Champagne prices soared in 2022 with both the on and off trade reporting record prices of the fizzy beverage. The Champagne 50 index showed solid growth of 18.7%, with brands like Cristal showing >100% gains for their most sought after vintages. Champagne returns rivalled that of their Burgundian neighbour, despite being produced in far higher quantities, as the two regions tussled throughout 2022 to be the top performing old world wine. 2022 Champagne returns were the envy of equity and fixed income investors around the world as the economic climate limited the performance of the most seasoned traders.

With record prices and large production volumes, what lies in store for the world’s favourite sparkling wine in 2023? As with everything, price is determined where supply meets demand.

Champagne Supply

The quantity of grapes that can be harvested each year is set in kg per hectare by the Comité Champagne. The Comité allows for extra yield to be harvested to build an extra reserve credit in case producers fail to meet the yield limit in subsequent years. This
extra yield will be used for non-vintage Champagne which can be blended and brought to the market quickly to meet demand.

Despite the yield credit build up, the CEO of Moet Hennessy, Phillippe Schau, told Bloomberg in November that Moet is running out of Champagne. Moet dominates the non-vintage mid-market segment with production of >30 million bottles a year, and has global supply chain synergies under the Louis Vuitton Moet Henessy conglomerate. Moet’s supply shock is testament to Champagne’s inability to meet demand, even in the nimbler, non-vintage category.

Supply issues were echoed by Michael Drappier of Drappier Champagne, who took steps to withhold stock from the market so as not to run out over the highest margin periods of Christmas/New Years and Valentines Day. For context, the Drappier Champagne house has been running since 1808, spanning over 62 hectares and producing circa 1.6million bottles a year across all its ranges. This is the first time they have faced such significant supply shortages in their 215 year tenure.

In 2022 the Comité Champagne tried to remedy some of the supply issues by increasing the Yield Limit to 12,000kg/ha; however, there is no quick fix. The increase in yield will provide some reprieve for non-vintage champagnes with a lag time of 1-2 years; however, the high end vintage investment market is a far slower juggernaut. As investment champagne is released when ready to drink, the top cuvées have fermentation times of 8-10 years. For example, the latest Dom Perignon Vintage is 2012. This lag time from harvest to release makes increasing supply to meet market demand very slow.

The top vintage Champagnes’ yield limit is a small percentage of that set by the Comité Champagne. For the top Cuvées to maintain quality and obtain high critic scores, vines cannot be overplanted due to soil nutrient restrictions. There are also land restrictions as only the top terroir with soil type, aspect and altitude have the potential to produce investment worthy wines. For example, if we compare Moet’s annual production of circa 30 million bottles to top champagne Salon’s production of circa 50,000 bottles, we can see how both vine and terroir restrictions limit supply for the top end Champagnes.

A further supply restriction is the vintage itself. Non-vintage champagne can use grapes from any year and blend them, while vintage champagne can only use grapes from that year. Non-vintage champagne can use the extra credit reserve to overcome any shortfall, while vintage champagne cannot. This highlights how strong the demand for champagne is when the CEO of Moet is stating they are running out of champagne, including non-vintage.

At the top end, producers like Salon and Krug only release on top vintages.

Therefore, on poorer vintage years no champagne is released to the market creating a supply shock which increases the price of back vintages whilst guaranteeing quality for the buyer.

The last supply restriction and potentially the biggest elephant in the room is climate change. The average temperature in Champagne has increased by 1.3 °C compared with the 30 year average. The rising temperatures fast-forward the harvest due to grapes ripening earlier, and increase the chance of wild fires. This however is not the main issue. Global warming has increased the severity of the weather fluctuations in the Spring budding season. This was highlighted in 2021 when two frosts in April wiped out circa 30% of the yield, with the more delicate Chardonnay grape worst affected. This was then followed by persistent rainfall as the weather warmed up during the spring and early summer, which created the ideal conditions for the spread of mildew fungus in the vines, causing a further 25-30% reduction in yields. We can see in 2021 the Comité Champagne set a yield limit of 10,000kg/ha, yet the actual yield was 6000kg/ha due to the adverse weather conditions. Please note the actual yield was supported by the yield credit build up, so the harvested yield would have been significantly below this figure. Global warming unfortunately is not a one-off event and Champagne growers are bracing themselves for future weather-related supply shocks.

Champagne Demand

When looking at global champagne demand, a good barometer is the number of bottles shipped each year. Another metric would be the value of total champagne sales; however, given the steady price increase of Champagne, it becomes more difficult to get an apples-to-apples comparison of the underlying demand.

Between 2013 and 2019, Champagne demand was fairly static with a five percent delta between the two poles. With the advent of the Covid pandemic the on-trade market was forced to shut down and triggered the rise of off-trade demand. With consumers loaded with extra cash and the ability to buy Champagne without the large on trade mark ups, major brands like Cristal, Krug and Dom Perignon became commonplace on a kitchen table. At first glance the 18% drop in Champagne shipments in 2020 could be viewed negatively; however, it was the catalyst for a buoyant off trade market which created record years in 2021 and 2022, supported by the reopening of the on-trade. Champagne is no longer a beverage purely for celebration.

Given such strong Champagne Shipments in 2022, what do we expect for Champagne demand in 2023? With the bearish economic forecast for 2023, it would be reasonable to presume that Champagne shipments would consolidate this year; however, there are number of positive triggers which would imply the opposite.

According to Knight Frank’s 2022 Wealth Report, within the next 5 years we will see an increase of approximately 25-30% in the number of UHNWI (Ultra High Net Worth Individuals) worldwide. The UHNWI would be the largest consumer of luxury goods in which top vintage Champagne resides. This consensus is shared by management consultancy Bain and Co in their 2022 Q3 report; Bain expect the luxury goods market to increase by 60% in 2030 vs 2022 “even in the face of current economic turbulence.” This will put upward price pressure on the most elite investment Champagnes as global demand for luxury goods grows. The report highlights the boom is to be driven by the younger generations:

“In coming years, the spending of Gen Z and Gen Alpha is set to grow some three times faster than for other generations until 2030, making up a third of the market…

This is, in part, driven by a more precocious attitude towards luxury, with Gen Z consumers starting to buy luxury items some three to five years earlier than millennials and Gen Alpha expected to behave in a similar way.”

A report published by industry think tank Wine Intelligence supports this argument stating “the growth in the sparkling category in the past few years – and which has accelerated in the past 12 months is coming primarily from the urban affluent consumer aged under 45 – principally the Millennials and LDA Gen-Z cohorts.” This point is further reinforced by LVMH who in their Q3 results saw overall champagne sales up 32% in the first nine months of 2022 in a new “roaring 20s age of decadence.”

It is not just in EMEA and USA where there is large potential upside; According to the Union des Maisons de Champagne, China is the 14th largest export market for Champagne in 2021, 93.8% smaller than the US and only marginally larger than Denmark. China’s lockdown policy has been the most severe globally and with restrictions only now starting to ease, there is large upside for the Chinese market.

We have seen in the past that the high-end Chinese market is heavily influenced by trends in the West with both Bordeaux and Burgundy. It would not be outside the realms of possibility to see the Chinese Champagne demand echo that of post lock down U.K, Europe and the USA. Consulting firm GlobalData echoes that thesis, predicting the market for wine in China to almost double by 2026. The sparkling wine category is estimated to grow 11.3% per year.

Most recently we have seen the Dubai government remove the 30% sales tax on alcohol as the Gulf Tiger aims to encourage tourism and immigration from the West. With Dubai currently housing 67900 HNWI and expected to be one of the 20 richest cities in the world by 2030 this will be good for the whole high end alcohol segment. I expect Champagne to outperform due to its luxury status which compliments the high-end Dubai lifestyle and the large number of Millennial and Gen Z expats enjoying Dubai’s low income tax environment.

As with all goods, the price of Champagne is determined where supply intersects demand…

As we have discussed, high-end Champagne supply is fixed and very difficult to change in the short term. We have seen the Comité of Champagne increase supply in 2022; however, due to the top Champagnes only releasing their wines 10 years after harvest, the extra stock will not hit the market until 2032. It is also worth noting that the actual increase in supply will be small due to terroir constraints, and vintages may be scrapped altogether due to climate change. If we were to hold demand constant, prices would rise due to the inability for supply to keep up.

In reality, demand will never be constant and despite Champagne’s recent strong performance, I expect shipments of Champagne to increase in the future driven by a global increase in UHNWI, increased consumption from Millennials and Gen Z’s and an increased demand from China. We have seen this year that even the largest production Champagne Houses are running out of supply despite shipping 331 million bottles, and with future demand expected to rise, the market can only respond one way.

At Cult and Boutique, we have been advising clients into Champagne for the last decade.

Champagne is unique, only being released when ready to drink, and with the top houses producing wines with 20 year drinking windows, it benefits the investor with both long and short term investment strategies. The majority of our clients have a representation of Champagne in their portfolios and will have enjoyed solid returns. It is understandable for new clients to hold reservations investing in such a high performing region; however, our roles as portfolio managers are to look past the hype and focus on the market dynamics. Cult and Boutique are maintaining our BUY recommendation in 2023.