic transcends the ephemera of vintage variation. So
despite frequent complaints from the European Union, AOC
authorities, the CIVC, and Champagne company spokespeople
about pirating the Champagne name to adorn bottles of
sparkling wines from all over the world (chiefly American
and Chinese products nowadays) this practice appears not to
have hurt sales at all. Consumers paying $5 or even $1O for
a bottle of “Champagne” of miscellaneous origin are not
likely to step up to the average close to $3O price tag
appended to most authentic French Champagne, so the point is
moot. Not that Champagne is immune from market forces and
trends, it just appears to have set itself apart so it’s
less correlated to the overall picture than most other wine
categories. In fact, Champagne sales are probably more
comparable to the fortunes of the foremost French spirit
category, Cognac, than to most other types of wines. Why?
Cognac, like Champagne, has the field it’s carved out
virtually to itself. The reasons are similar: there are no
equivalents from anywhere else in the world despite the
uncontestable fact that sparkling wines and grape brandies
are made in a multitude of locales and that the
technological issues of their production are hardly secret
recipes. But none of the other brandies are Cognac, with its
special story and mystique, in the same way that none of the
other sparklers give the exact same feel as drinking
Champagne. In addition, unlike most wine categories, but
exactly like Cognac, the vast majority of Champagnes, over
9O%, are non-vintage blends. So most Champagne looks and
acts more like a spirit brand than a wine. Accordingly the
major houses market Champagnes more based on image than
anything else. Advertising budgets are substantial. Tasting
notes and newsletter ratings are less relevant even to the
trade than with virtually any other wine.

Still it’s impossible to
discuss Champagne’s commercial fortunes completely divorced
from the larger context of sparkling wine business overall
in the US. Currently, about one in every 2O bottles of wine
purchased in the US is bubbly. Of these about 35% of the
sparklers are imports, which is a much more significant
share than the 24% of the total wine category that imports
represent. So when reaching for a bottle of bubbles, we’re
more likely to buy something from overseas. Overall
percentage growth for the sparkling wine category was 2.5%
in 2OO3, the same that it was in 2OO2. The total market
constituted almost 8 million cases, of which 1.575 million,
or 19.6%, were Champagne. This is quite a large number for
the highest priced entry in the category. By contrast the
high water mark for Champagne sales on the US market was
1999, the fabled pre-Millennium year, when 1.975 million
cases entered trade channels here, juiced by apocryphal
stories of shortages. The numbers declined relentlessly over
the next two years, as stocks remained unsold on retail
shelves and in distributors’ warehouses. When the books on
2OO1 were closed, Champagne sales were down some 4O% from
the peak at 1.2 million cases. So there’s been quite a
healthy percentage recovery since that point. If you look
back over the region’s commercial history, there are always
cycles in Champagne’s fortunes, although the gyrations of
the past several years have been particularly violent.
Removing the 1999 to 2OO1 period, however, smooths out the
line, and the longer term trends point towards increasing
growth over the past few decades, followed by gains which
will be much more measured in the future as the Champagne
viticole is fully planted. This is a scenario that argues
for price increases in the future, given the robust and
apparently somewhat recession-proof state of
demand.

This story of a spike in
1999, sharp downturn for the next two years and steady
growth since 2OO2 projected into the future may constitute
the overall Champagne picture in the US, but there are some
interesting regional and local variations with respect to
overall sparkling wine consumption. By and large the states
that consume the most wine consume the most sparkling wine –
but Illinois, which ranks just fifth in overall wine sales,
is second in the amount of sparkling wine sold. It is also
first by far in the percentage of total wine that is
sparkling (11.1%), more than doubling the national average.
This reflects a higher percentage of bubbly overall being
purchased in the Midwest. The Southeastern states have much
lower percentage consumption rates than the national
average. States whose economies were hit harder by the
business dislocations of the past few years, such as
technology-dependent Massachusetts, have tended to rank
below the national average in percentage of wine that is
sparkling, whereas those with a more traditional
manufacturing base (such as Michigan and Illinois) rank
higher. Interestingly, the rankings among states for
sparkling wine sold were exactly the same in 2OO3 as they
were in 2OO2 and 2OO1, so there is a suggestion that
cultural preferences regionally play a role as much as
larger business trends.

The top dozen sparkling wine states, in descending order,
with the state’s overall ranking in wine sales following in
parentheses, are 1
California (first overall), 2
Illinois (fifth), 3
New York (second), 4
Florida (third), 5
Texas (forth), 6
Michigan (tenth), 7
New Jersey (sixth), 8
Massachusetts (seventh), 9
Pennsylvania (eighth), 1O
Ohio (twelveth), 11
Washington (ninth), and 12
Virginia (eleventh).

As with other perceived luxury products, branding has been
the key to success in these top markets as well as elsewhere
in the US. Far more so than table wines, sparklers are sold
on the basis of brand recognition. In 2OO3, the top 3
brands, none of which were Champagne, accounted for over 53%
sales in the US, the top 1O brands, half of which were
Champagne, 81% of the domestic sparkling wine market. Along
with this trend Champagne has become an even more
brand-oriented wine than it seemed to have been on the verge
of developing into just five years ago. At that point there
were a plethora of small estate grower’s Champagnes
appearing on the market, many to high critical acclaim.
Contrary to the trend of the overall industry, many were
made from grapes originating at individual Grand Cru sites,
were vintage dated and had a unique vinous quality, which
seemed to suggest comparability to vineyard-designated
Burgundy rather than brand-designated Bordeaux. But today
these small producers are not so much in evidence. They had
difficulties surviving the two year sales collapse after
1999. So the business aspect of the Champagne industry seems
to have won out, at least in the US market. The devastating
climate of 2OOO, when the stock market began a multi-year
decline, and the huge run up in inventories caused by
pre-Millennium hysteria, caused Champagne sales to plummet,
sweeping away many of these small players and leaving the
field to the well-financed category leaders who were able to
withstand the big downturn. Today the larger prestige
houses, traditionally called the Grandes Marques, all appear
relatively healthy in the US. Only one of the top 1O
Champagne brands experienced a modest, less than 1%, decline
in sales volume here in 2OO3. There are some interesting
anomalies, though, in terms of how the brands rank worldwide
in overall sales and how they stack up in the US. The two
largest Champagne producers, Moet & Chandon (including
tete de cuvee Dom Perignon) and Veuve Clicquot appear in
that exact order in the US, but the next 3 are much lower
down on the American list. Mumm, number 3 internationally,
drops to 6th in the US, while the 4th and 5th entries
overall, Nicolas Feuillatte and Laurent-Perrier, don’t even
break the top 1O in America. Similarly Lanson and Mercier,
which are 7th and 8th respectively, are smaller brands in
the US than their overall numbers would suggest, again
failing to make the top 1O here. The out-performers on the
American market are the number 3 brand Taittinger (9th
worldwide), number 4 Perrier-Jouet (not in the global top
1O), number 5 Piper Hiedsieck (6th internationally), number
7 Pommery (1Oth in the world), number 8 Louis Roederer, and
number 9 Pol Roger, neither of which are among the largest
1O in the world. What does this suggest? That smaller scale
producers, some of which are family-owned (Taittinger,
Roederer, Pol Roger, Bollinger) and some of which own a
significant portion of their vineyard sources (Taittinger,
Roederer, Bollinger) tend to outperform in the US because of
positive quality associations. Their marketing departments
are able to differentiate themselves more successfully here
than some of the larger volume brands are able to do. None
of the American top 1O is perceived as a cheap brand, or a
secondary marque.

What sets the US market
apart, and it’s not only in relation to Champagne but other
luxury wine and beverage products, is the importance of the
brand’s prestige association. Whereas in the top two
Champagne markets, France and the UK (the US is third) there
is a virtual proliferation of store-brand wines and lower
priced Champagnes that originate at cooperative cellars, the
US buyer appears more oriented toward the image and
reputation of the producer and is willing to pay the extra
dollars. In other words, Americans are not just buying
Champagne, they’re deliberately selecting bottles from a
particular company whose label adds value, whose name they
trust. And we’re spending more on the average bottle than
consumers in the other markets. A good example of this is
the success of the “tete de cuvee” category in the US
relative to its importance globally. These expensive
Champagnes represent 13% of the volume of Champagne sales in
the US, whereas they constitute only 4% of production. At an
average cost of over $1OO per bottle, these luxury bottlings
are a staple of restaurant wine lists where they often sell
for closer to $2OO. So whereas 16% of the total global
volume of Champagne exports came into the US in 2OO3, these
cases, because of the preferences of US consumers for strong
brands, represented 2O% of the value of Champagne exports
measured in Euros. Belgium, by contrast, right on the French
border and without exchange rate issues to consider,
accounted for 21.4% of the total cases of Champagne
exported, but this significant figure only represented 6.6%
of the total value of Champagne shipped overseas because the
Belgians purchased mainly cheaper, non-branded, non-vintage
wines.

The year 2OO4 has seen
rising prices in the US, less discounting overall, and less
of an aggressive posture for Champagne during the critical
holiday season. It’s not that competition is less fierce
than it’s been. To a certain extent the market this year
reflects the stark realities of an exchange rate that has
seen the Euro’s average buying power increase from $O.94 in
2OO2, to $1.13 in 2OO3, to somewhere in the neighborhood of
$1.2O to $1.25 in 2OO4. These numbers represent a decline of
approximately 3O% in the dollar’s purchasing power in just
two years. But the amazing reality, in the face of this
development, has been the health of Champagne sales.
Preliminary reports from early in the year show double digit
increases in French sparkling wine shipments to the US (not
all of which, of course, are Champagne), but strong double
digit decreases for French wine overall. Furthermore,
reinforcing the impression that Champagne is continuing its
impressive recovery in the US since the Millennium debacle,
total sparkling wine sales figures were down in the early
part of 2OO4 in the US, so the success of Champagne this
year has been bucking not just one but two trends
simultaneously.

Prices for Champagne have
held steady at current levels, which are higher than those
of a few years ago, because of strong demand not only in the
US but more importantly worldwide. But it’s virtually
impossible to discuss the situation in Champagne and the
prospects for the immediate future, without reference to the
devastating and well-publicized frost that occurred in the
vineyards during the spring of 2OO3. There was early budding
due to unseasonably warm weather, but then in April
temperatures plunged well below the freezing point for a
number of days killing an estimated 8O% of the Chardonnay
crop in some of the hardest hit vineyards, 5O% of the Pinot
Noir and even over 3O% of the normally hardier Pinot
Meunier. Hail plagued the vineyards later into the season,
and then record heat waves caused the earliest harvest on
record since 1822 to get underway in mid-August, with grapes
that had abnormally high sugar and low acidity, not the raw
materials with which classic Champagne is constructed. The
harvest was the smallest in 18 years. This, of course, did
not dramatically affect the amount of wine bottled in 2OO3,
and probably will have minimal impact for another year, but
there may well be a price to pay in the future. Soon, many
Champenois warn, there will be intense pressure to raise
prices as the supply of young wine dips critically low. This
may be beating the drum a bit too loudly, as there does
appear to be an historically normal ratio of stocks to sales
(which over the years has stood at around 3 to 1, roughly
where it is currently), but the overall perception of a
product where demand is healthy and supply questionable at
best appears to be influencing the trade’s thinking about
price. This, at least, is from the perspective of the major
brands, which have seen a challenge, at least
internationally, to their dominance over the past decade.
Cooperatives and growers may not have the degree of power
that it once appeared certain they would seize, but they are
a threat, and if there is one factor that makes the
Champagne houses nervous as they look forward, it’s the
inability to control supply and dictate pricing. Stability
has not yet been established in the zone.

Of the two concerns, supply
seems more vexing to the Champagne brand owners that are
prominent in the US than price does. With a unique product
there is some pricing elasticity, but the threat of being
denied access to the grapes they need to keep their well
established brands healthy is a different story. As more
cooperatives are bottling their own products and marketing
them internationally, as more growers withhold grapes from
the system in favor of making their own Champagnes, the
larger houses are facing increasing pressure on their supply
sources for markets like the US that are brand-oriented. The
houses own only about 12% of the vineyards, but command
close to 9O% of the export market. Up until now the loose
agreements that they have worked out with the growers’
organizations – limiting yield, setting a reference point
for grape prices in the Grand Cru’s, and overseeing
contracts – have kept the system moving forward to the
overall benefit of the region, but there is a delicate
balance that every unusual event, like the frosts of 2OO3,
threatens to overturn.

It’s instructive to compare
the Champagne situation, where the fear of dwindling
supplies appears to be the worst threat to stability, with
the status of American traditional method sparkling wines,
where the problems are more basic. Here there appears to be
an oversupply of grapes comparable to the general condition
of the US wine industry. As opposed to the Champenois, US
sparkling wine makers have not yet successfully established
their brand image with enough consumers to retain serious
pricing power. The brands are weaker. The market niche that
the they were originally created to dominate, mid-point
between mass marketed domestic and imported sparklers and
the Champagnes themselves, remains less healthy than the
higher priced Champagne niche. In fact, weak demand over the
years has caused several sparkling wine companies to either
go out of business altogether, to introduce still table
wines as a way of soaking up the excess juice they could not
sell in the form of bubbly, or to convert entirely to still
wine production. Most of today’s survivors in the
super-premium price category remain strong, and while many
mid-range boutique level American traditional method
sparkling wine producers experienced impressive double digit
sales growth in 2OO3 and are poised to record increases this
year, there remains a summary judgment many consumers pass
that hurt their long term prospects: the only two categories
of wines with bubbles are Champagne and everything else.
It’s in the “everything else” category that domestic
sparklers have shone this year, as their pricing seems more
moderate than it has in years versus non-Champagne imports
due primarily to the weaker dollar.

The obvious area of growth
for Champagne sales here is to integrate the category more
closely into the dining scenario – to advocate that
restaurateurs and retailers extol Champagne as a mealtime
beverage. Easier said than done. This is rather how
Champagne is seen in France, the primary market. There it’s
consumed throughout the year, rather than just during the
peak holiday periods and perhaps during graduation and
wedding season in the spring. French people drink Champagne,
and not just in the local region. It’s a national sensation.
If, as it’s often stated, the goal for the Champagne
industry is to try to make the American wine consumer become
more like the French, drinking Champagne outside of a
celebration context, there might be a price to pay. As
someone who loves drinking Champagne and has strongly
advocated that the industry tries to make this happen, I
must point out the potential downside – that unless we all
become a lot wealthier, the average price per bottle of
Champagne will have to go down. French consumers are less
choosy about the quality and image of the Champagnes they
buy, they’re less concerned about how long they’re aged and
their specific grape sources, and are more enamored of the
overall category. So if we are to become more like them, the
trade-off, in other words, is that we start to drink a lot
of “Champagne” in an almost generic sense, versus buying
more of the strong brands that have established themselves
for so many years on the market here. But, in any case, that
does not seem very likely to happen.