CHAMPAGNE: On the sale trail

Champagne managed to reverse its bad fortunes in the off-trade at the end of 2009, showing good volume and value growth. But what effect will the retailers’ tactic of heavy discounting ultimately have on the category, asks Charlotte Hey.

2009 was a turbulent year for the Champagne category across the board in the UK and the off-trade retail sector was no exception.

In the summer some major brands were rumoured to have suffered a 40% loss in year-on-year sales and things were looking pretty grim. No-one was holding out much hope for any kind of growth over the 12 months to the end of the year, however good Christmas was going to be. But then the unexpected happened and no-one was more surprised than the Champenois and the brand owners at the end of December.

Looking closely at the Nielsen figures it proved to be a nail-biting finish to the year; at the end of the week of 7 November, Champagne sales in retail in the UK were down 47% compared with the previous year, and the UK suppliers were beginning to panic. But the tide was about to turn and by the end of the week of 12 December, sales, in terms of volume, moved to positive for the first time since the end of 2008.

Perhaps the most astonishing thing, and the factor that allowed the Champagne houses to breathe a collective sigh of relief, was that in the last eight weeks of the year the MAT showed an increase of 23% in value and 25% in volume for the category with total volume of sales for the 12 months from 2008 ending 3.4%.

For Andrew Hawes, managing director of Mentzendorff: “The last eight weeks to the end of the year were extraordinary. While one wouldn’t want to see Champagne promotions on this scale building the category it is not true to say that what happened at the end of last year was a bad thing.

"The retailers took up the offers and the activity, plus consumers were prepared to buy, which saved the category, as opposed to 2008 when the ‘thrift’ agenda and tough currency conditions drove retailers away from Champagne.” In 2009 Hawes sees the volume and value growth at the end of the year as a sign that “consumers didn’t just shop the discounted deals – what happened is, it turned people back onto Champagne”.

Colin Cameron, marketing director at Percy Fox & Co, is of the same opinion. “There was a feeling that consumers got back into Champagne. I don’t think anyone expected how well it would pick up.” He continues: “Retailers used Champagne as a footfall driver as they needed to get consumers in and spending.

"This certainly held volume but it didn’t help what we would want to see for the grand marque branded sector of the category; however, you have to balance one thing against another.”

Lynn Murray, marketing director at Hatch Mansfield, states: “The uplift in Champagne sales in the last quarter of 2009 is definitely down to the retailers using Champagne to drive footfall leading up to the Christmas period. It came as a surprise, given the poor start to the year, and I would say that the year ended higher than most would have expected.

“For premium brands this return to deep promotion has to make one question what will be the long-term effect. It is challenging for those ‘true’ brands that are distributed across different channels. It can be difficult to manage because the promotions in the off-trade do have an impact on the brand in other areas.” Murray continues: “The upside is that these promotions do increase trial.”

While the pre-Christmas rally saved the category in 2009, the surge in sales was mainly down to discounting tactics on the part of the retailer. The worry is that if this continues in 2009, as it most probably will, what effect will it have on the category in the mid-term.

Dee Blackstock MW, Champagne buyer for Waitrose, is quite clear on this point. She believes that the prospects for the coming year have to be viewed in the context of what went on last year. “2009 was very much a year of two halves, with the second half being of very short duration and driven by deep discounting in November and December. Champagne brands signed up to more frequent price promotions during 2009 than in 2008, and this balanced reduced sales at higher retails, so Champagne was relatively flat when not on promotion.”

Blackstock sees that “if Champagne supports regular ‘normal’ price promotions of around £5 off or 20% off and puts through cost price increases, which looks likely, pushing the prices of many household branded non-vintage Champagnes over £30 – growth is likely, therefore, to be fairly flat or negative”.  

“However,” she adds, “if retailers feel the need to match last year or improve upon it, then you could see some guerrilla tactics at Easter and in the summer, which could quite conceivably be followed by similar half-price deals on ‘exclusive labels’ or on household brands, ie down to £15.99 as Nov/Dec 09.”

For Blackstock, if you add to this the fact that sparkling wine is outperforming Champagne on a regular basis and the Champenois’ retail prices  go up further “then this category will be playing into the hands of fizz”. She has a point.  Could Champagne be running the risk of losing some of its lustre?

Blackstock insists that “promotions will devalue the category if half price continues to be a frequent mechanic”. She adds: “It would be much better for the image of the category to maintain current retail prices and run ‘sensible’ promotions (maximum 20% off) on a regular programme than dumping popular and respected brands down to half price.” This tactic would make the UK, while still Champagne’s number one export market, even less profitable and, as we have already started to see, more prone to the reemergence of tertiary brands in the fight between retailers to grab market share.

Daniel Bracegirdle, Champagne buyer at Sainsbury’s, says that Champagne “is working well for us and it is an important category for our customers; we have had a strong Christmas, Valentine’s Day was up year-on-year in comparison to 2009 and

we have some strong activity planned for Mother’s Day”.

He continues: “Tertiary labels do play a role in the category, mainly because consumers buy into Champagne before they buy into a brand. Also when you consider, for example, that our own tertiary brand is the fifth biggest brand in the market, bigger than Veuve Clicquot, for example, you can understand the importance of the role they play.”

In addition Bracegirdle is firm in his belief that “promotions play a large part in our activity because we find that they reinforce consumer loyalty to the category which helps us retain their loyalty and keep them in our stores. As a result we do have to keep the aggressive deals to keep people with us”.

Interestingly, the other market that performed well in 2009 for Champagne that is reliant on heavy discounting strategies and is dominated by retailer tertiary labels is France. Could the UK market be going the same way as Champagne’s enormous domestic market? And has the recent activity in the UK market potentially exacerbated this situation?

Some suppliers in the UK admit to being worried that the Champagne houses are not unified in terms of what they want from the category, that their message is a mixed one and ultimately it is in the hands of the retailers as to which direction Champagne will take in coming months.

The hard truth is that the retail environment is tougher than ever and when it comes to negotiating, the rules of engagement are restricted by the code of conduct, meaning that suppliers can set the price of a product but they have no control over the final price that retailers will sell it at.

In other words, suppliers can agree promotional support, price and timing, but there is no control until the promotion breaks in store. Rumours indicate that it has got to the point that some retailers are no longer even interested in the RRSP (recommended retail selling price).

There is no doubt, however, that continued promotional activity will erode value in the category and it would be interesting to know where the real value lies for the retailer over and above retaining customer loyalty, as Bracegirdle claims.

Whether the UK will move towards the French retail model or whether it will become less attractive to the Champagne brand due to eroding value is a matter for the mid to long term. In the short term it seems that the big deals are here to stay as long as the retailers are prepared to use the product to attract customers to their stores. What is clear is that the category is having to adapt to the “new normal” that dictates current trading conditions.

Surplus stocks will only exacerbate the situation and that is even before the (UK) election, currency and possible price increases are contemplated. As Hawes says: “What we are seeing is polarisation of the market. Strong brands have grown market share, but for January and February [2010] the signs are not good. The skies cleared over Christmas but now we are back to where we were; the on-trade is grim and the retail environment is tougher than ever. It is understandable that consumers have put their wallets away. I don’t believe that 2010 will bring any surprises.“

Champagne remains as sensitive as ever to the fluctuations of broader macroeconomic conditions.

Charlotte Hey, March 2010