The Champagne Industry in 2020

This industry note includes data covering the French Champagne industry, as well as major global competitors, consumers, and some artisanal Champagne producers. This note is suitable for exposing students to the French Champagne industry, comparing and contrasting the Champagne brand with sparkling wines from other countries and wine-growing regions, and introducing the concepts of industry attractiveness, competitive force analysis, and industry dynamics.

According to wine writer Eric Asimov in The New York Times, owing to global warming, places, like England, that were historically unsuited for producing fine wine were given the opportunity to join the global wine world, transforming local economies in the process. Legendary French houses, which had nervously been giving English sparklers the side eye for close to a decade, started moving into the U.K. Taittinger and Vranken-Pommery invested millions of dollars planting vineyards and setting up production in England. The land was cheaper, the soil was similar, and the climate was ideal. In fact, many claim the terroir in England today was analogous to Champagne's in the 1970s, the period the region reached its peak in terms of quality. 14 Currently, 2,000-plus acres specifically for sparkling wine were under vine in England, with thousands more planned, compared with France's 76,000 acres devoted to Champagne grapes. As of 2017, there were 503 commercial vineyards and 133 wineries producing five million bottles of wine in England, a marked increase from three million bottles in 2011. This amounted to a 66 percent increase in five years. More than 4,940 acres of grapes were being grown there, a number that has doubled in the past 10 years and was projected to grow another 50 percent by 2020. Of the wine produced, 66 percent was sparkling (24 percent was still white and 10 percent was red or rosé). Within the sparkling category, Chardonnay, Pinot Noir, and Pinot Meunier accounted for more than 50 percent of the varietals used (being the three authorized grape varieties used in the Champagne region to make Champagne).
Some artisan Champagne makers felt that they had another solution for an uncertain future in the region. While these small producers represented less than one percent of the total Champagne produced, they had created an informal alliance of twelve houses that had come to be known as Les Mains du Terrior. Alexandre Penet was the owner of La Maison Penet, a small Champagne producer that owned vineyards in Verzy and Verzenay, two small villages in the Champagne region. M. Penet reported that he, along with several other artisan Champagne makers, " [were] often influenced by winemaking practices in Burgundy, [but] had recently decided to produce Champagnes from one particular plot in order to provide Champagne lovers with a new experience and a unique insight into the diversity to be found in Champagne." 15 See Exhibit 3 for a pictorial list of these producers.

Exhibit 3 Artisanal Producers, Les Mains du Terroir de Champagne
Source: Françcois Schmidt. Used with permission.

Production
The production of Champagne began with the harvest in late summer, before the harvest for other types of wine. The preferred grape varieties for Champagne were Chardonnay and Pinot Noir (along with Pinot Meunier in the Champagne district of France). These grapes ripened slowly in cooler Northern vineyards and were picked early while total acidity was high and sugar content was low. Hotter summer spells from global warming increased the sugar content in some grape varieties, reducing the need for adding sugar. Wines were then blended in order to achieve a consistent flavor profile and level of quality from year to year. This was known as the "cuvée" wine and was moved to a large tank where sugar and yeast were added. The mixture was then drawn off into bottles and capped with a crown cap made out of stainless steel. Bottles were laid on their side as the second fermentation took place in the bottle and allowed the bubbles to develop.
After a period of several years, the Champagne was prepared for completion. The dead yeast in the bottle was removed in a process known as "riddling." Bottles were slowly turned upside down and rotated in stages, so the yeast sediment moved into the neck. The material in the neck was then frozen. When the cap was removed, the yeast popped out of the bottle. The wine was adjusted for fill level and sweetness before the cork was applied to complete the process. The méthode champenoise process described above spanned several years, required much hand labor, and utilized costly grapes, so these products tended to be quite expensive. Two other methods were developed in order to supply a lower priced product.
The first was the transfer process. After the second fermentation, instead of performing riddling to collect the yeast sediment, the bottles were emptied into a tank and clarified in bulk. This became less popular as machines began automating the riddling in most modern operations .
The second was the charmat bulk process. It was generally used to make simple sparkling wines for the lower price category. The second fermentation took place in tanks instead of individual bottles. The yeast was removed by filtering, and the product went to market much more quickly.

The importance of place of origin
There was a long tradition of relying on place of origin to serve as a cue in ascertaining the quality of a wine, especially when buyers were unable to actually taste the wine. There was a growing body of evidence that both country and region of origin had become important information as consumers made wine purchase decisions. Researchers have found that one third of respondents reported that place of origin was a consideration in wine purchasing. 16 Country and region of origin followed only brand as indicators of quality in a survey analysis originally performed in 2008 and replicated for verification in 2016. 17 Territorial branding emerged as a way to differentiate sparkling wines and attach a greater price premium to those wines. In 2017, a team of researchers at the University of Adelaide, Australia, found that country or region of origin was important in consumers' purchase decisions for sparkling wines, most often linked to the Champagne product. 18 Consumer respondents in this research investigation reported purchasing different sparkling wines for different occasions, implying that producers and marketers could benefit from developing a range of brands catering to diverse purchasing preferences, different price points, and unique situations.
Many sparkling wine consumers were willing to purchase premium brands such as Champagne, but only for special occasions and as gifts. Most sparkling wines were purchased for off-trade consumption that was sold outside of restaurants, hotels, and cafés. Yet, Champagne consumption in France and elsewhere around the world was facing changes in the luxury market, according to : The emergence of accessible luxury created a "new normal" trend of consuming luxury products as an everyday occurrence, often motivated by advertising messages and sales promotions with appealing price-to-quality ratios. Accordingly, Champagne producers faced stiff competition from non-Champagne sparkling wines such as cava [from Spain], prosecco [from Italy], and sparkling wines from the United States, Australia, and New Zealand. This trend had been exacerbated by the promotional strategies of competitive products and producers who used extreme discounting to eat away at the Champagne category. There was also an increase in the purchase of various other regional French sparkling wines: Crémant from the Burgundy, Alsace, and Jura regions; La Clairette de Die and Blanquette de Limoux from the South of France; and Vouvray and Mountlouis Pétillant from the Loire region. All of these products created a cannibalizing effect on the Champagne category. Non-Champagne sparkling wines accounted for 65 percent of all sparkling wines consumed in France. While the average price for a bottle of Champagne hovered around €20, the average price paid for a bottle of non-Champagne was around €6. [Spielmann & Williams, 2018: 6]    In late 2017, Moët Hennessy USA launched a new interactive "skill" on Amazon's digital assistant Alexa, called Bottles and Bubbles. This initiative was aimed at providing consumers with the opportunity to learn about Champagne and request food pairings and tips in their own homes. LVMH Group's wines and spirits business saw an increase in revenue growth of five percent in 2016. Profit from recurring operations increased by 10 percent and volumes increased by three percent. The company reported that Champagne and prestige cuvées had performed particularly well in 2017, and that Hennessy cognac enjoyed 10 percent year-on-year volume growth. However, its cognac and Champagne businesses remained dependent on the supply of grapes from restricted regions, so yields remained limited.

Pernod Ricard
Pernod Ricard produced and distributed wines and spirits: aniseed products, vodka, whisky, cognac, rum, gin, liqueurs, Champagnes, and wines. Its activity was organized around families of products built around brands.

Cava production in Spain
In January 2019, five Spanish cava producers broke from the Penedès Denominación de Origen (D.O.) to form Corpinnat, "a collective Union brand established with the aim of distinguishing great sparkling wines made in the heart of the Penedès from 100 percent organic grapes, harvested by hand, and entirely vinified on the premises of each winery." 19 Corpinnat (the heart or "cor" of Pinnat-the Catalan name for the Penedès region near Barcelona, Spain) was a micro D.O. representing a cooperative brand of sparkling wine made according to a set of five criteria. As of September 2019, Corpinnat was a cooperative of nine wineries that made a commitment to meet the following production criteria: (1) Terroir-located in a local area (map shown in Exhibit 7) in the heart of the Penedès valley between the mountain and the coast; (2) organically and biodynamically grown grapes must be used in production; (3) wines must be fermented for a minimum of 18 months or less (compared to the nine months minimum for cava); (4) producers must "vinify" their own grapes exclusively; and, (5) a minimum of 75 percent of the grapes used in production must be grown in the area (can be sourced under long-term contracts with other growers).

Exhibit 7 Map of Coprinnat Growing Zones in the Penedès Region of Spain
Source: Corpinnat Trade Association, https://www.corpinnat.com/en/territory, accessed November 28, 2020. According to Ton Mata, managing director of Recaredo, a cava producer in Penedès: There is such pressure on the area to change, but we have to change within the industry if we are to protect the growers. Corpinnat is the way forward for us five producers, or we die from competition with prosecco and Champagne. In 10-15 years, we hope to have 2,000 members. 20 Several United States sparkling wine producers labeled their sparkling wines as "Champagne," and the United States government allowed the use of the Champagne term on United States brands established on or before March 2006, as long as the geographic origin accompanied the Champagne term on the label, according to the United States Wine Institute. 21 New United States brands introduced after that date were not allowed to use the Champagne term. Traditional wine grape varieties used in California charmat sparkling wine and méthode Champagne production included Chardonnay, Pinot Noir, and Pinot Blanc, though many other varieties were also used, depending upon the style, production process, and price point. 22 Comparative worldwide market shares of all sparkling wine producers in addition to the major French Champagne houses are shown in Exhibit 8. The top ten selling United States sparkling wine brands by volume are shown in Exhibit 9. The leading United States sparkling wines by method of production are listed in Exhibit 10. Exhibit 11 tabulates the top fifteen sparkling wines sold in the United States and includes imported brands. Exhibits 12 and 13 present volume shipments by producer to the U.S., from California and from outside California, respectively. Speaking to the annual Wine Financial Symposium on October 2, 2019, Jim Clerkin, president and CEO of Moët Hennessy North America, commented: "People used to start with still wine and move to Champagne. Generation Z, they start with Champagne and maybe they move to still wine." 25

Wine tourism in Champagne
Wine tourists typically focused on a particular wine region, stayed in hotels or Airbnb lodging, then made one or, at most, two stops at a winery as part of their visits. Wineries provided guests with seated presentations that lasted much longer compared to the past, so there was considerably less time to visit many other wineries. Increasing tasting fees were also deterring casual consumers. According to a 2019 report from Silicon Valley Bank, most wine tourists planned and arranged visits in advance before they left home and were predisposed to buy before they walked into a tasting room. 26 Researchers at the University of Reims surveyed 28 producers in the Champagne region in 2011, and noted some significant barriers to promoting tourism: (1) Small producers, all of whom sold wine from their domaines, often did not think that they were involved in wine tourism, nor did they perceive it to be part of an overall marketing strategy; (2) Many small producers felt that tourism was for others to undertake, such as high volume and internationally-recognized producers, local restaurants, or hotels and inns; (3) A theory that wine tourism could increase brand equity and could be a means of adding value was often not understood and wine producers were not entirely certain what their visitors wanted; and, (4) Generally, European producers had limited interest in attracting wine tourists except as a means of counteracting declining sales. 27 Champagne had mostly been insulated from changing consumption and consumer demand cycles, at least thus far in the 21st century, so on the part of producers and négociants, there had been little need to promote wine tourism. 28