December 23, 2005
Bright Holidays for ‘Fragile’ Champagne Makers
By Caroline Brothers
TOURS-SUR-MARNE, France -- Mildewed walls, spider webs and caverns stacked with bottles blanketed in mold may not add up to most people's idea of Christmas and New Year's Eve festivities.But for workers spinning their forklift buggies round these gloomy tunnels sunk deep beneath the headquarters of champagne-maker Laurent-Perrier, there is little doubt the year-end party season is approaching, fast.
Champagne-makers in this hamlet not far from Epernay, like their rivals across the Champagne region of northern France, make 40 percent of their annual revenue in the last four months of the year, and the 2005 holiday season is looking good.
Yves Benard, co-chairman of France's CIVC federation of champagne-makers, sees volumes up 1.5 percent, and revenues up 3-4 percent this year.
But despite the flurry of pre-holiday activity at houses like Laurent-Perrier, all is not well on the Montagne de Reims plateau, in the Marne river valley and along the Cote des Blancs cliffs, where rows of vines are rooted in some of the most expensive real estate in France.
"Still waters run deep. The Champagne region is ill without even being aware of it," said Cedric Louboutin, an analyst at stock brokerage Fideuram Wargny and author of a major report on an industry that has only just recovered from a 1990s crisis.
"Everything looks fine on the surface, but Lanson's financial situation is worrying, Remy Cointreau is having trouble making money, and everyone is struggling because the price of grapes is going up relentlessly."
Champagne label Lanson clocked up a $12 million loss last year, and its owners are in exclusive talks with rival Boizel Chanoine Champagne over selling it for roughly $143 million, plus $488 million in debt.
CONSUMERS DID NOT FOLLOW
Remy Cointreau, meanwhile, is ditching its secondary champagne labels, starting with F. Bonnet, and is concentrating its efforts on an efficiency drive at its Charles Heidsieck and Piper-Heidsieck brands.
And the venerable Taittinger house, founded in 1734 and beset this year by problems of family succession, will change hands for the second time in 12 months when its new owners, the U.S. fund Starwood Capital, put it on sale.
The future of the Mumm and Perrier-Jouet labels seems more assured now they have been bought by spirits group Pernod Ricard: it can feed them into its giant export network.
Industry professionals and analysts say this is the region's biggest upheaval since the 1990s, when billionaire Bernard Arnault founded his LVMH empire partly on the back of Moet & Chandon and Veuve Cliquot champagne.
That wave of consolidation coincided with an explosion in the price of grapes. Champagne prices soared and sales across the industry collapsed.
"Consumers just did not follow," Louboutin said. It took until the millennium for the region to clamber out of crisis, and some fear it may be heading in that direction once again.
That, Louboutin says, is because the price of the Pinot Noir, Pinot Meunier and Chardonnay grapes from which champagne is made is accelerating at an average rate of 4 percent a year. With prices now exceeding $5.90 per 2.2 pounds, the grapes in just a few years have become the most expensive in the world, he said.
The more vineyards a champagne house owns, the less dependent it is on outside suppliers. But most houses grow on average only 10 percent of their grapes and are highly vulnerable to price rises among third-party growers.
But, priced at $1,260,000 per 2.5 acres -- equivalent to some of Bordeaux's most prestigious vineyards -- champagne makers cannot simply buy up more regional vineyards.
And an official French body that protects rural France from monopolies stops big players accumulating too much land.
The top champagne brands can pass some of those grape price rises to customers and still preserve margins of 19 percent, helped by advertising campaigns. But smaller brands -- and brands like Lanson which own no vineyards of their own -- have much less room for maneuver.
For Yves Dumont, chairman of Laurent-Perrier, grape prices are the industry's big Achilles' heel.
"The success of a champagne house is very fragile and is based on a price for its raw materials that represents three quarters of its production costs," he told Reuters at the Tours-sur-Marne site the firm has occupied for nearly 200 years.
"If ever the price of raw materials ignites, we have nothing to help us recover ... There is no extra productivity, no economies of scale, no salary reductions we can use to compensate," he said.
With at least 3-1/2 years' output stored in its cellars while it matures, tying up working capital, any rise in raw material costs has implications long down the line.
"If we have a flare-up in the price of grapes we will be in trouble for 10 years," Dumont said.
Nor can champagne-makers act like other businesses, stimulating demand and stepping up production to meet it.
"We are not in a business where you produce what you can sell -- we can only sell what we can produce," said Dumont, who has turned around the company since arriving there in 1997.
"The first thing you need is patience. You should never go too quickly in a business where you have 3-1/2 years of stock -- whatever you do it will have no impact for 5 years," he said.