Monday, September 21, 2009

Champagne redux

A second consideration of the problems in the Champagne region covered in the previous Vinofictions post points to the possibility that the Champagne region and its 2009 marketing problem may be telling us much more.

Generally, as inventory builds, wholesale and retail prices should fall. Conversely, as inventory shrinks, prices should rise. Of course, the two movements are based on demand, and in the case of Champagne, rising inventory clearly says that demand is not growing as fast as production.

You might logically ask: with rising inventory of Champagne in the cellars, why aren’t prices falling?

The prices should fall, but they won’t—at least not for now.

We all know that Champagne’s image is one of luxury. It’s too bad for general wine drinkers that it is, since the sparkler is a fabulous product to pair with a variety of foods and, well, it’s just a fabulous product—period.

When you think of luxury, do you also think of it as a volume commodity?

Almost 300 million bottles of Champagne have been sent into the market each year lately—that equals 25 million cases, and that represents 60 million gallons! Surely, a case can be made for more affordable Champagne on the market.

A great portion of Champagne is under the control of a conglomerate known as the LVMH Group, the LV refers to the super luxury Louis Vuitton Company. LVMH controls Mo√ęt & Chandon, Veuve Clicquot, Ruinart, Mercier, and Krug.

Luxury companies are adept at cultivating customers with money who are willing to ask few questions and pay more for the privilege of enjoying the luxury mystique behind a brand name—it’s a formula of success that has spawned a global frenzy over brand names. The concept of branding is so pervasive that individually we are nothing unless we become recognized brands.

Companies that deal in luxury image brands have every interest in keeping their image up, because the profit margins are fantastic so long as there isn’t a problem like an economic meltdown or major across-the-board recession. At that point, in order to keep the profits up, luxury goods companies must go all out to reduce their costs so that they can meet the weaker demand but at the same high per-unit price to consumers lucky enough to still afford it.

With most consumer goods, profits flow to many who simply move things around. That’s why Champagne middle merchants are in line with LVMH to get their grape buying costs down while maintaining Champagne prices to consumers at present levels—and so, the 2009 Champagne harvest will be cut (maybe in half and maybe by government decree) to slow Champagne inventories and to reduce Champagne maker’s costs.

An argument can probably be made that the so-called luxury market shines a glaring light on the gullibility of people with money, but there is nothing wrong with producers and merchants wanting to protect and maintain their exorbitant profits; that’s capitalism.

Unfortunately, capitalism also means that for luxury brand names to maintain their status in a recession it’s the suppliers who suffer. In this case, the farmers who are being told how much grape volume they will be allowed to sell in the 2009 harvest. Farmers take the loss because they haven’t the luxury of charging a luxury company an arbitrary price—here prices are set by the buyer and not by the seller.

Put all this into perspective and it looks pretty much like class warfare: the corporate elite sticking it to the laborer.

In this case, the corporate elite is also sticking it to the consumer because, since they are in the position of holding too much inventory, they could easily reduce the price of Champagne and let more of the public get to try some. While a move like that could potentially open up and create a new market for Champagne, it would also mean that the luxury brand would have to antagonize its rich customers, making both the brand owners and the rich feel uncomfortably like the rest of us.

It isn’t all about grapes and wine.

If you are reading this entry anywhere other than on the vinofictions blog, be aware that it has been lifted without my permission (and without recompense), and that’s a copyright infringement, no matter that the copyright information appears with it.

Copyright Thomas Pellechia
September 2009. All rights reserved.

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