Champagne sales hit by recession

Recession has caused a slowdown in the Champagne market according to the latest market report from Mintel

Champagne’s fortunes are closely tied to those of the economy, hence the arrival of the downturn in 2008 was particularly inopportune. Until then, the demand for Champagne in the UK – which is comfortably the number one international export market – but also emerging economies in Asia, had been such that the Comité interprofessionnel du vin de Champagne (CIVC) had increased production capacity, fearing missing out on profits.

Now the Champagne region finds itself in a bind, with around four years’ surplus, but global demand has dropped off dramatically.

This has meant that Champagne has been more reliant on the UK market than it would have liked. However, the UK market is struggling, remaining longer in recession than many other major global economies, while the UK on-trade market is seeing a sharp decline, with the British Beer and Pub Association (BBPA) estimating in July 2009 that as many as 52 pubs were closing per week, impacting on a valuable source of income.

Not only have these factors meant declining revenue in a key market, but they have increased the bargaining power of the major grocery multiples at a time when the Champagne surplus and financial pressures have reduced the bargaining position of Champagne producers. The supermarkets have offered UK consumers a fantastic deal, particularly over the Christmas 2009 period, allowing cash-strapped consumers to still be able to afford Champagne, and ensuring that the expected huge volume decrease in the UK market was cushioned.

This has meant poor returns for the heavily branded – and more highly priced – Champagne Houses over the past two years, with own-label Champagne, supplied by smaller growers, the major winners. While growers selling cut-price Champagne is bad news for the CIVC as a whole, in reality it is difficult to stop this practice occurring.

With the supermarkets gaining more power in the off-trade, the heavy discounting of Champagne is likely to remain a feature of the market regardless of whether the economy improves, something which risks damaging the luxury status of the brand. For example, Mintel finds that already 12% of drinkers think that discounts/promotions mean that Champagne is no longer a luxury item.

As a result of the changing UK off-trade structure, as well as the continuing strength of the euro against the pound sterling, we may see Champagne Houses de-prioritising the UK market, and focusing more on the US and emerging Asian markets, where the structure is more amenable to negotiating higher margins.

But sparkling wine is coming of age

Sparkling wine was doing well before the recession, and that continues to be the case, particularly at the premium end. This market has benefited from improving quality and greater consumer awareness and is stealing share from still wine as well as Champagne users looking to trade down to a cheaper alternative during the economic downturn.

Mintel’s consumer research shows that the gap between quality perceptions of sparkling wine and Champagne is decreasing. For example, four in ten drinkers of either Champagne or sparkling wine think that “sparkling wine is almost as good as Champagne but a lot cheaper”; while, a third think that “the quality of sparkling wine has improved in recent years”.

Currently, sparkling wine is a disparate collection of brands, lacking the organisation of the Champagne region which falls under the umbrella of the CIVC. However, in August 2009, Italy succeeded in having all its Prosécco-producing regions awarded the DOC designation – “denominazione di origine controllata”, meaning that the product can only been grown in a specific part of Italy. This is an important first step in building the brand, and recent sales of Prosecco suggest the product has a big future.

The UK is another market to watch. Climate change means that the UK is increasingly becoming a fertile environment for growing grapes for sparkling wine, and perceptions that we cannot make good wine in this country are starting to change, with 2.7 million of the population thinking that ‘English wine is very good quality these days’, and English wines such as Nyetimber regularly picking up international awards. Local produce is increasingly in demand, and becoming synonymous with authenticity as well as being more environmentally friendly.

What will the future bring?

These are tough times for the alcohol market; more health-conscious consumers are drinking less, meaning that drink categories are fighting for a shrinking share of UK consumers.

However, both Champagne and sparkling wine are well placed to succeed. There is a continuing desire for premium products, as well as a shift towards in-home drinking which favours drinks such as wine, sparkling wine and Champagne – products which are far cheaper to drink in-home and ideal as a compromise purchase between genders.

The economy is also showing signs of recovery, with the government announcing in January 2010 that the fourth quarter of 2009 had seen a slight 0.1% increase in Gross Domestic Product (GDP), meaning that Britain had finally come out of recession. Although the recovery is still fragile, Mintel estimates that the economy will start to recover slowly in 2010.

The Champagne market is expected to recover slowly from the nadir of 2009, when it sold only 23 million litres of Champagne, largely due to a volume decline of 31% in the struggling on-trade. However it will struggle to grow its value in real terms, due to greater reliance on the multiple grocers, whose strategy is to discount alcohol heavily to attract shoppers, hence the spate of £10 Champagne offers in December 2009.

Sparkling wine has weathered the recession and is expected to continue to grow steadily over the next five years, driven by demand for premium variants.

1 March 2010 - Felicity Murray