The outlook in Champagne is upbeat, with sales on the increase in France and export markets, and the prospect of continued growth. However, writes Richard Woodard, challenges remain for Champagne shippers, not least how to sustain steady growth as rising demand pushes up prices.

With sales rising at home and abroad, Champagne is bucking the trend in the French wine industry, currently suffering amid the global oversupply of wine, according to a recently published report from just-drinks. Moreover, the Global Market Review of Champagne - Forecasts to 2010, suggests the prospects are broadly positive for France's premier sparkling wine region.

Since post-millennium overstocking drove export shipments below 100m bottles in 2001, Champagne's international trade has been rising steadily, boosted by stable core markets, growth in the UK and fast-rising interest in small but emerging markets. The latest figures suggest a continuation of this trend. Export shipments in the seven months to the end of July 2006 were up by 7.7%, with even the recently static French market showing a 3.6% increase over the same period in 2005.

However, some producers are worried that the region will not have sufficient capacity to meet the fast-rising demand. "Ideally we would prefer 1%-2% [growth]," says Yves Dumont, chairman of the management board at Laurent-Perrier. "We simply don't have the supply to fulfil such growth."

There are signs that Dumont's wish will be at least partly granted. Price rises, caused by exchange rates in dollar markets and by the simple mechanics of supply and demand pushing up grape prices, are likely to lead to a slowdown in growth towards the end of the year. Volumes are likely to show 3%, or even slightly lower, year-on-year growth for 2006 as a whole.

While that will be welcomed by the Champenois, the concern will be that any slowdown gains a momentum of its own as consumers finally decide that their favourite brand of fizz has become too expensive, leading to a slump in worldwide demand.

Furthermore, Champagne sales are strongly linked to economic prosperity so, as the global economic outlook becomes more uncertain, this is a further threat to Champagne sales. "The success of Champagne is linked to a wonderful economy worldwide - no recession, low interest rates, low inflation," says Dumont. "It's difficult to say that it will get better than that. We all know the economy will go through another cycle."

On a more positive note - and here the situation in 2006 is very different from the early 1990s - Champagne is currently enjoying growth in a far higher number of export markets than ever before. As such, it is hard to see a repeat of the slump of 15 years ago happening in the next few years. Price rises in core markets will create challenges in volume terms, but these will also help many companies drive more of their business into higher-margin, super-premium products.

Indeed, with rising demand putting pressure on supply, many companies are putting more effort into high-value, lower-volume products, with less emphasis on price discounting and a stronger development on vintage and prestige cuvées. The same factors are putting the long-term future of the buyers' own brand (BOB) and premier prix sectors, especially in France and the UK, in question.

Another feature of the changing face of Champagne in the early years of the 21st century is the expanding and evolving role of the co-operative, with the bigger operators becoming brand owners to rival the traditional houses.

However, while the co-operatives are asserting themselves, Moët Hennessy continues to lead the sector by a country mile, while Vranken Pommery Monopole is maturing with an increased accent on value, as well as chasing volume. Pernod Ricard is set to drive up the luxury focus at Mumm and Perrier-Jouët, while the profitability of Louis Roederer and Bollinger will remain the envy of many.

The last year or so has also seen some interesting corporate developments in Champagne. The Lanson International business has been taken over by Boizel Chanoine Champagne, with president Bruno Paillard intent on repositioning the Lanson brand further up the price ladder, separating it from the core of the own-label business.

Meanwhile, the Taittinger family, with the financial assistance of bankers Crédit Agricole Nord-Est, bought back control of the house from equity group Starwood Capital. Now, the Taittingers have to find the investment to buy out most of Crédit Agricole's stake, which could be tricky. So that saga still has some way to run.

Looking forward, the threat global warming poses to Champagne may have been somewhat exaggerated. Contrary to some reports, Champagne is in no immediate danger of becoming a desert, but generally warmer weather has led to more consistent flowering and naturally higher yields in recent years - only threatened by the greater incidence of storms and the ever-present danger of spring frosts.

Peak summer temperatures have risen 4° C or so between 2000 and 2005 - although that is a relatively short-term sample. There is better evidence in the increase in berry and cluster size over the past 15 years, with average grape weight almost doubling from 9.3g to 17.5g over the period.

There is more than one reason for these trends. More precise clonal selection and better viticultural management have had an effect, but earlier budbreak, flowering and harvest times are the primary causes of bigger berries and clusters in the region.

So Champagne in 2006 remains a prosperous sector, but one with its challenges and problems, especially on the grape supply side. Business could either go very well or very badly for the Champenois in the next decade or so, but one thing is certain - they have a far higher chance of success than most of their wine-producing fellow countrymen.

This article is taken from Global Market Review of Champagne - Forecasts to 2010, a recently published report by just-drinks. To download the report, click here.