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11.2004

Massachusetts Beverage Business

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Article By: Sandy Block, MW


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.

 

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