Light at the end of the tunnel?

Light at the end of the tunnel?

A return to third quarter sales growth at Laurent-Perrier adds to signs that Champagne is on an upward curve in 2010, but pricing pressure is a serious concern.

The best guess is for a gradual climb, and pricing problems could yet burst the bubble, but there is no doubt that green shoots are sprouting in northern France's Champagne vineyards.

Laurent-Perrier today reported sales up 7% in value and 30% in volume in the three months to the end of December. 

Its sales figures follow news of 6% volume growth for the Champagne sector in the final two months of 2009, as reported by trade body Comité Interprofessionnel des Vins de Champagne (CIVC) this week.

Champagne is one of the most cyclical of all alcoholic drinks, so it was no surprise when the sector was one of the first to fall amid the global economic implosion in autumn 2008. 

Nor should it be a surprise if Champagne is one of the first drinks categories to regain ground, as confidence in economic recovery grows in major export markets. 

A glance at stocks of major Champagne houses shows that the sector, like stock markets around the world, has travelled far since the dark days of a year ago.

Laurent-Perrier's share price is 43% ahead of this time last year, while rival Vranken-Pommery Monopole is 52% ahead, Boizel Chanoine Champagne is 71% up and Moet Hennessy (LVMH) has gained 64%.

These climbs are steeper than many stock market recoveries over the last 12 months, including the FTSE 100, which is up by just under 25% for the same period.

Sales performance has varied greatly depending on which countries a company counts as key markets. Volume sales of Champagne in France, for example, were largely flat in 2009 against 2008.

Most Champagne sector employees and officials have said, either to just-drinks or in public statements, that they remain cautious on 2010. The Governor of the Bank of England said today that global economic recovery remains fragile.

If a reminder were needed of the delicate nature of recovery and the difficulties of 2009 for Champagne, Remy Cointreau has in the last week announced plans to cut around a quarter of jobs at Champagne division Piper-Heidsieck.

Price erosion is a significant problem for Champagne.

Consumers, helped on in recent months by retailer discounting, are stubbornly resisting efforts by the likes of Laurent-Perrier to shift them up to higher priced bottles of fizz.

Laurent-Perrier's price/mix declined by 22% in its third quarter and by 14% for its first nine months. The CIVC has reported global Champagne volumes down 9% for 2009, but value sales down 17%, indicating consumers have traded down to cheaper brands.

"We remain cautious for wines and spirits," independent analyst Véronique Adam, previously of JPMorgan and founder of Pablofinance, said following the release of LVMH sales figures last week.

"We think that down trading is not over and might prevent Moet-Hennessy to restore its margins," she said, predicting low single digit growth in Moet Hennessy Champagne and Cognac sales in 2010.

A move by the CIVC to limit production from the 2009 harvest should go some way to constrain oversupply, which could foster lower pricing.

Around 293m bottles of Champagne were sold in 2009, according to CIVC figures. That compares to 322.5m bottles in 2008 and a record 339m bottles in 2007.

Some industry leaders have taken a more philosophical approach to the fall in volume sales, bearing in mind that two years ago the media was awash with "fears" that Champagne could not produce enough bottles to supply global demand.

Champagne sales by volume can only afford to grow by an average 2% annually for the next decade, otherwise there will by supply shortages, Ghislain de Montgolfier, president of the Union des Maisons de Champagne (UMC), said last year.

A planned expansion of the Champagne growing region is not expected to come into force for several years.