CHAMPAGNE – EXPORTS: Bubbles, bubbles, everywhere!
“standfirst”>If you believe the hype, consumers in China, India and Russia are prepared to pay over the odds to get their hands on luxury products.
Fionnuala Synnott asks whether the excitement surrounding these emerging markets is just a load of froth or a key strategic move for the Champenois
If the newspapers are to be believed, China, India and Russia are bursting with consumers itching to spend their growing disposable income on Western luxury goods. In fact, the Comité Interprofessionel du Vin de Champagne (CIVC) is so excited about the potential of these markets that it has named them the top three targets for the Champagne industry.
This enthusiasm is shared by many of the Champagne houses, which believe that getting a foot in the door early on is vital if they are to reap the dividends of future market growth. “We believe the time has come to look at these markets seriously because the entry ticket will be more expensive in five year’s time. As other houses become more established, it will be harder to find distributors, agents and people on the ground”, says Dominique Lahure, export director for Nicolas Feuillatte, which is currently in the process of redefining its key priority markets.
Although the emerging markets have shown impressive volume growth it has been from a very low base. Olivier Cavil, director of communications for Mumm and Perrier Jouët, is pragmatic: “You have to be reasonable and look beyond the media buzz. The number of cases sold in China is still very low and is just a drop in the ocean compared to the UK market. China will take some time to get to the same volumes as the UK or France and the figures are even lower in India. But these are still very exciting markets. They present high growth potential, especially in value sales.”
There is no doubt that China, India and Russia are becoming richer but average spending power per capita is still low compared to countries in the EU or the US. In theory, this means that the market for consumer goods in emerging countries such as China and India is more likely to be focused on volume rather than per capita spending. However, the opposite appears to be true for the Champagne category with volume sales low in all three countries. Champagne houses therefore look set to target the wealthy elite by promoting their prestige cuvées first.
Frederic Heidsieck, sales director at Roederer, likens today’s Chinese market to the Japanese market 25 years ago, where consumers took more of an interest in prestige cuvées before moving onto brut NV. “Nowadays, in Japan, people are looking for good value Champagne, not just prestige cuvées. In China and India, we will start by focusing on our prestige cuvées then move onto Brut NV to generate volume sales.”
Russia, a country that – unlike China – has a Champagne history that predates the 20th century, is also an ideal market for implementing a value strategy. According to Ambroise Bobtcheff, export director for Taittinger, prestige cuvée Champagne is an important contributor to volume sales in the Russian market. “Prestige cuvée accounted for 35% of the business in Russia in 2006 compared with around 20% in the UK. One of the key characteristics of the Russian economy is the big difference in wealth distribution – when people are rich they are really very rich. We are targeting customers, who want the best of the best.” Taittinger is therefore trying to develop its Comte de Champagne sales in Russia. But this doesn’t mean that the house will solely operate a prestige strategy. “We want to establish the brand by selling our NV Brut, which generates volume sales and can be an entry point for Champagne by the glass.”
Laurent Reinteau, business development director for Veuve Clicquot, also sees opportunities in the Russian luxury sector. The house has invested significantly in the market over the past three years. “We have created a joint venture with Whitehall (the wine and spirit importer owned by Mark Kaufman). We also have an office devoted to all PR and consumer activities and are more in control of our distribution and brand building.”
Despite the undeniable growth of the Champagne category in China, India and Russia, barriers to entry remain high. In India, the biggest barrier to entry is import tariffs, which are still high despite the Indian finance minister’s decision to abolish the additional tax on wines and spirits earlier on this year.
But Nicolas Feuillatte’s Lahure is not convinced that duty rates are that significant: “Obviously high duty rates make Champagne more expensive and limit penetration of the mass market but the industry is targeting a part of the population that is extremely well-off and has similar spending habits to consumers in Western countries. These people won’t be inhibited by very high prices.”
Counterfeit products are also an issue in the emerging markets, especially in China. However, new measures are being taken to make regulation more stringent, largely thanks to the lobbying activities of the OIV and leading wine brands. Pernod’s Cavil says: “The Chinese government has recently regulated the use of the term vintage. Before, a producer could put the term vintage on almost any wine label. But from 1 January 2008, 80% of the wine in the bottle will have to be from the same vintage in order to justify using the term.”
Meanwhile, in Russia, the biggest challenge is government regulation. Duty stamps, for instance, have to be placed on every bottle but they can be difficult to get hold of (as importers found out last year). But Heidseick is pragmatic: “Administrative difficulties are part and parcel of exporting. A certain degree of flexibility and risk assessment are part of the export game.”
With all the excitement surrounding the emerging markets, it is easy to forget the importance of established export markets such as the UK and the US. When it comes to volume consumption, the UK has topped all other export markets for over a decade. And, despite reports of a plateau effect on Champagne sales earlier on this year, demand for Champagne continues to grow. Rainteau comments: “The UK market still has some growth potential especially at the high end, where some people are ready to upgrade to vintage or high end cuvées.” Bobtcheff agrees: “The big major markets will continue to grow, thanks to an improvement in the sales mix and an increase in the sales of prestige cuvée Champagne.”
The US is also an avid consumer of Champagne, and has been the second most important export market in the category since 1999, despite the weakness of the dollar in the past few years. Lahure says: “The dollar rate is very important because every Champagne exporter sells in dollars, not in euros. Profit is very strongly affected but we haven’t seen volume sales affected.” But Panos Sarantopoulos, MD for Krug, does not think that currency fluctuations are that significant: “Companies have varying methods of hedging against currency fluctuations, with a number of houses tending to pursue strategies that are longer term and not dictated by momentary currency exchange rates.” Rather than sales volumes, Sarantopoulos thinks the most relevant indicator of potential future growth is market penetration. He explains: “In the UK, where Champagne consumption is well established, it is said that penetration is at 35%. By comparison, in the US, Champagne penetration stands at about 12%, which suggests that there is still quite a bit of potential for growth.”
Heidseick, meanwhile, sees potential for per capita growth: “The average French person consumes between two and three bottles of Champagne per year. There is, therefore, still potential for per capita growth in the established markets.”
Slowly does it
Champagne houses will have to operate a dual export strategy if they are to make the most of growing export markets in the next few years. Many Champenois remain convinced that the top export markets will continue to grow with the UK generating more value sales and other EU markets and the US generating volume sales. But it is clear that changing demographics and favourable economic conditions are creating new Champagne consumers in the emerging markets. However, Champagne producers should be wary of putting all of their eggs into untested markets such as China. Although the market has undeniably grown, the pace of growth is still erratic. According to the CIVC, volume sales in China grew by over 260% in 2004 but only by 24.8% in 2005. Roederer’s Heidseick thinks the Champenois should be positive and enthusiastic but not “stupidly or naively so”. He explains: “The wine culture in these countries needs to be developed. At the moment, consumers in these markets are used to drinking spirits and sodas. It is important to respect the pace of growth of these markets even if it is slower than we would like.”
Sarantopoulos remarks: “We are still at the early stages of translating emerging market interest in Champagne into significant business, compared to the larger, more mature markets. Though it may be several years before the Champagne category, as a whole, sees a true boom in these emerging markets, international Champagne brands will probably be in a position to reap the benefits of this work first.”
© db October 2007