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Crunch time for Champagne brands

Published:  23 October, 2008

Falling prices and rising costs are not a happy combination. But companies with strong brands, like LVMH and Pernod Ricard, don't mind paying more for grapes in the short-term because they sell their wines at a premium. They can absorb the extra costs and still remain profitable.

But they also hope rising grape prices will drive out of business those whom they think sell Champagne too cheaply. It is certainly difficult for such companies to pay more for grapes, which account for a large proportion of their costs, just when they are being forced to cut prices in an effort to prop up sales.

The credit crunch adds further anxiety for those houses with the highest level of debt. Their credit rating and ability to borrow depends partly on the value of their stock - typically around three years supply. But that stock declines in value as prices fall.

With French banks cutting back lending and perhaps even calling in debts, the weaker negociants may have to try and sell still more Champagne to fund their debt at a time when prices are falling, thereby feeding a vicious downward spiral.

But it would be shortsighted for the growers to push prices up to the extent that they drive significant players out of the market. If they do, Champagne may end up mirroring Cognac, where a handful of large brands are able to dictate what they pay for grapes - and the prices the growers get will dramatically reduce.

Giles Fallowfield is a freelance wine writer specialising in Champagne.