Over the last few weeks I have read and heard so much misinformation, and bizarre interpretations about the upcoming Champagne harvest, and more specifically the still undecided yield. It is clear from the rumours running rife in the vineyard and the many articles clearly lacking research on the subject, that most people have forgotten the economic reasoning behind Champagne’s yield setting mechanism. Hence the below will dissect the Champenois appellation and co-dependent relationship between houses and growers, before touching on what numbers this could translate to in today’s economic and health crisis.
How is the Champagne appellation determined?
Champagne is unique among wine regions by setting it’s ‘appellation’ yield in function of projected sales. The appellation equals the sellable yield, and is in fact a minimum rather than a maximum. The number is calculated in kg/ha based on the region’s forecasted sales, and growers are expected to provide this. There is a system of ‘Reserve Individuelle’ (RI), which allows growers to subsidize their yields in case their agronomic yield (kgs of grapes actually out in the vineyard) do not meet the appellation requirement. Every year, growers can harvest an extra amount (often 3,000 kg/ha) on top of the official appellation to supplement their RI , which has been capped by the INAO at 8,000 kg/ha. And if the agronomic yield is particularly high, the remaining grapes when pressed become DPLC (dépassement du plafond limite de classement) also called VO (vin ordinaire), and regulations require this volume to be distilled before the end of the following year.
This system is completely quantity based without much regard for the quality, even if a lot of officials/houses and even growers will argue that the RI and the DPLC are tools to improve the quality. One could assert this is true in the case of the very abundant 2018 harvest, which allowed most of the rot infested 2017 juice to be replaced. But in my opinion the real question should be why houses accepted and paid a premium for rotten grapes in the first place…
Moreover, while there are certainly advantages to having a controlled supply to meet market needs, the system is based on a generic forecast rather than the sum of individual forecasts. However, Champagne (as the region) doesn’t ‘sell’ any wine, it’s the different producers – Houses, Independent Growers and Cooperatives – who do the actual selling. And not everyone has the same selling possibilities. As in every business, some people sell better than others, yet everyone is supposed to meet the appellation yield, even if it doesn’t meet its sales expectations. This has resulted in some producers adding to their stocks year after year, whilst others are running short.
The forecast metric is further flawed by Champagne’s comprehensive stock system, a precondition to meet the bottle aging requirements, which only really works well in relatively stable market conditions. Big sales fluctuations either create an acute shortage or a very expensive oversupply, weighing on the producer’s cash flow and profitability. The ‘ideal’ stock supply has been defined (again on general level) as being 3 to 3.5 years, even if this does not necessarily reflect individual producer’s needs. Some people prefer long aging, others prefer to sell their wines according to the minimum aging requirements.
Houses vs growers
A last factor we should acknowledge is the co-dependent relationship between the champagne houses and the region’s grape growers, as this is likely the main reason why the appellation maximum really is a minimum. The houses are the economic engine of the region, and are responsible for more than 70% of the total sales. However, they only own 10% of the land. This means, that bar a few exceptions, they are reliant on the grape growers to meet their sales demand. Grape growers, on the other hand, are dependent on the houses for their income, as very few farmers selling by the kg have other day jobs. The only ones outside this system are independent grape growers (RM) and co-operatives (CM) which produce and sell their own wines. It is, however, important to point out that over the last decade the RM’s have lost roughly a quarter of their bottle sales (just over 17 million bottles). The main reason behind this decline is that many RM have converted to selling grapes rather than making champagne, which has proved to be ‘easier’ cash, especially since grape prices per kg have increased from year to year. However, this has also made them more dependent on a big and stable appellation.
One should also note that the constantly increasing grape price, mainly pushed up by LVMH in their quest to expand their market share, has caused the profit margins of many a house to dwindle and put considerable stress on their cash flow situation. However, most of them have preferred to keep their contracts, as many feared giving them up would further bolster LVMH’s supremacy in the region. I elaborated on LVMH’s push for power in Champagne this piece on Wine-Searcher
Now that we have ‘remembered’ that the Champagne appellation is an economic decision, let’s have a closer look at today’s market conditions, as they are the reason why the appellation still has not been set, even though harvest has started already.
Declining sales since 2007
Analysing champagne sales figures of the 21st century, we can see the sales peaked in 2007, when just under 339 million bottles were sold. By 2019 sales had dropped by just over 12% to 297.5 million bottles. In short, Champagne never regained the market share it had before the 2008 financial crisis. In line with the appellation setting mechanism, this has translated in smaller yields. Hence., over the same period the appellation yields dropped by just short of 18% from 12,400 kg/ha in 2007 to 10,200 in 2019. Nevertheless, it’s important to record that in that same period, Champagne further increased its stock levels: overall the appellation was consistently set above the actual sales, indicating forecasts generally have been a little too optimistic.
At the beginning of April, in the middle of the Covid-19 lockdown, Jean-Marie Barillère, the president of the Union des Maisons de Champagne (UMC) and one of the two co-presidents of the Comité Champagne, predicted champagne sales would drop roughly by 33% in 2020. He estimated the pandemic induced health and economic crisis would see the regions sales decrease by 100 million bottles translating in a decline of total revenue of 1.7 billion Euro.
stock / sales ratio
Reading between the lines, this significant sales reduction also means that the region’s stock to sales ratio increased by 1/3, or in absolute numbers from 4.5 years to almost 7 years. (based on 2019’s 1.35 billion bottles of stock).
If we assume that the 200 million bottle sales forecast is in line with all other forecasts, it is likely that this figure is once again over-estimated. Especially if we take into consideration that the pandemic is far from being under control. Restrictions on restaurants and bars, on travel and large gatherings (e.g. weddings) continue to have a direct effect on champagne sales. Add to this the recession effect and the already declining popularity of champagne in the last decade (remember the 12% sales volume loss since 2007). All of this makes it very unlikely (not to say impossible) that sales will bounce back to almost 300 million bottles any time soon. In other words: the 7(+) years stock to sales ratio is here to stay.
Champagne is lucky because the wine will improve with bottle age, however, sitting on 7 years of stock is not advisable for any business; it’s expensive and it seriously impacts the ROI. It is therefore important to start selling the excess stock but also to hold on to its value.
In concrete terms this means that the appellation figure needs to take into consideration clearing some of the excess the stock. It should therefore be lower than the forecasted 200 million bottles, which roughly translates to 7,000 kg/ha.
Without the co-dependent relationship between houses and growers, the soundest economic decision would be to harvest not more than is needed for special cuvees and vintage champagne (as 2020 is looking very promising). After all, there is plenty of stock to assure the forecasted sales. However, this is not possible for two reasons. Firstly, it would leave grape growers selling by the kilo without income and hence on a sure route to bankruptcy. Secondly, the RM, CM and houses who have not enough stock would be pushed out of the market. At the same time setting the appellation at 7,000 kg/ha would put too much pressure on many of the cash strapped houses (especially since grape prices are in most cases still linked to last year’s value), and could lead to bankruptcies here. This would translate in many contracts being cancelled and grape growers remaining without income in years to come. The obsolete stock would moreover be dumped in the market impacting and hampering the average value for other producers.
It’s obvious that a win-win situation is not on the books this year. No matter what figure is decided, there will be many losers and many businesses will go under. I therefore believe that the decision needs to be taken in light of what’s best for Champagne (as a whole) in the long term. The focus should be on preserving the value and the diversity of the appellation.
A good, but nonetheless painful, compromise would be to set the appellation at 3/4’s of the forecasted sales – eg 150 million bottles, and use the stocks for the remaining 50 million bottles. In kg/ha this translates to roughly 5250 kg/ha, almost half of what the appellation was last year. Champagne already agreed on some compromises to help both independent producers and houses in their stock and cash flow management. The first one’s would be allowed to purchase more than the 5% authorised by the INAO and still keep their RM status. The latter can bottle and pay part of the appellation in 2022.
Questioning the validity of the current appellation setting mechanism
To conclude, it’s obvious from the above that today’s appellation system does not work in times of crisis. It also does not promote quality or innovation and has so far hampered Champagne’s ecological goals. I feel therefore the time has come to change the appellation system. Even if the INAO requires a maximum appellation, this maximum can, and most importantly should be set in function of the quality. It should be an absolute maximum just like it is in other appellations. And the grape supply should be negotiated by the tonne (kg) rather than by the hectare, and contracts should ideally include qualitative and ecological bonuses.
This will allow champagne to really improve on its quality, be more attractive to the ecologically minded millennials who are tomorrows customers, and it will help Champagne producers to better control their stock rotations. It will also prevent today’s situation where harvest has already started without the yields being known. As in Chinese, crisis indeed means danger but also an opportunity to change.
All figures used have been provided or calculated on figures by the CIVC