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Fizzonomics

Surging demand for prestige cuvée champagne in China, Russia, South America and other nascent markets is causing concern among western wine lovers. Will their beloved fizz rocket in price – or worse, run out? John Stimpfig reports. Illustration by Chris Burke

January 10 2013
John Stimpfig

Anyone who wants to know how popular prestige cuvée champagne has become in certain parts of the People’s Republic of China might check out one of Shanghai’s fashionable nightclubs such as M1nt, Muse or Bar Rouge. Once inside, you won’t have long to wait before witnessing processions of bottles of Belle Epoque, La Grande Dame, Cristal or Dom Pérignon being dispatched to dimly lit tables and discreet private rooms.

But how can you tell if China’s hip and affluent elite are downing DP rather than Moët in the club’s occluded gloom? The answer at M1nt is brilliantly simple. Each Rmb2,980 (£295) bottle of Dom Pérignon is not only born aloft by a waiter, but also brightly illuminated by an LED light.

“We only put on this show for Dom Pérignon and on a good night we’ll easily sell 100 bottles,” says Alex Cumming, M1nt’s New Zealand-born head sommelier. Consequently, it’s not uncommon to see a single order of 10 green bottles snaking its way past gyrating clubbers. It never fails to make an impression and adds new meaning to the term “conspicuous consumption”. Hefty sales of the brand are already having a big impact on the club’s bottom line. “It has quickly become the most important part of the business,” says Cumming. “But we probably do sell more DP than anyone else in China.”

Right now, that’s not saying much. Last year, China consumed a measly 1.3m bottles of champagne’s global shipment of 323m. And with prestige cuvées accounting for less than 4 per cent of sales, the country is very much on the emerging-market list.

As ever, though, the devil is in the detail. Over the same period, champagne imports to China were up a whopping 87 per cent. Naturally, this hasn’t gone unnoticed in Reims and Epernay, where the locals can barely contain their excitement. “There’s no question that China is going to become a very significant market for champagne,” says Bollinger’s CEO Jérôme Philippon. “The Chinese want recognised luxury lifestyle brands. They also love alcohol, love to spend and love to party. All the ingredients are there for champagne to be incredibly successful.”

But it won’t be a pushover. Champagne is a new and unknown product in the country’s drinking portfolio, which is still dominated by hard spirits. As a wine, it’s also inauspiciously white – Chinese consumers prefer red. What’s more, the bubbles won’t go down well with the country’s traditional gambei culture of making multiple toasts during the course of a meal.

According to XuGuang Chen, CEO of drinks importer C&D International, Chinese drinkers have a lot of catching up to do. “Few can comprehend the difference between a sparkling wine and champagne, let alone a prestige cuvée,” he observes. There are also the practical problems of the country’s hopelessly fragmented distribution system and sky-high import barriers.

But if anyone can prise open a tough market, it’s the doughty and talented Champenois. Twenty years ago, most in the wine trade thought that Japan would be an impossible nut to crack. Now, it’s the second-biggest export market for prestige cuvée champagne. As Joe Marchant, of Bordeaux Index, the London and Hong Kong-based wine merchant, points out: “Sales just exploded in the 1990s. But what’s also significant was the sequence of events. Japan went from red bordeaux to burgundy and then champagne as the market diversified. Now, the exact same model seems to be occurring in China.”

Predictably, the pioneers have been LVMH and Pernod-Ricard, which quickly and cleverly took advantage of their spirits portfolios in order to leverage their champagne businesses. Both are aggressively pushing their champagne brands in China, spending millions of pounds developing the market. LVMH already has a several hundred-strong sales force in the country and has even invested in its own vineyards to produce sparkling wine under its Chandon label. “But it’s not easy,” says Richard Geoffroy, Dom Pérignon chef de cave. We are still at the potential stage. There is a huge amount of work to do.”

Progress has been surprisingly rapid, nevertheless, especially at the niche end of the market, where both drinks giants have wasted little time targeting their most likely consumer quarries: young, fashion-conscious clubbers in China’s burgeoning “tier one” cities.

Significantly, these new ultra-wealthy consumers – men and women – have either been educated in the west or travelled there extensively, where they picked up the habit of drinking grande marque champagne. Many were initially exposed to it on first- or business-class flights with Singapore Airlines or Cathay Pacific.

“There is a new category of young, rich people who love champagne and, importantly, this group is growing very fast,” says Pol Roger’s CEO, Patrice Noyelle. Last year, when hosting a dinner in Nanjing, west of Shanghai, he noticed “that the 35-year-olds drained their glasses of champagne, while the 50-somethings were leaving them full. That’s OK because it’s the younger generation which is setting the consumer fashion trends. They are the future for champagne in China.”

It’s not just nightclubs that are helping to cement champagne’s celebratory and luxurious image there, though. The country’s juggernaut economic growth has also fuelled countless luxury-store openings in Shanghai, Beijing and Guangzhou, where the de rigueur wine to serve is increasingly a prestige cuvée. For LVMH in particular, that association has been a huge win-win situation. Launches of Bulgari, Berluti or Fendi have, of course, been washed down with copious quantities of Dom Pérignon, alongside the more usual Cheval Blanc.

Champagne connoisseurship has been largely skin deep in the country, thus far, with most consumers buying for the brand rather than taste or house style. But there are pockets of sophistication. “I think people would be surprised by how many knowledgeable aficionados there are here,” says Patricio de La Fuente Saez, managing director of Links Concept, which distributes Louis Roederer’s Cristal China.

“The Chinese aren’t just big spenders, either, they’re also very fast learners,” he adds. “It has taken Hong Kong 30 years to become a major market for champagne. China will probably take just five years. We’re already selling out of our allocation of Cristal about eight months into the year. So it’s not a question of having to actively promote it.”

Rather than focusing on the club scene, Louis Roederer, Bollinger, Bruno Paillard, Salon and Pol Roger have concentrated on elite hotels and restaurants – Shanghai’s Shangri-La and Park Hyatt, for example, not to mention the upscale mall Three on the Bund’s Whampoa Club, Mercato and Jean Georges restaurants. At the Park Hyatt, sommelier Jerry Liao now has more than 50 champagnes on his list.

Significantly, most of Liao’s well-heeled customers are local Chinese rather than expats, who tend to go for “free-flow” brunch deals paired with by-the-glass Taittinger Brut. “Price is no problem because sales are good, and we’re seeing more and more demand,” says Liao. “The people who come here are getting increasingly confident, adventurous and appreciative of the differences between the brands. To me, this suggests that Shanghai, at least, has gone beyond the first stage.”

That’s Noyelle’s experience, too. “What’s most remarkable is that, as a percentage of sales, we already sell more of our deluxe Winston Churchill cuvée in China than in France or the UK,” he says.

According to Don St Pierre, former CEO of fine wine importer ASC Wines, the Champenois also have another area of opportunity to exploit. “I think the great prestige cuvées have enormous potential to do well in gift giving, which is a huge part of Chinese culture, specifically at the New Year and the autumn Moon Festival. At the moment, champagne doesn’t quite have the ‘face value’ cachet of red bordeaux, but it’s only a matter of time.”

The multimillion-dollar question, though, is how big can champagne become in China? Bollinger’s Philippon is unequivocal: “Having lived and worked in Asia, I have got to know China very well and I am incredibly positive about our future. The fact is that sooner or later, China becomes the biggest market in the world for most western products. My firm conviction is that it will be no different for champagne.”

Such an outcome could, however, have damaging repercussions for drinkers in Europe and the US – one of which is already horribly familiar to affluent oenophiles. It’s the scenario in which the Chinese really do get a raging thirst for luxury champagne, sending prices through the roof.

“I think that’s entirely possible,” says the Hong Kong fine-wine merchant and restaurateur, Paulo Pong. “We’ve seen it all before with bordeaux and burgundy. In the space of just two years, First Growth prices went insane thanks to China. At some point, the same could happen to champagne.”

Moreover, it’s not just China’s growing affinity for French bubbly that is starting to impact on the delicate balance of limited supply and elastic global demand. Last year, imports to Russia surged by almost 90 per cent. It was a similar story in a number of South American countries, most notably Brazil – despite its swingeing import tax of nearly 300 per cent.

Remarkably, Dom Pérignon recorded more growth in South America last year than in any other region. (One can only speculate what might happen to sales should a number of punitive tax regimes come down, which many believe they will, eventually.)

Nor is it solely the Bric countries which have turned into champagne hotspots. So, too, have Australia, the United Arab Emirates, South Korea and Nigeria. Even Japan has bounced back from the devastating impact on its economy of the tsunami disaster to become both Krug and Perrier-Jouet’s biggest export market for prestige cuvée fizz.

Compare this febrile growth with much of Europe’s barren and infertile economic landscape and the contrast couldn’t be more marked. As one very senior Champenois wryly observes: “China is refreshing and exciting. Crisis-torn Europe is demoralising.” So while it still accounts for nearly 80 per cent of all champagne sales, many are wondering how much longer this can continue. Not least because the champagne houses are also facing serious pressures of their own. In particular, rising production costs mean tighter margins and less profitability, especially in Europe where sales are falling and it’s been difficult to raise prices.

So creating and building market share in China and Brazil isn’t just a matter of choice for some houses; it’s a business imperative. In September, Charles Armand de Belenet, global marketing and communications director at Mumm and Perrier-Jouet, admitted that the region will increasingly have to rely on new markets to compensate for lost revenues from falling sales in countries such as France and the UK. “If you don’t have a distribution network outside of Europe, then it’s going to be hard for brands to survive in the coming years,” was his chilling warning.

Only last year, LVMH reported that all the revenue growth in its wines and spirits portfolio was generated by markets outside the US and Europe – which must make it tempting to follow the money sooner rather than later. As the specialist champagne writer Giles Fallowfield points out: “Why sell a prestige cuvée brand for €100 in Europe, when you can sell it for three or four times that amount in a Shanghai nightclub?”

In response, the Champenois insist that they won’t sell out on their loyal European customers. “We owe our existence to traditional markets,” says Krug CEO Margareth Henriquez. “We wouldn’t dream of closing those doors or putting too much pressure on prices.”

Noyelle is also reassuring. “We will grow the allocation bit by bit as the market grows. But we won’t give China any more than that because we never put all our eggs in one basket. Frankly, it’s not sensible to follow a booming market too closely. It’s good on the way up, but on the way down you crash with it. That’s what happened with bordeaux, but it wouldn’t be the case with champagne. We wouldn’t make that mistake.”

More dispassionate observers such as Fallowfield are, however, far from convinced. “Are these emerging markets going to take an increased share of the limited production of the top prestige cuvées, leaving less for the mature markets in Europe and the US?” he asks. “Of course they are. It is already starting to happen.”

See also

Champagne