Champagne set for more consolidation
Champagne has already seen significant merger and acquisition activity in the past year or so, but there could be further deals in the pipeline, writes Nuria Sadurni of Euromonitor International.
It has been a busy year or so in Champagne on the merger and acquisition front but the region could be set for further consolidation, as companies look to expand to maximise returns from a relatively buoyant Champagne market and, most importantly, secure grape supply.
Given the limitations in terms of total wine production - as Champagne is a single delineated area - grape supply is a major structural issue in the region. A couple of poor harvests in succession would run stocks down considerably and create a shortage in supply. Acquiring vineyards is expensive and opportunities to do so are limited. Only small parcels of land tend to become available for purchase, and at a high price.
While a possible extension of the region is under consideration, this is a complex debate given the varied and often opposed views of the key stakeholders. So as long as the current structure is maintained, Champagne houses are obliged to enter into long-term leasing contracts covering price, quantity and quality.
But rising demand in the next few years is likely to put increasing pressure on companies' current grape supply arrangements. Euromonitor International expects demand for Champagne to grow by 2% to 3% in the next few years. Exports to June 2006 were up by almost 9%, although total annual growth is expected to be somewhat lower as price rises set in.
Given that current levels of production are broadly on a par with demand, this will create a shortage of grapes. Should this be the case, larger companies with greater monetary power are likely to be able to monopolise the grape supply, leaving smaller companies unable to stretch budgets to compete in price terms, putting them at risk of losing business through a lack of raw material. Ultimately, even larger companies will squeeze their own margins through the high cost of grapes.
A further issue is the Champagne houses' massive dependence on local grape suppliers, who own 90% of the vineyards in the region, with only the remaining 10% in the hands of the actual Champagne houses and brandowners.
Figures from the French investment house Société Generale suggest that none of these companies owns more than 50% of the vineyards that provide its production, with the exception of Taittinger. According to Euromonitor International, Taittinger's own vineyards account for 50% of its supply. Other companies with a relatively high self-supply ratio are Groupe LVMH (Moet-Hennessy) with 30% and Laurent-Perrier with 11%.
As the interest shown in Taittinger when it came up for sale illustrates, the need to secure grape supply is one of the prime motivations behind acquisitions and consolidation. Indeed, in addition to plentiful stocks, production strength can be seen as a crucial factor for a company's success in Champagne. Also important are marketing strengths, a wide product mix (Pernod Ricard and Rémy Cointreau for example have portfolios which not only include spirits but also stretch across other wine regions and styles), and of course powerful brands and strong distribution networks, which will help distribute premium products.
For all these reasons, a more concentrated environment in Champagne seems likely in the future as a result of further acquisitions by the larger players. Euromonitor International believes acquisition activity could include the takeover of small companies by the principal houses, though this may be difficult given the fragmented nature of the market and the large amount of the business represented by small companies. According to Euromonitor International data, smaller companies accounted for as much as 53% of the market in 2004. Acquiring one of these smaller producers would alone not give significant additional volume to a major supplier.
The last year or so has already seen a considerable amount of merger and acquisition activity. Partly as a result of family shareholders wishing to sell up and partly because of structural weaknesses in some companies, a number of Champagne players have changed hands recently. Arguably the most notable of these deals was the sale of Taittinger by family members to the French bank Crédit Agricole du Nord Est.
Interestingly, one of the unsuccessful bidders for Taittinger was Indian group United Breweries, which brought into question the willingness of French authorities to allow foreign groups to acquire the country's leading Champagne companies. Indeed, the fact that acquisition activity has by and large been confined to French companies has fuelled talk about the degree of protectionism prevalent within the Champagne sector.
Another important acquisition was completed at the beginning of 2006. The BCC Group (Boizel Chanoine Champagne) struck a deal with the two main shareholders of Lanson - the Mora family and Caisse Nationale des Caisses d'Epargne - to take control of Lanson International for EUR122m (US$156m), in addition to taking on EUR400m of Lanson debt. Debt had spiralled due to structural issues, including a weak distribution network.
Meanwhile, Rémy Cointreau Group, which ranks fourth among Champagne companies by volume, looked to offload some Champagne brands, such as Bonnet, and abandon others during 2005. This was in order to focus on its key brands Piper-Heidsieck and Charles Heidsieck.
Also in 2005, Bollinger acquired fellow independent Champagne house Ayala, gaining a good part of Ayala's Champagne stock. Last year also saw Vranken-Pommery Monopole acquire minority shares in Pommery, in which it already owned a 66.5% stake. Vranken followed that move with the acquisition of 21ha of vineyards in the Montagne de Reims for EUR20m in April.
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