Description
A typology of strategies related to the distribution channels used by Champagne makers is established. Champagne makers' operating profit depends on their distribution network, which affects selling prices. Based on a sample of 20 Champagne makers ("Maisons de Champagne"), economic and financial performance indicators for Champagne makers are analyzed with reference to the type of distribution channel.
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 1
I nternational Food and Agribusiness Management Review
Volume 8, I ssue 4, 2005
Typology and Financial Performance of Champagne Makers
According to Distribution Channel
Francis Declerck
a
a
Associate Professor, Finance Department; and Researcher, I nternational Agri-Food Management
I nstitute; ESSEC Business School (ESSEC-I MI A), B.P. 50105 - 95021 Cergy-Pontoise cedex,
France.
Abstract
A typology of strategies related to the distribution channels used by Champagne
makers is established. Champagne makers’ operating profit depends on their
distribution network, which affects selling prices. Based on a sample of 20
Champagne makers (“Maisons de Champagne”), economic and financial
performance indicators for Champagne makers are analyzed with reference to the
type of distribution channel.
Keywords: Champagne, distribution channel, strategy, performance
Corresponding author: Tel: +33-(0)1-3443-3266
Email: [email protected]
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 2
Introduction
I n 1992, during the economic recession in Western Europe and North America,
consumers were unwilling to pay a high price for a bottle of Champagne, but
the grapes used to produce that wine had been harvested 3 years earlier and
purchased at a very high price. I n 1991 and 1992, only 214 million bottles were
sold compared to the 149 million bottles sold in 1989. Squeezed between high
costs and low retail prices, Champagne makers had to sell Champagne in
supermarkets at a lower price than usual. A few years later, after the boom in
1999 that saw sales reach 327 million bottles, economic stagnation returned.
Sales dropped to 269 million bottles in 2001, 288 million bottles in 2002 and
293 million bottles in 2003, as shown in tables 1 and 2. The Champagne
business was worth 3.4 billion euros in 2003. This paper shows how
Champagne makers - called “Maisons de Champagne” - have learnt how to
improve value creation over the decade through the use of different distribution
channels.
Table 1: Sales of Champagne by volume from 1997 to 2003
Sales in million
bottles (75cl) 1997 1998 1999 2000 2001 2002 2003
I n France 165 (61%) 179 (61%) 190 (58%) 149 (59%) 165 (63%) 175 (61%) 174 (59%)
Outside France 103 (39%) 113 (39%) 137 (42%) 104 (41%) 98 (37%) 113 (39%) 119 (41%)
Total annual
sales 269 292 327 253 263 288 293
Growth rate of
sales by volume +5.2% +8.5% +12.0% - 22.6% +3.9% +9.5% +1.9%
Table 2: Sales of Champagne by value from 1997 to 2003
Sales in billion
euros 1997 1998 1999 2000 2001 2002 2003
I n France 1.51 (59%) 1.64 (55%) 1.91 (52%) 1.52 (51%) 1.64 (55%) 1.75 (53%) 1.80 (53%)
Outside France 1.04 (41%) 1.31 (45%) 1.76 (48%) 1.45 (49%) 1.33 (45%) 1.54 (47%) 1.60 (47%)
Total annual
sales 2.55 2.95 3.67 2.97 2.97 3.29 3.4
Growth rate of
sales by value +7.0% +15.7% +24.4% - 19.1% 0 % +10.8% +3.4%
Objectives
The objectives of the paper are:
1. To identify the types of distribution strategy implemented by Champagne
makers
2. To measure the economic and financial performance of Champagne makers
from 1992 to 2001 for each type of distribution
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 3
3. To relate performance indicators to strategic decisions with respect to
distribution channels
The structure of the paper is as follows. First, a review of literature looks co-
ordination and market power issues in food chains, it is mainly focused on
producer-retailer relationships. Second, the methodology and data are discussed.
Third, empirical findings about the Champagne industry are presented to shed
light on the processor and retailer system. Finally, conclusions are drawn and the
prospects for future development are examined.
Review of Literature
While Williams (1973) points out the generalized notion of a vertical coordination
continuum, the literature about the industrial organization has evolved towards
new institutional economics (Ménard & Shirley, 2005a), incorporating transaction
costs and institutional environment as key elements in the organization of
vertical systems. Looking at transaction inefficiency factors promoting vertical
integration in food industries, Bhuyan (2005) finds that major reasons are
diseconomies of scale and the fewness of sellers/buyers and finally demand
uncertainty.
Robicheaux and Coleman (1994) adapted the structure-conduct-performance
model and focused on a behavioral approach to investigate buyer-supplier
relationships.
More focused on agri-food chain management, Trienekens and Zuurbier (1996)
and Omta, Trienekens and Beers (1998) and the Dutch school observe increasing
co-ordination – particularly about information exchange and logistics - in chains
and networks. So, supply chains firms can work more efficiently to serve
consumers.
On another side, Malassis (1973), creating the French school of “filières”,
emphasizes on power as a key driver of leadership and management of the
agriculture and food business systems. Furthermore, Perez (2003), and Coelho
and Rastoin (2004) highlight the changing role of corporate governance in public
companies whose shareholders focus more on financial profitability than on
industrial strategy..
Weiss (1989) stresses a market power hypothesis in food retailing since price is
positively related to more concentrated market structure in many local market
industries including food retailing due to local tight oligopolies. High profit may
be due to lower costs or the offer of more expensive, higher quality, differentiated
products (Demsetz, 1973). Following Cotteril (1986) and Nelson, Siegfried, and
Howell (1992) observe that services, including breadth of product line and express
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 4
lane, are a major way for differentiation. But Cotteril (1999) finds that market
share and concentration are not no significantly related to services and that most
cost savings in large superstores are offset by pricing power liked to increased
services levels. So, he rejects the Demsetz critique.
Further, Rogers (2001) observe that concentration has advanced in almost every
US food manufacturing industry, including the wine and brandy industry, over
the 1958-1997 period and farmers remain outspoken that something are injured
by the reduced number of buyers Cotteril (2001) develops a structural model of
price transmission in a channel that has differentiates product oligopolies at two
stages: retailer oligopoly and manufacturer oligopsony power. According to
different market power level, the distribution of welfare may vary a lot among
farmers, marketers, and consumers. The rise in US and European retail buyer
concentration induced the development of private labels. There exist also private
labels in the Champagne business.
Champagne is produced in a restricted designated area of origin (appellation
d’origine contrôlée - AOC, in French) to the east of Paris, France, but it is
consumed around the world. About 65% of all Champagne bottled is drunk in
France, the other 35% being consumed in other countries, mainly the UK, the
USA, Germany, and I taly (CI VC, 2002).
As in every industry, the business carried out by “Maisons de Champagne” is
constrained by consumer demand. But it also has to respect legal restrictions on
production both in terms of quantity (grapes must come from a limited designated
area of origin, and there is a maximum authorized yield) and quality (specified
varieties of vines must be used, manual harvest only, etc). However, there is still
an uncertainty factor because of weather fluctuations from year to year, which
cause fluctuation in grape production levels. On the demand side, shipments of
bottles from processors to retailers vary from year to year because of swings in
economic growth in the developed countries (CI VC, 1992 - 2001).
Gaucher, Hovelaque and Soler (2000) have formulated the optimal procurement
and inventory policies and calculated chain profits according to various levels of
coordination between two producing firms. Gaucher, Soler and Tanguy (2002)
studied quality incentives and supply contracts in the wine chains. Soler and
Tanguy (2002) and Saulpic and Tanguy (2002) found that attracting equity
capital from investors on stock exchanges is the Champagne makers’ best
financial strategy for expansion. Giraud-Héraud, Mathurin and Soler (2003) have
analyzed the legitimacy of supply regulation mechanisms for products protected
by a designation of origin. They argue that such mechanisms reduce uncertainty,
thus encouraging investment in quality improvement.
Declerck & Pichot (1994) note that since it takes 3 years to turn grapes into
Champagne, the adjustments of supply to demand lead to jumps in retail prices in
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 5
economic booms and drops in retail prices in periods of stagnation/recession. This
phenomenon disconcerts consumers and seriously affects vine growers and wine
makers. Declerck (1996) shows that high value added to sales and low financial
leverage are good indicators to explain operational and financial performance in
the Champagne industry. Declerck (2004) reports that vine growers and wine
makers have learned from experience and are able to negotiate terms with
retailers to limit price swings. A producer – retailer cycle is exhibited with 3 loops
over the period 1978-2002.
Methodology, Data and Major Difficulties
Methodology
Porter’s model (1985) is used for strategic purposes, leading to definition of a
typology of Champagne makers according to their distribution channel:
• Supermarket operators
• Specialized distributors like wine stores, cafes, hotels, restaurants, etc.
• Global distribution networks, i.e. combining on-trade and off-trade outlets,
worldwide. The characteristics of each distribution channel are studied,
particularly barriers to entry - which may be quite considerable - and
access to consumers.
According to their distribution channels, Champagne makers have different
characteristics that can be observed through:
1. Measures of financial structure:
• Equity capital to total assets
• Equity capital to long-term capital
• Financial leverage, measured as the financial debt to equity
2. Economic performance indicators:
• Sales growth in 2001 compared to 2000
• Value added, i.e. the wealth created by labor and capital, measured
by the difference between production and consumption of raw
materials and external services
• Labor costs
• Earnings before interest, taxation, depreciation & amortization
(EBI TDA)
• Operating margin
3. Financial measures of performance:
• Profit margin
• Return on equity (ROE)
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 6
Data
Secondary data used to measure the economic and financial criteria of
Champagne makers come from financial data banks and cover a ten-year-period
(1992–2001). They are used to compute financial ratios in order to grasp the
financial situation of corporations.
Data come from the Champagne wine interprofession committee - Comité
I nterprofessionnel du Vin de Champagne (CI VC), Nielsen and Banque de France,
the websites of the Union of Champagne makers (Union des Maisons de
Champagne) and the annual reports released by some “Maisons”.
The paper also uses analysis of financial data available in the “DI ANE” data bank
from Bureau van Dijk Electronic Publishing for 20 Maisons de Champagne over
the period 1992-2001. The 20 Champagne makers in the sample are Besserat de
Bellefon, Bollinger, Canard-Duchêne, De Castellane, De Cazanove, Duval-Leroy,
Krug, Lanson, Laurent-Perrier, Marne et Champagne, Mercier, Moët & Chandon,
G.H. Mumm, Piper Heidsieck, Pommery, Louis-Roederer, Ruinart, Taittinger,
Veuve Clicquot Ponsardin and Vranken. Data after 2001 were not available for all
20 companies, and in order to compare the Maisons de Champagne on the same
basis, 2001 is therefore the last year analyzed.
Major Difficulties
The major difficulties for this financial analysis lay in the following:
• The presentation of accounting documents: the wording used in the
accounts may be too vague to grasp the precise meaning, for instance in one
case when “other assets” amounted to 30% of total assets
• Accounting years of different length
• Non-availability of data for some years
• Exceptional events like divestitures, mergers or acquisitions that may
affect the interpretation of figures
I n order to avoid misinterpretation in analysis, some checking of sources of these
documents was required.
Empirical Findings
Structure of Champagne Brands on the French Market: Branded Products and
Private Labels
The French market absorbs about two thirds of Champagne sales. I n 2002 in
French super and hypermarkets, 14 brands of Champagne held 19% of the
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 7
market. This concentration ratio is low with respect to the 40% threshold for a
top-4-firm concentration ratio considered by most authors the limit for perfect
competition in food industries (Declerck & Scherrick, 1993). The Champagne
market is thus highly fragmented and competition is very fierce.
I n French modern retailing in 2002, according to AC Nielsen data (Laboissière,
2003) about one out of four bottles of Champagne was sold under a private label.
Tables 3 and 4 show that the market share of private labels in France increased
by 23.6% in volume and 19% in value in 2002, and this penetration is slowly
increasing. The market shares of private labels for other sparkling wines, rum,
spirits and wine-based aperitifs are lower, but register more significant growth
than private label Champagnes. Private label penetration is greater for red AOC
Bordeaux and red AOC Côtes du Rhône wines. Over the 25 years from 1978 to
2003, vine growers and wine makers were able to expand and double sales from
about 150 million to 300 million bottles.
Table 3: Volume Market Share of Branded Products and Private Labels for
Selected Alcoholic Beverages at French Modern Retailers
Alcoholic beverages
Market share of branded
products
Market share of private
labels
Champagne* 76.6 % (+ 5 %) 23.6 % (+ 6.4 %)
Rum** 80% (+ 1.3 %) 20 % (+ 8.2 %)
Vodka** 87 % (+ 5%) 11 % (+ 10 %)
Gin** 84 % (- 3.1%) 16 % (+ 9.7 %)
Tequila** 86 % (- 7.7%) 14 % (+ 50.7 %)
* Source: Laboissière, 2003
** Source: Laboissière, 2004
Table 4: Value Market Share of Private Labels for Selected Alcoholic Beverages at
French Modern Retailers
Market share of private labels in 2002
Champagne 19%
Other sparkling wines 13%
Whisky 9%
Wine-based aperitifs 9%
Red Bordeaux (claret) AOC wine 37%
Red Côtes du Rhône AOC wine 23%
Source: Laboissière, 2004
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 8
Competitive Environment of Champagne Makers by Type of Distribution Channel
The principal features of the champagne market include barriers to entry,
technological and storage constraints and the question of access to consumers
(due to the product’s alcohol content). All these must be taken into account in
producers’ and retailers’ expectations of risks and price.
The Champagne industry has specific technological and storage constraints. The
time necessary to produce Champagne is a crucial constraint: the process takes
about 3 years, from the grape harvest to the sale of the bottle. Consequently, large
stocks of bottles aging in cellars must be financed.
The legal constraints affecting production are those applicable for a designated
area of origin:
• Strictly defined production area, encompassing 35,155 hectares east of
Paris
• Maximum yield limit on grapes
• Compliance with strictly applied rules (type and quantity of grapes,
environmental conditions, specific processing requirements, etc)
Most of the designated area of origin is already planted with vines, and only a few
hundred additional hectares are potentially available. I f totally covered by vines,
the vineyards of Champagne, which can currently produce about 320 million
bottles, could reach production of 340 / 360 million bottles. But no further
expansion would be possible.
On the sales side, legal constraints differ from one country to another. Many
countries have restrictions on communication and advertising on wine. France
does not easily grant authorization for supermarkets and hypermarkets larger
than 300 m
2
. Most countries outside Europe limit or prohibit the sales of wines
and spirits in food stores. Most alcoholic beverages are sold at specialist wine
merchants and liquor stores. Taxation of alcoholic beverages is also specific to
each country.
Figure 1 shows the competitive forces that determine the Champagne industry’s
profitability. Champagne wine makers are under pressure from both:
• Their suppliers, i.e. vine growers and co-operatives of vine growers
• Their major clients: on the French market, which accounts for 2/3 of sales,
6 purchasing centers (belonging to supermarket and hypermarket
operators) buy and distribute 46 million bottles of the total 93 millions
bottles sold by “Maisons de Champagne” in France, i.e. about 50% of
production
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 9
Threat of potential entrants Legal protections and constraints
Potential Entrants Legislation
. High barrier to entry due to high volumes . Legislation on designated areas of origin (AOC) to protect
demanded by hyper and supermarkets the "Champagne" name, limiting surfaces and yields
. High barrier to entry due to the supply of . Laws (e.g. Evin law in France) limiting communication
grapes of particular vintages to be blended in and advertisements on alcoholic beverages
order to guarantee quality over large volumes . Laws (e.g. Raffarin law in France) limiting the opening up
. High barrier to entry due to the cost of an I ndustry competitors =
of supermarkets and hypemarkets larger than 300 m
2
international commercial & logistical network Maisons de Champagne
Characteristics: Bargaining power of buyers
Bargaining power of suppliers . Strong competition between Buyers =supermarkets, cafes, restaurants, wine stores
Suppliers =vine growers merchants and co-ops Super & hypermarket operators and hotel-restaurant chains:
. Strong bargaining power since suppliers . Operators fragmented - have strong bargaining power in France and Western
may make wine with a co-op and there is : between merchants and Europe where they are highly concentrated.
. No substitute for "AOC Champagne" grapes wine-making co-ops - have the power to delist and reject large volumes of wine from
. Limited area of "Champagne" vineyards . Lack of brand homogeneity store shelves, so Champagne makers may be in financial danger.
. Limited grape yield across countries
I ndependent wine stores and cafes worldwide:
Threat of Substitute Products or Services Performance drivers Low bargaining power because they are not highly concentrated
Substitutes . Brand awareness Large sales force is required to reach large numbers of individual clients
. Other sparkling wines . Volumes of wine from the
. Other wines same blend of grapes in Bargaining power of final buyers
. Spirits: whisky, rhum, Cognac, order to ensure constant taste Final clients =consumers
vodka, gin, etc Households and business men / women have no bargaining power.
All they can do is refuse to buy.
Figure 1: Competitive Forces that Determine the Champagne I ndustry's Profitability
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 10
The bargaining power depends on the type of distribution channel:
• There are specific barriers to entry for French modern retailers, in the form
of :
- The high volumes demanded by the six major hyper and
supermarket operators: Auchan, Carrefour, Casino, Cora,
I ntermarché, Lucie (Leclerc–Système U)
- The strict requirement for grapes of particular vintages to be
blended in order to guarantee constant quality over large volumes
• Barriers to entry may be similar for distribution through international
chains of hotels and restaurants. But most on-trade cafes, hotels,
restaurants, liquor services and nightclubs are independent and have low
bargaining power. Champagne makers may therefore attain a stronger
position in selling through the on-trade channel of distribution, which is
not highly concentrated. However, reaching such individual clients in niche
markets requires an extensive network of commercial agents and a low-cost
logistical network.
• I n many countries outside Western Europe, wine cannot be sold in
supermarkets. Consequently, Champagne makers with international sales
operations mainly sell through the on–trade distribution channel.
Performance
Price by Type of Distribution Channel
The Maisons de Champagne sell bottles under their own brand of the same name.
Some Champagne makers sell mainly to modern retailers in France or Europe,
while others sell mainly to the on-trade distribution channel. Some of them have
a worldwide distribution network.
A typology of 20 Champagne makers is drawn up according to the distribution
network used in France (see table 5). The breakdown of the sample is as follows:
• Seven Champagne makers selling mainly to French modern retailers
(Canard-Duchêne, De Castellane, De Cazanove, Duval-Leroy, Marne &
Champagne, Mercier and Vranken)
• Six Champagne makers with mainly on-trade distribution selling through
liquor services, cafes, hotels, restaurants and night-clubs (Besserat de
Bellefon, Bollinger, Krug, Laurent-Perrier, Louis-Roederer and Ruinart)
• Seven Champagne makers with a global distribution network (Lanson,
Moët & Chandon, Mumm, Piper Heidsieck, Pommery, Taittinger and
Veuve Clicquot Ponsardin)
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 11
Observations show that:
• The lowest prices for branded products are observed for brands mainly sold
in super and hypermarkets. Prices range from 15 € to 25 € (excluding VAT)
in France. I t should be noted that these Maisons also sell bottles to modern
retailers under private labels at cheaper prices, between 10 and 15 € a
bottle in general.
• I ntermediate prices apply for Champagne makers selling mainly to liquor
services, cafes, hotels, restaurants and nightclubs.
• The highest prices are achieved by the Maisons with a global international
network of sales outlets.
Table 5: Typology of 20 Champagne Brands by Price and Distribution Network in
France
Retail price of
a 75 cl bottle
Prevailing distribution:
super/hyper markets
Prevailing distribution:
Liquor services, cafes,
hotels, restaurants, night-
clubs
Prevailing Distribution:
Global network
>25 € Krug
Bollinger
Louis-Roederer
Ruinart
Veuve Clicquot Ponsardin
Moët & Chandon
Taittinger
20 - 25 €
Laurent Perrier
Pommery
Piper-Hiedsieck
Lanson
Mumm
15 - 20 €
Canard-Duchêne Mercier
Besserat de Bellefon
<15 € De Castellane
De Cazanove
Duval-Leroy
Vranken
Marne & Champagne
Figure 2 shows that prices outside France are higher than prices in France, where
competition is tougher due to:
• Competition from co-operatives of vine growers which process Champagne
for their members or for themselves and mainly serve the French market
• The high sales levels concentrated in the six purchasing centers owned by
the big French modern retailers
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 12
8
9
10
11
12
13
14
15
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year
P
r
i
c
e
i
n
c
o
n
s
t
a
n
t
e
u
r
o
s
o
f
2
0
0
1
Price per bottle outside France
Average price per bottle weigthed by sales
Price per bottle in France
Figure 2: Price of a Bottle of Champagne from 1978 to 2004, in Constant Euros of
2001
Results
Table 6 relates the financial performance of Champagne makers to their main
type of distribution channel used in 2001.
Tables 7, 8 and 9 show details of financial results for every Champagne maker in
the sample. Table 7 presents the financial results of Champagne makers selling
mainly to modern retailers. Table 8 documents the financial performance of
Champagne makers selling mainly to wine specialists, cafes, hotels, and
restaurants. Table 9 presents the financial comparison of Champagne makers
with global distribution channels, i.e. selling both on-trade and off-trade
worldwide.
The financial performance of Champagne makers is analyzed with reference to
three complementary aspects:
• Equilibrium of the financial structure
• Economic and operating profitability
• Financial profitability
Mean and median values are provided.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 13
Table 6: Financial Comparison of Champagne Makers per type of Distribution Channel in 2001
MEAN VALUES MEDI AN VALUES
Major channel of distribution
French modern
retailers
On-trade
distribution
Global
international
distribution
French modern
retailers
On-trade
distribution
Global
international
distribution
Vineyard ownership in hectare
82 75 137 18 45 270
Key Results
Total Sales in k€
67 056 48 180 179 478 55 690 38 896 94 300
Operating I ncome in k€
6 435 12 334 41 423 5 178 9 917 10 372
Net I ncome in k€
1 393 8 367 30 108 1 151 5 270 14 892
Financial Structure
Equity Capital / Total Assets
29% 55% 50% 27% 50% 54%
Equity Capital / Long Term Capital
37% 62% 55% 28% 59% 64%
Financial Debt / Equity Shareholder's Funds
272% 62% 74% 218% 65% 42%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
17,4% -1,3% -7,9% 24,0% 2,2% -9,0%
Value Added to Sales
16,3% 41,7% 37,3% 17,9% 44,8% 34,7%
Labor Costs to Value Added
31,8% 31,9% 41,9% 31,4% 33,2% 45,0%
Financial Expenses to Value Added
37,5% 23,9% 20,9% 38,3% 20,0% 20,0%
EBI TDA to Total Assets
6,1% 10,9% 8,7% 4,6% 12,9% 6,5%
EBI TDA to Sales
9,4% 27,3% 19,7% 9,4% 28,2% 16,8%
Operating margin =EBI T to Sales
9,6% 23,0% 23,1% 9,6% 19,6% 12,7%
Financial Profitability
Profit margin on Sales
2,1% 17,7% 16,8% 2,1% 15,3% 17,8%
Return on equity (ROE)
1,7% 11,6% 11,0% 4,6% 13,2% 9,6%
Growth rate over the period 1997-2001
Growth rate of sales
-2% 13% 9% -2% 16% 19%
Growth rate of EBI T
-9% 82% 775% -25% 28% 66%
Growth rate of Net I ncome
-76% 716% 246% -78% 72% 90%
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 14
Table 7: Comparison of Champagne makers selling mainly to modern retailers in 2001
Champagne Makers ="Maisons de
Champagne"
Canard
Duchêne
De Castellane De Cazanove Duval Leroy
Marne &
Champagne
Mercier Vranken
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 18 0 0 150 0 231 175 82 18
Key Results
Total Sales in k€
53 989 24 903 42 408 55 755 129 880 55 690 106 769 67 056 55690
Operating I ncome in k€
5 178 1 530 1 698 3 129 13 321 6 247 13 940 6 435 5178
Net I ncome in k€
3 295 -3 011 223 1 151 -829 5 868 3 054 1 393 1151
Financial Structure
Equity Capital / Total Assets
30,1% 26,7% 27,9% 21,5% 10,7% 72,1% 11,7% 28,7% 26,7%
Equity Capital / Long Term Capital
55,0% 27,9% 34,4% 25,6% 10,9% 85,0% 17,2% 36,6% 27,9%
Financial Debt / Equity Shareholder's
Funds
45,7% 217,9% 168,5% 263,2% 660,3% 1,6% 548,0% 272,2% 217,9%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
35% -33% 58% 29% 24% 6% 3% 17,4% 24,0%
Value Added to Sales 12,4% 19,3% 10,1% 17,9% 20,0% 14,1% 20,2% 16,3% 17,9%
Labor Costs to Value Added 16% 56% 41% 48% 31% 9% 21% 31,8% 31,4%
Financial Expenses to Value Added 40% 31% 38% 33% 62% 8% 50% 37,5% 38,3%
EBI TDA to Total Assets
12,3% 3,3% 4,6% 4,5% 4,0% 7,2% 6,9% 6,1% 4,6%
EBI TDA to Sales
9,4% 6,3% 4,9% 7,8% 11,5% 11,9% 13,9% 9,4% 9,4%
Operating margin =EBI T to Sales
9,6% 6,1% 4,0% 6,2% 10,3% 11,2% 13,1% 9,6% 9,6%
Profitability
Profit margin on Sales
6,1% -12,1% 0,5% 2,1% -0,6% 10,5% 2,9% 2,1% 2,1%
Return on equity (ROE)
14,6% -22,5% 1,5% 4,6% -2,0% 7,6% 8,3% 1,7% 4,6%
Growth rate over the period 1997-2001
Growth rate of sales
12% -45% 72% -2% -18% -33% 3% -2% -2%
Growth rate of EBI T
-25% -39% 86% -51% -14% -44% 26% -9% -25%
Growth rate of Net I ncome
-40% -221% -85% -78% -126% 16% 5% -76% -78%
For Marne & Champagne, the accounting year 1997 lasts 14 months.
So, it is difficult to analyse the growth rate over the period 1997-2001 for Marne & Champagne.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 15
Table 8: Comparison of Champagne Makers Selling Mostly to Wine Specialists, Cafes, Hotels and
Restaurants in 2001
Champagne Makers ="Maisons de
Champagne"
Besserat de
Bellefon
Bollinger Krug
Laurent-
Perrier
Louis -
Roederer
Ruinart
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 10 153 19 70 200 0 75 44,5
Key Results
Total Sales in k€
14 844 38 138 15 892 112 965 67 586 39 654 48 180 38 896
Operating I ncome in k€
1 261 12 457 3 151 21 953 27 803 7 377 12 334 9 917
Net I ncome in k€
3 413 6 924 1 987 11 739 22 525 3 616 8 367 5 270
Financial Structure
Equity Capital / Total Assets
40,6% 59,3% 68,1% 39,2% 88,0% 36,0% 55,2% 49,9%
Equity Capital / Long Term Capital
49,2% 67,3% 72,8% 43,2% 88,9% 50,0% 61,9% 58,7%
Financial Debt / Equity Shareholder's
Funds
102,6% 41,8% 25,7% 108,8% 4,1% 88,0% 61,8% 64,9%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
8% 17% -29% -8% 5% -1% -1,3% 2,2%
Value Added to Sales 16,5% 55,4% 55,0% 34,6% 55,1% 33,7% 41,7% 44,8%
Labor Costs to Value Added 34% 32% 39% 25% 23% 38% 31,9% 33,2%
Financial Expenses to Value Added 55% 8% 36% 14% 5% 26% 23,9% 20,0%
EBI TDA to Total Assets
2,8% 17,7% 5,9% 13,5% 12,7% 13,1% 10,9% 12,9%
EBI TDA to Sales
8,8% 36,1% 31,6% 24,7% 42,4% 20,3% 27,3% 28,2%
Operating margin =EBI T to Sales
8,5% 32,7% 19,8% 19,4% 41,1% 16,6% 23,0% 19,6%
Profitability
Profit margin on Sales
23,0% 18,2% 12,5% 10,4% 33,3% 9,1% 17,7% 15,3%
Return on equity (ROE)
15,1% 13,2% 3,2% 13,1% 11,2% 13,8% 11,6% 13,2%
Growth rate over the period 1997-2001
Growth rate of sales
-22% 50% -3% 15% 23% 16% 13% 15%
Growth rate of EBI T
94% 99% 10% 245% 28% 18% 82% 61%
Growth rate of Net I ncome
3997% 92% 82% 72% 58% -3% 716% 77%
For Besserat de Bellefon, the accounting year 1997 lasts 14 months. So, its growth rate over the period 1997-2001 cannot be analysed
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 16
Table 9: Comparison of Champagne Makers Selling Both On-trade and Off-trade Worldwide in 2001
Champagne Makers ="Maisons de
Champagne"
Lanson
Moët &
Chandon
Mumm
Piper
Heidsieck
Pommery Taittinger
Veuve Clicquot
Ponsardin
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 0 >760 275 50 470 (*) 270 363 137 270
Key Results
Total Sales in k€
81 465 551 526 86 905 127 739 94 300 77 997 236 412 179 478 94 300
Operating I ncome in k€
10 372 161 788 9 753 9 119 7 550 13 562 77 819 41 423 10 372
Net I ncome in k€
973 98 062 30 182 3 471 4 147 14 892 59 029 30 108 14 892
Financial Structure
Equity Capital / Total Assets
26,0% 52,0% 54,0% 31,0% 66,0% 66,0% 55,0% 50,0% 54,0%
Equity Capital / Long Term Capital
33,0% 57,0% 66,0% 35,0% 64,0% 67,0% 64,0% 55,1% 64,0%
Financial Debt / Equity Shareholder's
Funds
193,0% 46,0% 21,0% 161,0% 30,0% 26,0% 42,0% 74,1% 42,0%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
13% -13% -22% -18% -7% 1% -9% -7,9% -9,0%
Value Added to Sales 31,3% 46,5% 30,5% 23,7% 34,7% 46,2% 48,5% 37,3% 34,7%
Labor Costs to Value Added 36% 28% 47% 45% 64% 49% 24% 41,9% 45,0%
Financial Expenses to Value Added 36% 23% 12% 20% 17% 6% 32% 20,9% 20,0%
EBI TDA to Total Assets
6,3% 15,5% 6,5% 5,7% 3,1% 6,9% 16,8% 8,7% 6,5%
EBI TDA to Sales
16,8% 31,4% 13,0% 11,3% 9,5% 20,6% 35,3% 19,7% 16,8%
Operating margin =EBI T to Sales
12,7% 29,3% 11,2% 7,1% 8,0% 17,4% 32,9% 23,1% 12,7%
Financial Profitability
Profit margin on Sales
1,2% 17,8% 34,7% 2,7% 4,4% 19,1% 25,0% 16,8% 17,8%
Return on equity (ROE)
1,4% 15,5% 25,9% 3,9% 2,2% 9,6% 18,5% 11,0% 9,6%
Growth rate over the period 1997-2001
Growth rate of sales
-35% 21% -24% 45% 1% 19% 36% 9% 19%
Growth rate of EBI T
31% 26% 176% 2028% 3061% 37% 66% 775% 66%
Growth rate of Net I ncome
90% 7% 1316% 197% -24% 103% 33% 246% 90%
(*) When Pommery was sold to Vraken group in April 2002, 450 ha out of 470 ha were kept by LVMH for Moët & Chandon mainly.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 17
I n terms of corporate sales, the total sales of Champagne makers with global
distribution networks were the highest, with a median value of 94.3 million € for
the sample in 2001. Sales of Champagne makers distributing mainly to French
modern retailers follow, at 55.7 million €. Sales of Champagne makers selling
mainly through on-trade distribution outlets are lower, at 38.9 million €.
The financial structure of Champagne makers selling mainly to French modern
retailers is very weak. These companies have a very high level of financial debt,
standing at about 201 to 270% of equity. Champagne makers with mainly on-
trade distribution and Champagne makers with global distribution have good
financial structure, with debt at about 65% and 42 to 74% respectively. The other
financial structure ratios confirm these results.
Based on median value, Champagne makers selling mainly to French modern
retailers have the lowest vineyard ownership (18 ha) compared to other
Champagne makers (45 ha for Champagne makers with mainly on-trade
distribution and 270 ha for Champagne makers with global distribution).
EBI TDA is a measure of wealth created by the operational activity of the
company, independently of the company’s financing, depreciation, amortization
and tax policy. The economic profitability, measured by EBI TDA to sales, is about
27% to 28% for Champagne makers with mainly on-trade distribution, which
register the best performance. Champagne makers with global distribution follow
with about 17% to 19%, which is still a good result. But with EBI TDA of about
9.6%, Champagne makers selling mainly to French modern retailers turn in a
poor performance.
The results are similar for the value added to sales ratio. Value added is the
wealth created by human and financial capital. I t is the difference between total
sales and external operating charges. Since labor costs are internal charges, they
are not included in those external operating charges. Financial expenses as a
percentage of value added are comparatively higher for Champagne makers
selling mainly to French modern retailers. This result is consistent with the fact
that their debt level is the highest. But the highest proportions of labor costs are
found at Champagne makers with global distribution networks, possibly because
big international firms have to pay more business executives.
The operating margin expressed as the ratio of EBI T to total sales, is about 19.6%
on average with a median value of 23% for Champagne makers with mainly on-
trade distribution. Champagne makers with global distribution networks have
the same mean value but a lower median value, 12.7%. These results are
excellent compared to financial results generally in the food and agribusiness
sector. However, Champagne makers selling mainly to French modern retailers
exhibit an average ratio lower than 10%.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 18
The financial profitability ratios show that Champagne makers with mainly on-
trade distribution and Champagne makers using global distribution are quite
similar:
• Their profit margin on sales is about 15% to 17%
• Their return on equity is about 10% to 13%
These results are very good: two thirds of annual Champagne sales usually take
place during the last four months of the year. This means that most sales took
place during the economic stagnation/depression after the attacks in New York on
September 11, 2001.
However, Champagne makers selling mainly to French modern retailers exhibit
very low ratios:
• Their profit margin on sales is about 2%
• Their return on equity is lower than 5%
Clearly, the economic, operating and financial profits depend on the distribution
network and the sales price. Champagne makers selling wine to supermarket and
hypermarket chains showed very low profitability. Champagne makers selling
through the on-trade distribution channel and worldwide networks were very
profitable in 2001. Similar patterns are observed in analyzing financial reports
from various years.
Furthermore, from 1997 to 2001, Champagne makers selling mainly to
supermarkets registered negative growth rates for sales, EBI TDA and net
income. They were unable to keep up the momentum from the sales boom of 1999.
Champagne makers with mainly on-trade distribution, meanwhile, enjoyed very
positive growth rates in business volumes and profitability, and Champagne
makers with global distribution networks grew even faster. They were able to
take advantage of the new millennium and also to maintain that advantage over
the following years.
The financial details provided in tables 7, 8 and 9 show that the family-owned
traditional Champagne makers Bollinger and Louis-Roederer, which only sell
through the international on-trade channels of distribution, achieve the best
results. They are just ahead of Champagne makers with global distribution like
Veuve Clicquot Ponsardin (LVMH group), Moët & Chandon (LVMH group) and
Taittinger, which also had excellent results.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 19
Conclusions
The findings are not surprising. On one side, the largest Champagne makers are
mass producers with economy of scale and cost leadership advantages. So, they
can market successfully worldwide both in supermarkets. On another side, high
quality Champagne producers rely on their brand equity and are able to sell at a
higher price through a network of wine stores, i.e. specialized retailers. When
they try to sell through supermarkets selling at discount prices, they are not
powerful enough and must accept lower prices in order to be listed. And they fail.
Champagne makers have poor financial results when they only face the market
power of the six major French supermarket operators.
Champagne makers with mainly on-trade distribution and Champagne makers
with global distribution worldwide have learnt how to improve value creation
over the decade, and took full advantage of the new millennium. They also
achieved excellent financial results. However, Champagne makers selling
mainly to supermarkets registered poor financial results.
The results explain why most Champagne makers are trying to increase their
non-supermarket sales, in order to achieve better prices and profitability. But
such a strategy requires the financial means to develop brand awareness and an
international distribution channel.
Most of the Champagne makers selling mainly to supermarket operators face
high financial debt and cannot afford such an investment. They can only access
international sales through partnership with other wine and spirits distributors,
as Piper Heidsieck did when its parent wine and spirit company, Remy-Cointreau
(France), decided to share its distribution network with J eam Beam Brands
Worldwide (USA), Highland Distillers Ltd (UK) and later Vins & Sprit A.B.
(Sweden).
Processors take advantage of branding and economy of scale in production. They
adjust their production strategy in taking distributors’ marketing power into
account.
The paper shows that Champagne makers need a second quality product, like
good sparkling wine, that can be processed at lower cost and sold at large scale
through supermarkets. They usually use a brand name related to their
Champagne brand name. Such a strategy is already undertaken: Moët &
Chandon produces sparkling wine under the brand “Domaine Chandon” in
California and Australia. Champagne Mumm also produces sparkling wine in
California, “Mumm Napa”. Sparkling wines are sold at lower price.
Such a strategy is also implemented by other food processors. For example:
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 20
• French producers of goose liver (foie gras) also sell cheaper products like
mousse of goose liver under their brand
• I n the European cheese sector, processors sell “gourmet” cheese like
“Roquefort” in shops specialized on delicatessen while they enjoy large
economies of scale with “camembert” and “brie” sold in supermarkets
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doc_552037622.pdf
A typology of strategies related to the distribution channels used by Champagne makers is established. Champagne makers' operating profit depends on their distribution network, which affects selling prices. Based on a sample of 20 Champagne makers ("Maisons de Champagne"), economic and financial performance indicators for Champagne makers are analyzed with reference to the type of distribution channel.
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 1
I nternational Food and Agribusiness Management Review
Volume 8, I ssue 4, 2005
Typology and Financial Performance of Champagne Makers
According to Distribution Channel
Francis Declerck
a
a
Associate Professor, Finance Department; and Researcher, I nternational Agri-Food Management
I nstitute; ESSEC Business School (ESSEC-I MI A), B.P. 50105 - 95021 Cergy-Pontoise cedex,
France.
Abstract
A typology of strategies related to the distribution channels used by Champagne
makers is established. Champagne makers’ operating profit depends on their
distribution network, which affects selling prices. Based on a sample of 20
Champagne makers (“Maisons de Champagne”), economic and financial
performance indicators for Champagne makers are analyzed with reference to the
type of distribution channel.
Keywords: Champagne, distribution channel, strategy, performance
Corresponding author: Tel: +33-(0)1-3443-3266
Email: [email protected]
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 2
Introduction
I n 1992, during the economic recession in Western Europe and North America,
consumers were unwilling to pay a high price for a bottle of Champagne, but
the grapes used to produce that wine had been harvested 3 years earlier and
purchased at a very high price. I n 1991 and 1992, only 214 million bottles were
sold compared to the 149 million bottles sold in 1989. Squeezed between high
costs and low retail prices, Champagne makers had to sell Champagne in
supermarkets at a lower price than usual. A few years later, after the boom in
1999 that saw sales reach 327 million bottles, economic stagnation returned.
Sales dropped to 269 million bottles in 2001, 288 million bottles in 2002 and
293 million bottles in 2003, as shown in tables 1 and 2. The Champagne
business was worth 3.4 billion euros in 2003. This paper shows how
Champagne makers - called “Maisons de Champagne” - have learnt how to
improve value creation over the decade through the use of different distribution
channels.
Table 1: Sales of Champagne by volume from 1997 to 2003
Sales in million
bottles (75cl) 1997 1998 1999 2000 2001 2002 2003
I n France 165 (61%) 179 (61%) 190 (58%) 149 (59%) 165 (63%) 175 (61%) 174 (59%)
Outside France 103 (39%) 113 (39%) 137 (42%) 104 (41%) 98 (37%) 113 (39%) 119 (41%)
Total annual
sales 269 292 327 253 263 288 293
Growth rate of
sales by volume +5.2% +8.5% +12.0% - 22.6% +3.9% +9.5% +1.9%
Table 2: Sales of Champagne by value from 1997 to 2003
Sales in billion
euros 1997 1998 1999 2000 2001 2002 2003
I n France 1.51 (59%) 1.64 (55%) 1.91 (52%) 1.52 (51%) 1.64 (55%) 1.75 (53%) 1.80 (53%)
Outside France 1.04 (41%) 1.31 (45%) 1.76 (48%) 1.45 (49%) 1.33 (45%) 1.54 (47%) 1.60 (47%)
Total annual
sales 2.55 2.95 3.67 2.97 2.97 3.29 3.4
Growth rate of
sales by value +7.0% +15.7% +24.4% - 19.1% 0 % +10.8% +3.4%
Objectives
The objectives of the paper are:
1. To identify the types of distribution strategy implemented by Champagne
makers
2. To measure the economic and financial performance of Champagne makers
from 1992 to 2001 for each type of distribution
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 3
3. To relate performance indicators to strategic decisions with respect to
distribution channels
The structure of the paper is as follows. First, a review of literature looks co-
ordination and market power issues in food chains, it is mainly focused on
producer-retailer relationships. Second, the methodology and data are discussed.
Third, empirical findings about the Champagne industry are presented to shed
light on the processor and retailer system. Finally, conclusions are drawn and the
prospects for future development are examined.
Review of Literature
While Williams (1973) points out the generalized notion of a vertical coordination
continuum, the literature about the industrial organization has evolved towards
new institutional economics (Ménard & Shirley, 2005a), incorporating transaction
costs and institutional environment as key elements in the organization of
vertical systems. Looking at transaction inefficiency factors promoting vertical
integration in food industries, Bhuyan (2005) finds that major reasons are
diseconomies of scale and the fewness of sellers/buyers and finally demand
uncertainty.
Robicheaux and Coleman (1994) adapted the structure-conduct-performance
model and focused on a behavioral approach to investigate buyer-supplier
relationships.
More focused on agri-food chain management, Trienekens and Zuurbier (1996)
and Omta, Trienekens and Beers (1998) and the Dutch school observe increasing
co-ordination – particularly about information exchange and logistics - in chains
and networks. So, supply chains firms can work more efficiently to serve
consumers.
On another side, Malassis (1973), creating the French school of “filières”,
emphasizes on power as a key driver of leadership and management of the
agriculture and food business systems. Furthermore, Perez (2003), and Coelho
and Rastoin (2004) highlight the changing role of corporate governance in public
companies whose shareholders focus more on financial profitability than on
industrial strategy..
Weiss (1989) stresses a market power hypothesis in food retailing since price is
positively related to more concentrated market structure in many local market
industries including food retailing due to local tight oligopolies. High profit may
be due to lower costs or the offer of more expensive, higher quality, differentiated
products (Demsetz, 1973). Following Cotteril (1986) and Nelson, Siegfried, and
Howell (1992) observe that services, including breadth of product line and express
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 4
lane, are a major way for differentiation. But Cotteril (1999) finds that market
share and concentration are not no significantly related to services and that most
cost savings in large superstores are offset by pricing power liked to increased
services levels. So, he rejects the Demsetz critique.
Further, Rogers (2001) observe that concentration has advanced in almost every
US food manufacturing industry, including the wine and brandy industry, over
the 1958-1997 period and farmers remain outspoken that something are injured
by the reduced number of buyers Cotteril (2001) develops a structural model of
price transmission in a channel that has differentiates product oligopolies at two
stages: retailer oligopoly and manufacturer oligopsony power. According to
different market power level, the distribution of welfare may vary a lot among
farmers, marketers, and consumers. The rise in US and European retail buyer
concentration induced the development of private labels. There exist also private
labels in the Champagne business.
Champagne is produced in a restricted designated area of origin (appellation
d’origine contrôlée - AOC, in French) to the east of Paris, France, but it is
consumed around the world. About 65% of all Champagne bottled is drunk in
France, the other 35% being consumed in other countries, mainly the UK, the
USA, Germany, and I taly (CI VC, 2002).
As in every industry, the business carried out by “Maisons de Champagne” is
constrained by consumer demand. But it also has to respect legal restrictions on
production both in terms of quantity (grapes must come from a limited designated
area of origin, and there is a maximum authorized yield) and quality (specified
varieties of vines must be used, manual harvest only, etc). However, there is still
an uncertainty factor because of weather fluctuations from year to year, which
cause fluctuation in grape production levels. On the demand side, shipments of
bottles from processors to retailers vary from year to year because of swings in
economic growth in the developed countries (CI VC, 1992 - 2001).
Gaucher, Hovelaque and Soler (2000) have formulated the optimal procurement
and inventory policies and calculated chain profits according to various levels of
coordination between two producing firms. Gaucher, Soler and Tanguy (2002)
studied quality incentives and supply contracts in the wine chains. Soler and
Tanguy (2002) and Saulpic and Tanguy (2002) found that attracting equity
capital from investors on stock exchanges is the Champagne makers’ best
financial strategy for expansion. Giraud-Héraud, Mathurin and Soler (2003) have
analyzed the legitimacy of supply regulation mechanisms for products protected
by a designation of origin. They argue that such mechanisms reduce uncertainty,
thus encouraging investment in quality improvement.
Declerck & Pichot (1994) note that since it takes 3 years to turn grapes into
Champagne, the adjustments of supply to demand lead to jumps in retail prices in
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 5
economic booms and drops in retail prices in periods of stagnation/recession. This
phenomenon disconcerts consumers and seriously affects vine growers and wine
makers. Declerck (1996) shows that high value added to sales and low financial
leverage are good indicators to explain operational and financial performance in
the Champagne industry. Declerck (2004) reports that vine growers and wine
makers have learned from experience and are able to negotiate terms with
retailers to limit price swings. A producer – retailer cycle is exhibited with 3 loops
over the period 1978-2002.
Methodology, Data and Major Difficulties
Methodology
Porter’s model (1985) is used for strategic purposes, leading to definition of a
typology of Champagne makers according to their distribution channel:
• Supermarket operators
• Specialized distributors like wine stores, cafes, hotels, restaurants, etc.
• Global distribution networks, i.e. combining on-trade and off-trade outlets,
worldwide. The characteristics of each distribution channel are studied,
particularly barriers to entry - which may be quite considerable - and
access to consumers.
According to their distribution channels, Champagne makers have different
characteristics that can be observed through:
1. Measures of financial structure:
• Equity capital to total assets
• Equity capital to long-term capital
• Financial leverage, measured as the financial debt to equity
2. Economic performance indicators:
• Sales growth in 2001 compared to 2000
• Value added, i.e. the wealth created by labor and capital, measured
by the difference between production and consumption of raw
materials and external services
• Labor costs
• Earnings before interest, taxation, depreciation & amortization
(EBI TDA)
• Operating margin
3. Financial measures of performance:
• Profit margin
• Return on equity (ROE)
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 6
Data
Secondary data used to measure the economic and financial criteria of
Champagne makers come from financial data banks and cover a ten-year-period
(1992–2001). They are used to compute financial ratios in order to grasp the
financial situation of corporations.
Data come from the Champagne wine interprofession committee - Comité
I nterprofessionnel du Vin de Champagne (CI VC), Nielsen and Banque de France,
the websites of the Union of Champagne makers (Union des Maisons de
Champagne) and the annual reports released by some “Maisons”.
The paper also uses analysis of financial data available in the “DI ANE” data bank
from Bureau van Dijk Electronic Publishing for 20 Maisons de Champagne over
the period 1992-2001. The 20 Champagne makers in the sample are Besserat de
Bellefon, Bollinger, Canard-Duchêne, De Castellane, De Cazanove, Duval-Leroy,
Krug, Lanson, Laurent-Perrier, Marne et Champagne, Mercier, Moët & Chandon,
G.H. Mumm, Piper Heidsieck, Pommery, Louis-Roederer, Ruinart, Taittinger,
Veuve Clicquot Ponsardin and Vranken. Data after 2001 were not available for all
20 companies, and in order to compare the Maisons de Champagne on the same
basis, 2001 is therefore the last year analyzed.
Major Difficulties
The major difficulties for this financial analysis lay in the following:
• The presentation of accounting documents: the wording used in the
accounts may be too vague to grasp the precise meaning, for instance in one
case when “other assets” amounted to 30% of total assets
• Accounting years of different length
• Non-availability of data for some years
• Exceptional events like divestitures, mergers or acquisitions that may
affect the interpretation of figures
I n order to avoid misinterpretation in analysis, some checking of sources of these
documents was required.
Empirical Findings
Structure of Champagne Brands on the French Market: Branded Products and
Private Labels
The French market absorbs about two thirds of Champagne sales. I n 2002 in
French super and hypermarkets, 14 brands of Champagne held 19% of the
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 7
market. This concentration ratio is low with respect to the 40% threshold for a
top-4-firm concentration ratio considered by most authors the limit for perfect
competition in food industries (Declerck & Scherrick, 1993). The Champagne
market is thus highly fragmented and competition is very fierce.
I n French modern retailing in 2002, according to AC Nielsen data (Laboissière,
2003) about one out of four bottles of Champagne was sold under a private label.
Tables 3 and 4 show that the market share of private labels in France increased
by 23.6% in volume and 19% in value in 2002, and this penetration is slowly
increasing. The market shares of private labels for other sparkling wines, rum,
spirits and wine-based aperitifs are lower, but register more significant growth
than private label Champagnes. Private label penetration is greater for red AOC
Bordeaux and red AOC Côtes du Rhône wines. Over the 25 years from 1978 to
2003, vine growers and wine makers were able to expand and double sales from
about 150 million to 300 million bottles.
Table 3: Volume Market Share of Branded Products and Private Labels for
Selected Alcoholic Beverages at French Modern Retailers
Alcoholic beverages
Market share of branded
products
Market share of private
labels
Champagne* 76.6 % (+ 5 %) 23.6 % (+ 6.4 %)
Rum** 80% (+ 1.3 %) 20 % (+ 8.2 %)
Vodka** 87 % (+ 5%) 11 % (+ 10 %)
Gin** 84 % (- 3.1%) 16 % (+ 9.7 %)
Tequila** 86 % (- 7.7%) 14 % (+ 50.7 %)
* Source: Laboissière, 2003
** Source: Laboissière, 2004
Table 4: Value Market Share of Private Labels for Selected Alcoholic Beverages at
French Modern Retailers
Market share of private labels in 2002
Champagne 19%
Other sparkling wines 13%
Whisky 9%
Wine-based aperitifs 9%
Red Bordeaux (claret) AOC wine 37%
Red Côtes du Rhône AOC wine 23%
Source: Laboissière, 2004
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 8
Competitive Environment of Champagne Makers by Type of Distribution Channel
The principal features of the champagne market include barriers to entry,
technological and storage constraints and the question of access to consumers
(due to the product’s alcohol content). All these must be taken into account in
producers’ and retailers’ expectations of risks and price.
The Champagne industry has specific technological and storage constraints. The
time necessary to produce Champagne is a crucial constraint: the process takes
about 3 years, from the grape harvest to the sale of the bottle. Consequently, large
stocks of bottles aging in cellars must be financed.
The legal constraints affecting production are those applicable for a designated
area of origin:
• Strictly defined production area, encompassing 35,155 hectares east of
Paris
• Maximum yield limit on grapes
• Compliance with strictly applied rules (type and quantity of grapes,
environmental conditions, specific processing requirements, etc)
Most of the designated area of origin is already planted with vines, and only a few
hundred additional hectares are potentially available. I f totally covered by vines,
the vineyards of Champagne, which can currently produce about 320 million
bottles, could reach production of 340 / 360 million bottles. But no further
expansion would be possible.
On the sales side, legal constraints differ from one country to another. Many
countries have restrictions on communication and advertising on wine. France
does not easily grant authorization for supermarkets and hypermarkets larger
than 300 m
2
. Most countries outside Europe limit or prohibit the sales of wines
and spirits in food stores. Most alcoholic beverages are sold at specialist wine
merchants and liquor stores. Taxation of alcoholic beverages is also specific to
each country.
Figure 1 shows the competitive forces that determine the Champagne industry’s
profitability. Champagne wine makers are under pressure from both:
• Their suppliers, i.e. vine growers and co-operatives of vine growers
• Their major clients: on the French market, which accounts for 2/3 of sales,
6 purchasing centers (belonging to supermarket and hypermarket
operators) buy and distribute 46 million bottles of the total 93 millions
bottles sold by “Maisons de Champagne” in France, i.e. about 50% of
production
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 9
Threat of potential entrants Legal protections and constraints
Potential Entrants Legislation
. High barrier to entry due to high volumes . Legislation on designated areas of origin (AOC) to protect
demanded by hyper and supermarkets the "Champagne" name, limiting surfaces and yields
. High barrier to entry due to the supply of . Laws (e.g. Evin law in France) limiting communication
grapes of particular vintages to be blended in and advertisements on alcoholic beverages
order to guarantee quality over large volumes . Laws (e.g. Raffarin law in France) limiting the opening up
. High barrier to entry due to the cost of an I ndustry competitors =
of supermarkets and hypemarkets larger than 300 m
2
international commercial & logistical network Maisons de Champagne
Characteristics: Bargaining power of buyers
Bargaining power of suppliers . Strong competition between Buyers =supermarkets, cafes, restaurants, wine stores
Suppliers =vine growers merchants and co-ops Super & hypermarket operators and hotel-restaurant chains:
. Strong bargaining power since suppliers . Operators fragmented - have strong bargaining power in France and Western
may make wine with a co-op and there is : between merchants and Europe where they are highly concentrated.
. No substitute for "AOC Champagne" grapes wine-making co-ops - have the power to delist and reject large volumes of wine from
. Limited area of "Champagne" vineyards . Lack of brand homogeneity store shelves, so Champagne makers may be in financial danger.
. Limited grape yield across countries
I ndependent wine stores and cafes worldwide:
Threat of Substitute Products or Services Performance drivers Low bargaining power because they are not highly concentrated
Substitutes . Brand awareness Large sales force is required to reach large numbers of individual clients
. Other sparkling wines . Volumes of wine from the
. Other wines same blend of grapes in Bargaining power of final buyers
. Spirits: whisky, rhum, Cognac, order to ensure constant taste Final clients =consumers
vodka, gin, etc Households and business men / women have no bargaining power.
All they can do is refuse to buy.
Figure 1: Competitive Forces that Determine the Champagne I ndustry's Profitability
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 10
The bargaining power depends on the type of distribution channel:
• There are specific barriers to entry for French modern retailers, in the form
of :
- The high volumes demanded by the six major hyper and
supermarket operators: Auchan, Carrefour, Casino, Cora,
I ntermarché, Lucie (Leclerc–Système U)
- The strict requirement for grapes of particular vintages to be
blended in order to guarantee constant quality over large volumes
• Barriers to entry may be similar for distribution through international
chains of hotels and restaurants. But most on-trade cafes, hotels,
restaurants, liquor services and nightclubs are independent and have low
bargaining power. Champagne makers may therefore attain a stronger
position in selling through the on-trade channel of distribution, which is
not highly concentrated. However, reaching such individual clients in niche
markets requires an extensive network of commercial agents and a low-cost
logistical network.
• I n many countries outside Western Europe, wine cannot be sold in
supermarkets. Consequently, Champagne makers with international sales
operations mainly sell through the on–trade distribution channel.
Performance
Price by Type of Distribution Channel
The Maisons de Champagne sell bottles under their own brand of the same name.
Some Champagne makers sell mainly to modern retailers in France or Europe,
while others sell mainly to the on-trade distribution channel. Some of them have
a worldwide distribution network.
A typology of 20 Champagne makers is drawn up according to the distribution
network used in France (see table 5). The breakdown of the sample is as follows:
• Seven Champagne makers selling mainly to French modern retailers
(Canard-Duchêne, De Castellane, De Cazanove, Duval-Leroy, Marne &
Champagne, Mercier and Vranken)
• Six Champagne makers with mainly on-trade distribution selling through
liquor services, cafes, hotels, restaurants and night-clubs (Besserat de
Bellefon, Bollinger, Krug, Laurent-Perrier, Louis-Roederer and Ruinart)
• Seven Champagne makers with a global distribution network (Lanson,
Moët & Chandon, Mumm, Piper Heidsieck, Pommery, Taittinger and
Veuve Clicquot Ponsardin)
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 11
Observations show that:
• The lowest prices for branded products are observed for brands mainly sold
in super and hypermarkets. Prices range from 15 € to 25 € (excluding VAT)
in France. I t should be noted that these Maisons also sell bottles to modern
retailers under private labels at cheaper prices, between 10 and 15 € a
bottle in general.
• I ntermediate prices apply for Champagne makers selling mainly to liquor
services, cafes, hotels, restaurants and nightclubs.
• The highest prices are achieved by the Maisons with a global international
network of sales outlets.
Table 5: Typology of 20 Champagne Brands by Price and Distribution Network in
France
Retail price of
a 75 cl bottle
Prevailing distribution:
super/hyper markets
Prevailing distribution:
Liquor services, cafes,
hotels, restaurants, night-
clubs
Prevailing Distribution:
Global network
>25 € Krug
Bollinger
Louis-Roederer
Ruinart
Veuve Clicquot Ponsardin
Moët & Chandon
Taittinger
20 - 25 €
Laurent Perrier
Pommery
Piper-Hiedsieck
Lanson
Mumm
15 - 20 €
Canard-Duchêne Mercier
Besserat de Bellefon
<15 € De Castellane
De Cazanove
Duval-Leroy
Vranken
Marne & Champagne
Figure 2 shows that prices outside France are higher than prices in France, where
competition is tougher due to:
• Competition from co-operatives of vine growers which process Champagne
for their members or for themselves and mainly serve the French market
• The high sales levels concentrated in the six purchasing centers owned by
the big French modern retailers
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 12
8
9
10
11
12
13
14
15
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year
P
r
i
c
e
i
n
c
o
n
s
t
a
n
t
e
u
r
o
s
o
f
2
0
0
1
Price per bottle outside France
Average price per bottle weigthed by sales
Price per bottle in France
Figure 2: Price of a Bottle of Champagne from 1978 to 2004, in Constant Euros of
2001
Results
Table 6 relates the financial performance of Champagne makers to their main
type of distribution channel used in 2001.
Tables 7, 8 and 9 show details of financial results for every Champagne maker in
the sample. Table 7 presents the financial results of Champagne makers selling
mainly to modern retailers. Table 8 documents the financial performance of
Champagne makers selling mainly to wine specialists, cafes, hotels, and
restaurants. Table 9 presents the financial comparison of Champagne makers
with global distribution channels, i.e. selling both on-trade and off-trade
worldwide.
The financial performance of Champagne makers is analyzed with reference to
three complementary aspects:
• Equilibrium of the financial structure
• Economic and operating profitability
• Financial profitability
Mean and median values are provided.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 13
Table 6: Financial Comparison of Champagne Makers per type of Distribution Channel in 2001
MEAN VALUES MEDI AN VALUES
Major channel of distribution
French modern
retailers
On-trade
distribution
Global
international
distribution
French modern
retailers
On-trade
distribution
Global
international
distribution
Vineyard ownership in hectare
82 75 137 18 45 270
Key Results
Total Sales in k€
67 056 48 180 179 478 55 690 38 896 94 300
Operating I ncome in k€
6 435 12 334 41 423 5 178 9 917 10 372
Net I ncome in k€
1 393 8 367 30 108 1 151 5 270 14 892
Financial Structure
Equity Capital / Total Assets
29% 55% 50% 27% 50% 54%
Equity Capital / Long Term Capital
37% 62% 55% 28% 59% 64%
Financial Debt / Equity Shareholder's Funds
272% 62% 74% 218% 65% 42%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
17,4% -1,3% -7,9% 24,0% 2,2% -9,0%
Value Added to Sales
16,3% 41,7% 37,3% 17,9% 44,8% 34,7%
Labor Costs to Value Added
31,8% 31,9% 41,9% 31,4% 33,2% 45,0%
Financial Expenses to Value Added
37,5% 23,9% 20,9% 38,3% 20,0% 20,0%
EBI TDA to Total Assets
6,1% 10,9% 8,7% 4,6% 12,9% 6,5%
EBI TDA to Sales
9,4% 27,3% 19,7% 9,4% 28,2% 16,8%
Operating margin =EBI T to Sales
9,6% 23,0% 23,1% 9,6% 19,6% 12,7%
Financial Profitability
Profit margin on Sales
2,1% 17,7% 16,8% 2,1% 15,3% 17,8%
Return on equity (ROE)
1,7% 11,6% 11,0% 4,6% 13,2% 9,6%
Growth rate over the period 1997-2001
Growth rate of sales
-2% 13% 9% -2% 16% 19%
Growth rate of EBI T
-9% 82% 775% -25% 28% 66%
Growth rate of Net I ncome
-76% 716% 246% -78% 72% 90%
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 14
Table 7: Comparison of Champagne makers selling mainly to modern retailers in 2001
Champagne Makers ="Maisons de
Champagne"
Canard
Duchêne
De Castellane De Cazanove Duval Leroy
Marne &
Champagne
Mercier Vranken
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 18 0 0 150 0 231 175 82 18
Key Results
Total Sales in k€
53 989 24 903 42 408 55 755 129 880 55 690 106 769 67 056 55690
Operating I ncome in k€
5 178 1 530 1 698 3 129 13 321 6 247 13 940 6 435 5178
Net I ncome in k€
3 295 -3 011 223 1 151 -829 5 868 3 054 1 393 1151
Financial Structure
Equity Capital / Total Assets
30,1% 26,7% 27,9% 21,5% 10,7% 72,1% 11,7% 28,7% 26,7%
Equity Capital / Long Term Capital
55,0% 27,9% 34,4% 25,6% 10,9% 85,0% 17,2% 36,6% 27,9%
Financial Debt / Equity Shareholder's
Funds
45,7% 217,9% 168,5% 263,2% 660,3% 1,6% 548,0% 272,2% 217,9%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
35% -33% 58% 29% 24% 6% 3% 17,4% 24,0%
Value Added to Sales 12,4% 19,3% 10,1% 17,9% 20,0% 14,1% 20,2% 16,3% 17,9%
Labor Costs to Value Added 16% 56% 41% 48% 31% 9% 21% 31,8% 31,4%
Financial Expenses to Value Added 40% 31% 38% 33% 62% 8% 50% 37,5% 38,3%
EBI TDA to Total Assets
12,3% 3,3% 4,6% 4,5% 4,0% 7,2% 6,9% 6,1% 4,6%
EBI TDA to Sales
9,4% 6,3% 4,9% 7,8% 11,5% 11,9% 13,9% 9,4% 9,4%
Operating margin =EBI T to Sales
9,6% 6,1% 4,0% 6,2% 10,3% 11,2% 13,1% 9,6% 9,6%
Profitability
Profit margin on Sales
6,1% -12,1% 0,5% 2,1% -0,6% 10,5% 2,9% 2,1% 2,1%
Return on equity (ROE)
14,6% -22,5% 1,5% 4,6% -2,0% 7,6% 8,3% 1,7% 4,6%
Growth rate over the period 1997-2001
Growth rate of sales
12% -45% 72% -2% -18% -33% 3% -2% -2%
Growth rate of EBI T
-25% -39% 86% -51% -14% -44% 26% -9% -25%
Growth rate of Net I ncome
-40% -221% -85% -78% -126% 16% 5% -76% -78%
For Marne & Champagne, the accounting year 1997 lasts 14 months.
So, it is difficult to analyse the growth rate over the period 1997-2001 for Marne & Champagne.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 15
Table 8: Comparison of Champagne Makers Selling Mostly to Wine Specialists, Cafes, Hotels and
Restaurants in 2001
Champagne Makers ="Maisons de
Champagne"
Besserat de
Bellefon
Bollinger Krug
Laurent-
Perrier
Louis -
Roederer
Ruinart
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 10 153 19 70 200 0 75 44,5
Key Results
Total Sales in k€
14 844 38 138 15 892 112 965 67 586 39 654 48 180 38 896
Operating I ncome in k€
1 261 12 457 3 151 21 953 27 803 7 377 12 334 9 917
Net I ncome in k€
3 413 6 924 1 987 11 739 22 525 3 616 8 367 5 270
Financial Structure
Equity Capital / Total Assets
40,6% 59,3% 68,1% 39,2% 88,0% 36,0% 55,2% 49,9%
Equity Capital / Long Term Capital
49,2% 67,3% 72,8% 43,2% 88,9% 50,0% 61,9% 58,7%
Financial Debt / Equity Shareholder's
Funds
102,6% 41,8% 25,7% 108,8% 4,1% 88,0% 61,8% 64,9%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
8% 17% -29% -8% 5% -1% -1,3% 2,2%
Value Added to Sales 16,5% 55,4% 55,0% 34,6% 55,1% 33,7% 41,7% 44,8%
Labor Costs to Value Added 34% 32% 39% 25% 23% 38% 31,9% 33,2%
Financial Expenses to Value Added 55% 8% 36% 14% 5% 26% 23,9% 20,0%
EBI TDA to Total Assets
2,8% 17,7% 5,9% 13,5% 12,7% 13,1% 10,9% 12,9%
EBI TDA to Sales
8,8% 36,1% 31,6% 24,7% 42,4% 20,3% 27,3% 28,2%
Operating margin =EBI T to Sales
8,5% 32,7% 19,8% 19,4% 41,1% 16,6% 23,0% 19,6%
Profitability
Profit margin on Sales
23,0% 18,2% 12,5% 10,4% 33,3% 9,1% 17,7% 15,3%
Return on equity (ROE)
15,1% 13,2% 3,2% 13,1% 11,2% 13,8% 11,6% 13,2%
Growth rate over the period 1997-2001
Growth rate of sales
-22% 50% -3% 15% 23% 16% 13% 15%
Growth rate of EBI T
94% 99% 10% 245% 28% 18% 82% 61%
Growth rate of Net I ncome
3997% 92% 82% 72% 58% -3% 716% 77%
For Besserat de Bellefon, the accounting year 1997 lasts 14 months. So, its growth rate over the period 1997-2001 cannot be analysed
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 16
Table 9: Comparison of Champagne Makers Selling Both On-trade and Off-trade Worldwide in 2001
Champagne Makers ="Maisons de
Champagne"
Lanson
Moët &
Chandon
Mumm
Piper
Heidsieck
Pommery Taittinger
Veuve Clicquot
Ponsardin
Sub-sample
average
Sub-sample
median value
Vineyard ownership in hectare 0 >760 275 50 470 (*) 270 363 137 270
Key Results
Total Sales in k€
81 465 551 526 86 905 127 739 94 300 77 997 236 412 179 478 94 300
Operating I ncome in k€
10 372 161 788 9 753 9 119 7 550 13 562 77 819 41 423 10 372
Net I ncome in k€
973 98 062 30 182 3 471 4 147 14 892 59 029 30 108 14 892
Financial Structure
Equity Capital / Total Assets
26,0% 52,0% 54,0% 31,0% 66,0% 66,0% 55,0% 50,0% 54,0%
Equity Capital / Long Term Capital
33,0% 57,0% 66,0% 35,0% 64,0% 67,0% 64,0% 55,1% 64,0%
Financial Debt / Equity Shareholder's
Funds
193,0% 46,0% 21,0% 161,0% 30,0% 26,0% 42,0% 74,1% 42,0%
Economic Performance
Sales Growth in 2001 w.r.t. 2000
13% -13% -22% -18% -7% 1% -9% -7,9% -9,0%
Value Added to Sales 31,3% 46,5% 30,5% 23,7% 34,7% 46,2% 48,5% 37,3% 34,7%
Labor Costs to Value Added 36% 28% 47% 45% 64% 49% 24% 41,9% 45,0%
Financial Expenses to Value Added 36% 23% 12% 20% 17% 6% 32% 20,9% 20,0%
EBI TDA to Total Assets
6,3% 15,5% 6,5% 5,7% 3,1% 6,9% 16,8% 8,7% 6,5%
EBI TDA to Sales
16,8% 31,4% 13,0% 11,3% 9,5% 20,6% 35,3% 19,7% 16,8%
Operating margin =EBI T to Sales
12,7% 29,3% 11,2% 7,1% 8,0% 17,4% 32,9% 23,1% 12,7%
Financial Profitability
Profit margin on Sales
1,2% 17,8% 34,7% 2,7% 4,4% 19,1% 25,0% 16,8% 17,8%
Return on equity (ROE)
1,4% 15,5% 25,9% 3,9% 2,2% 9,6% 18,5% 11,0% 9,6%
Growth rate over the period 1997-2001
Growth rate of sales
-35% 21% -24% 45% 1% 19% 36% 9% 19%
Growth rate of EBI T
31% 26% 176% 2028% 3061% 37% 66% 775% 66%
Growth rate of Net I ncome
90% 7% 1316% 197% -24% 103% 33% 246% 90%
(*) When Pommery was sold to Vraken group in April 2002, 450 ha out of 470 ha were kept by LVMH for Moët & Chandon mainly.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 17
I n terms of corporate sales, the total sales of Champagne makers with global
distribution networks were the highest, with a median value of 94.3 million € for
the sample in 2001. Sales of Champagne makers distributing mainly to French
modern retailers follow, at 55.7 million €. Sales of Champagne makers selling
mainly through on-trade distribution outlets are lower, at 38.9 million €.
The financial structure of Champagne makers selling mainly to French modern
retailers is very weak. These companies have a very high level of financial debt,
standing at about 201 to 270% of equity. Champagne makers with mainly on-
trade distribution and Champagne makers with global distribution have good
financial structure, with debt at about 65% and 42 to 74% respectively. The other
financial structure ratios confirm these results.
Based on median value, Champagne makers selling mainly to French modern
retailers have the lowest vineyard ownership (18 ha) compared to other
Champagne makers (45 ha for Champagne makers with mainly on-trade
distribution and 270 ha for Champagne makers with global distribution).
EBI TDA is a measure of wealth created by the operational activity of the
company, independently of the company’s financing, depreciation, amortization
and tax policy. The economic profitability, measured by EBI TDA to sales, is about
27% to 28% for Champagne makers with mainly on-trade distribution, which
register the best performance. Champagne makers with global distribution follow
with about 17% to 19%, which is still a good result. But with EBI TDA of about
9.6%, Champagne makers selling mainly to French modern retailers turn in a
poor performance.
The results are similar for the value added to sales ratio. Value added is the
wealth created by human and financial capital. I t is the difference between total
sales and external operating charges. Since labor costs are internal charges, they
are not included in those external operating charges. Financial expenses as a
percentage of value added are comparatively higher for Champagne makers
selling mainly to French modern retailers. This result is consistent with the fact
that their debt level is the highest. But the highest proportions of labor costs are
found at Champagne makers with global distribution networks, possibly because
big international firms have to pay more business executives.
The operating margin expressed as the ratio of EBI T to total sales, is about 19.6%
on average with a median value of 23% for Champagne makers with mainly on-
trade distribution. Champagne makers with global distribution networks have
the same mean value but a lower median value, 12.7%. These results are
excellent compared to financial results generally in the food and agribusiness
sector. However, Champagne makers selling mainly to French modern retailers
exhibit an average ratio lower than 10%.
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© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 18
The financial profitability ratios show that Champagne makers with mainly on-
trade distribution and Champagne makers using global distribution are quite
similar:
• Their profit margin on sales is about 15% to 17%
• Their return on equity is about 10% to 13%
These results are very good: two thirds of annual Champagne sales usually take
place during the last four months of the year. This means that most sales took
place during the economic stagnation/depression after the attacks in New York on
September 11, 2001.
However, Champagne makers selling mainly to French modern retailers exhibit
very low ratios:
• Their profit margin on sales is about 2%
• Their return on equity is lower than 5%
Clearly, the economic, operating and financial profits depend on the distribution
network and the sales price. Champagne makers selling wine to supermarket and
hypermarket chains showed very low profitability. Champagne makers selling
through the on-trade distribution channel and worldwide networks were very
profitable in 2001. Similar patterns are observed in analyzing financial reports
from various years.
Furthermore, from 1997 to 2001, Champagne makers selling mainly to
supermarkets registered negative growth rates for sales, EBI TDA and net
income. They were unable to keep up the momentum from the sales boom of 1999.
Champagne makers with mainly on-trade distribution, meanwhile, enjoyed very
positive growth rates in business volumes and profitability, and Champagne
makers with global distribution networks grew even faster. They were able to
take advantage of the new millennium and also to maintain that advantage over
the following years.
The financial details provided in tables 7, 8 and 9 show that the family-owned
traditional Champagne makers Bollinger and Louis-Roederer, which only sell
through the international on-trade channels of distribution, achieve the best
results. They are just ahead of Champagne makers with global distribution like
Veuve Clicquot Ponsardin (LVMH group), Moët & Chandon (LVMH group) and
Taittinger, which also had excellent results.
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 19
Conclusions
The findings are not surprising. On one side, the largest Champagne makers are
mass producers with economy of scale and cost leadership advantages. So, they
can market successfully worldwide both in supermarkets. On another side, high
quality Champagne producers rely on their brand equity and are able to sell at a
higher price through a network of wine stores, i.e. specialized retailers. When
they try to sell through supermarkets selling at discount prices, they are not
powerful enough and must accept lower prices in order to be listed. And they fail.
Champagne makers have poor financial results when they only face the market
power of the six major French supermarket operators.
Champagne makers with mainly on-trade distribution and Champagne makers
with global distribution worldwide have learnt how to improve value creation
over the decade, and took full advantage of the new millennium. They also
achieved excellent financial results. However, Champagne makers selling
mainly to supermarkets registered poor financial results.
The results explain why most Champagne makers are trying to increase their
non-supermarket sales, in order to achieve better prices and profitability. But
such a strategy requires the financial means to develop brand awareness and an
international distribution channel.
Most of the Champagne makers selling mainly to supermarket operators face
high financial debt and cannot afford such an investment. They can only access
international sales through partnership with other wine and spirits distributors,
as Piper Heidsieck did when its parent wine and spirit company, Remy-Cointreau
(France), decided to share its distribution network with J eam Beam Brands
Worldwide (USA), Highland Distillers Ltd (UK) and later Vins & Sprit A.B.
(Sweden).
Processors take advantage of branding and economy of scale in production. They
adjust their production strategy in taking distributors’ marketing power into
account.
The paper shows that Champagne makers need a second quality product, like
good sparkling wine, that can be processed at lower cost and sold at large scale
through supermarkets. They usually use a brand name related to their
Champagne brand name. Such a strategy is already undertaken: Moët &
Chandon produces sparkling wine under the brand “Domaine Chandon” in
California and Australia. Champagne Mumm also produces sparkling wine in
California, “Mumm Napa”. Sparkling wines are sold at lower price.
Such a strategy is also implemented by other food processors. For example:
Declerck / I nternational Food and Agribusiness Management Review Volume 8, I ssue 4, 2005
© 2005 International Food and Agribusiness Management Association (IAMA). All rights reserved. 20
• French producers of goose liver (foie gras) also sell cheaper products like
mousse of goose liver under their brand
• I n the European cheese sector, processors sell “gourmet” cheese like
“Roquefort” in shops specialized on delicatessen while they enjoy large
economies of scale with “camembert” and “brie” sold in supermarkets
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