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Research in Focus - From Ground Zero Up for Champagne?

The report, Global Market Review of Champagne – Forecasts to 2014, describes the industry's response to the economic meltdown as "patchy" and argues that the decision to sanction a large harvest in 2008 was disastrous, feeding more supply into the market even as sales in key markets began to plunge.

The result was that, at the end of 2008, all parts of the supply chain – importers, distributors, wholesalers, retailers and on-trade businesses – were left with large amounts of unsold Champagne and little prospect of finding consumers willing to buy them. And their reaction, in turn, was to stop buying from the producers.

"All the markets were hurt at the same level, especially the international markets like the US, UK, Japan, Germany and Italy," Anne-Charlotte Amory, president of Piper-Heidsieck, tells just-drinks in the report. "At the same time, all the markets are recovering now, except Japan which is a bit slow – but Germany, the UK, the US and Belgium are growing again."

In fact, sales in 2009 were stronger than many in the region had dared hope. Exports tumbled 36.4% by value in the first six months of the year, prompting something close to panic in the boardrooms of Reims and Epernay, but recovered to fall 20.3% in 2009 as a whole.

That partial rebound was fuelled by a rash of discounting in the crucial Christmas trading period, with per bottle prices in the French market dropping below EUR9, and in the UK to below GBP10 – their lowest levels in a decade.

This, the report says, is the big concern facing the industry as Christmas 2010 approaches – that selling a high-cost product like Champagne cheaply simply to generate cash flow is not sustainable in the longer term.

"We want the market to change its mentality, because we can't stay like this," complains GH Martel president Vincent Rapeneau. "But if you don't take part in such offers, you are losing market share. We cannot survive like this."

Most in the industry expect another tough Christmas, but hope that the easing of the imbalance between supply and demand will allow base prices to rise noticeably on last year, the report finds.

However, it will take far longer for profit margins to recover to pre-recession levels, with Nicolas Feuillatte managing director Dominique Pierre putting the timescale for this at four to six years.

The just-drinks report broadly agrees with this analysis, predicting that it will take several years for value to fully recover, hampered by the uncertainty of the economic recovery and the pressure exerted by ultra-competitive retailers in markets like the UK, Belgium and Germany.

Meanwhile, the volume recovery is expected to continue through to the end of 2010, before a difficult year impacted by austerity measures in 2011 and the resumption of steady volume growth in 2012.

The margin resurgence is threatened on the one hand by continued price pressures in the fragile recovery in the US and Western Europe, and aided on the other by renewed strong growth in the emerging markets of China and Brazil in particular.

In the meantime, Champagne has worked to put right the mistakes of the over-sized 2008 harvest, severely limiting production in 2009 to the equivalent of about 270m bottles, when annual global sales were around 290m bottles.

The interprofessional body also agreed to change the terms of payment from the houses to the growers, allowing a five-stage payment instead of the usual four, and delaying the first payment for a month.

This measure – by no means universally popular and opposed by leading figures such as Lanson-BCC president Bruno Paillard – helped to improve the balance sheets of some leading companies at the end of 2009, removing the spectre of possible bank charges as they struggled to meet debt obligations.

Ironically, however, Champagne has also been aided by the fragility of the banking and financial sector. Wounded financial institutions like investing in Champagne because they have a physical entity – bottles – to recover in the event of bankruptcy, and so have mostly remained patient and willing to invest in the industry.

This is one contrast with the previous recession of the early 1990s, and Paillard has found another. "The interest rates are at a very different level," he observes in the report. "In 1991-3, they were 9-12%. Today, thanks to the decision of the European Central Bank, the cost of financing inventories is reduced to 1.5-2%. At that price, it's worth it for the banks to be patient."

Assessing the winners and losers among the main companies in such a time of turmoil is no easy task, but the report identifies companies with diverse product portfolios and strong, volume-driven brands at lower price-points as some of the stronger performers.

By contrast, those who rely on one single brand for their turnover have been left vulnerable to pressures on price and profitability, with a stark choice of either preserving prices and sacrificing volume – or dropping prices and reducing margins to maintain cash flow.

All producers have been affected to a greater or lesser extent; but the report identifies businesses with strong low-priced brands – like Vranken-Pommery Monopole and Lanson-BCC – as having weathered the economic storms better than most.

Others, such as Moët Hennessy and Louis Roederer, were sufficiently profitable in the first place to be able to absorb a dip in their EBIT margins and still make money – but others, such as Piper Heidsieck, saw their margins mostly wiped out by the decline in sales and profitability.

Meanwhile, the report argues that short-term economic concerns should not be allowed to affect Champagne's longer-term plans to boost supply by expanding the appellation, which in any case will not result in increased production until 2020 or even later.

Sales trends for the sector have been broadly positive – despite the odd recession – for 50 years, and the industry badly needs to safeguard supplies, prevent shortages and create the building blocks for projected sales growth in the longer term – however distracting the world's recent economic woes may be.

Further details of just-auto's research report, Global market review of Champagne – forecasts to 2014 are available by following this link
http://www.just-drinks.com/market-research/global-market-review-of-champagne-forecasts-to-2014_id95414.aspx?lk=pr

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