Management Briefing

Champagne - Part II: Production

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In the second part of just-drinks' management briefing for November, Richard Woodard turns his attention to the production side of the Champagne industry.

Managing Champagne production is, to say the least, a tricky balancing act. Generic body the CIVC aims to reconcile the interests of the Champagne houses with the grape growers', while attempting to forecast what the market will be doing in three years’ time (when this year’s harvest will mainly be sold). 

In 2008, they got it wrong, fixing a production limit which made the harvest one of the biggest ever in the region, just as the global economy imploded. The result was plummeting sales and unsold stocks – along with drastic cuts to production in the following two years to redress the balance. 

Now that the recovery has taken hold in Champagne’s main markets, the shackles can be loosened slightly. Production limits for the precociously early 2011 harvest were set at 12,500kg per hectare – roughly in line with the natural quality yield of the vineyards, according to Canard-Duchêne marketing director Alexis Petit-Gats. 

Early indications on quality are promising. Petit-Gats reports a “nice balance” between sugar and acidity, encouraging expectations that these “fruity and structured” wines might yield a vintage, although it is early days at the time of writing. 

Other operators, such as Bruno Paillard, president of Lanson-BCC, are optimistic about quality but defer talk of releasing a vintage until the spring, when the wines can be more accurately assessed. 

There were difficulties, though. Laurent-Perrier reports difficult weather in July and August, making finding the right maturity for the grapes a tricky business. The result, the company believes, will be huge variations in quality depending on where the grapes are from, and when they were harvested. 

Nearly a quarter of the 2011 harvest has been placed into reserve stocks, but rising demand will be at least partially met by a déblocage – meaning that the equivalent of 2,000kg/ha will be released from those stocks. 

The decisions are based on what Petit-Gats describes as “very measured” Champagne sales forecasts of 2.5% annual growth to 2014, and he points out that production is still well below the pre-crisis levels, when yields hovered around 13,000-14,000kg/ha for five consecutive years. 

But it remains a delicate balance. Jacquart managing director Laurent Reinteau believes this year’s production limit is “reasonable”, but adds: “It could have been slightly lower to sustain a more long-term Champagne value strategy.” In other words, restricting production would inject more value into Champagne, from grape to bottle.

There are concerns about the impact on grape prices, however. Lanson-BCC's Paillard talks of “a kind of war” over grape contracts among the major players, leading to a 2.5% to 3% increase in grape prices, even with the increased production levels in 2011. 

Petit-Gats goes further, putting the increase at 3.5% to 4%. “For the second consecutive year, we will experience a significant price increase for the grapes, accounting for a crucial part of our Champagne production,” he says. “We will naturally have to pass on this increase to the markets. Before the last crisis, grapes used to represent about 35% of the average selling price of a bottle of Champagne; this ratio is reaching 40% these days.”

Pierre agrees that, as grape prices increase at the same pace as the cost of living, it’s inevitable that this increased cost should be passed on to the consumer, but he argues that it would be “unreasonable” to expect grape prices to rise or fall to any significant extent. 

The fight for grape contracts and the pressure on prices is unlikely to diminish in the near future, unless of course the eurozone crisis descends into a full-blown depression engulfing not just Greece, but also Italy and Spain, with harmful knock-on effects for France and Germany.

That doomsday scenario aside, the main players are gearing up for long-term growth, with Moët Hennessy brushing the dust off its pre-recession plans to increase Champagne production and storage capacity by 20% from the 2012 harvest.

And, in the longer term still, plans to expand the appellation are still in hand, but will have no impact in the short or medium term. So painstaking is the process that it will be years yet before the first vines take root in the new areas; even then, planting will be phased in gradually, vines will take at least three years to become productive – and then three years more will be required before the first bottles are sold. The results in terms of increased production and sales will not be felt for maybe ten years or more. 

In the here and now, older heads and Champagne historians may feel some unease at the rising grape prices. Historically, whenever production has become this expensive in Champagne, it has been followed by a slump as the market overheats and consumers rebel against rising prices on the retail shelves and restaurant wine lists. 

That said, Champagne shipments have never been as geographically diversified as they are in 2011, and many Champenois believe – and certainly hope – that this spreading of the sales risk will protect them from a repeat of this phenomenon.

For part one of this briefing, click here. Part three can be found here.

Sectors: Wine

Companies: Perrier

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