Today's Wall Street Journal had a story titled "As Champagne Fizzles, Makers Squash Supply." A few items in it caught my attention:
- Champagne producers collectively agreed to pick 32% fewer grapes and reduce bottles produced by 44% this year in attempt to prop up Champagne prices in the wake of falling demand.
- An industry source estimates there are more than 1.2 billion bottles sitting in warehouses.
- Annual sales peaked at 339 million bottles in 2007 and might be 260 million this year so 1.2 billion bottles is a 4-5 year supply. In other words, this "problem" was already building prior to the recession.
Supply and demand constraints
The fundamental law of supply and demand is at work. Normally, lower demand with constant supply would lead to lower prices but there seems to be a collective view by the producers that this is unacceptable (something that we see with California high-end wineries too). In the face of limited levers to boost short-term demand and a reluctance to let prices fall, the only solution left was to cut production (as they have done).
What if prices were allowed to fall?
Let's consider the advantages of allowing prices to float downwards to a new equilibrium:
- Demand would rise, helping erase the oversupply situation. When the economy recovers, a smaller supply overhang will enable prices to bounce back sooner.
- Champagne would avoid losing market share to other sparkling wines and still wine substitutes that may be hard to recover later.
- The Champagne category could use more price-competitive offerings to grow base consumption and attract new consumers amongst people who might otherwise not drink Champagne. "Habits" or preferences once formed tend to persist so there's the potential for a long-term gain in consumption from cultivating greater consumption with lower prices.
Some producers might argue that their brand would be negatively impacted if they lowered prices. I doubt it. Everyone knows we're in a recession and many luxury goods businesses have had to cut prices. It's not like this is an isolated example across categories.
What's your view?
If you were a Champagne producer, would you vote to cut supply or allow prices to fall? I know every consumer and wine collector would choose the latter.
UPDATE: On September 12, the WSJ magazine published a story on the plight of the Champagne industry called Bubbles Take a Bath. It's worth a read.
