Bordeaux Regional Analysis

Jane Anson, (first published Wine Business International, February 2008)

Christian Seely, managing director of Chateau Pichon Longueville Baron and Chateau Petit Village in Pomerol, has a privileged overview of the workings of the upper end of the Bordeaux market place. At a recent wine conference, he spoke of the economics of making wine in the region. ‘It hardly needs to be stated that over the past 20 years, Bordeaux wines have proved a sound investment at the higher end’. He illustrated his point with figures showing that, since 1986, the price of the first growths of Bordeaux had risen an average of 988%, the second growths 477% and the third growths 245%. It’s not of course just the classified growths of the Left Bank that attracts those rises. In more recent years, Saint Emilion’s Chateau Ausone has become Bordeaux’s most expensive wine during the annual en primeur campaign, and Pomerol stars such as Petrus and Le Pin continue to attract enormous sums (a case of Pomerol’s Chateau Petrus 1982, for example, is currently going for £43,700).

But the figures also starkly illustrate the disparity in the Bordeaux marketplace. Over the same 20 year period, the price of the ‘basic Bordeaux’ has remained more or less unchanged, fluctuating between €800 and €1,200 per tonneau (a tonneau contains around 1,300 bottles). Bordeaux has around 10,000 winemakers, 400 negociants and 120 courtiers, and one out of every five adults in the region is involved in the wine business either directly or indirectly. But the spectacular growth rates concern only perhaps 200 – at a generous estimate – of the region’s properties. These are the ones with a secondary market that sell on in auction houses and make margins at every point of the retail chain. For the rest, the competition from emerging wine producing countries, falling consumption in France and tougher drink driving laws have all proved heavy burdens.

Bordeaux is still France’s largest quality wine region, making 40% of its AOC wines, and as such is enormously important to the French economy as a whole, for which wine created US$7 billion towards the GDP in 2004. International corporations, from Peugeot to Louis Roederer to LVMH have invested in the region in recent years, taking control of flagship properties such as Chateau Guiraud, Chateau Pichon Longueville Comtesse de Lalande and Chateau Yquem. However, in landowning as elsewhere it is a two-speed economy. While appellations such as Saint Emilion and Margaux have land prices of up to €4 million per hectare, French bank Credit Agricole is the biggest viticultural landowners in Bordeaux today, having repossessed so many smaller vineyards, and prices in the less presitigious appellations have fallen steeply from highs in 2001 and 2002.

Sales both domestically and to export are equally shaky. Overall, sales fell for five straight years from 2001 to 2006, although figures for August 1 2006 to July 31 2007 stabilised, reaching 5.67 million hectolitres, up 0.4% from the previous year. Of this 32% was sold in France, and 68% overseas. Russia in particular has seen strong growth, with exports up 54% to 30,400 hectolitres. On the export market, sales rose 3% in volume, 4% in value. The figures however, reveal more worrying trends when broken down by appellation (see box) – particularly again for the basic red Bordeaux, which continues to lose market share.

The exposure of almost 35% to the French domestic market is also risky. Annual French wine consumption fell by 11.1% to four billion bottles between 2001 and 2005 and continues to decline. France, currently the world's largest consumer, is expected to fall behind both the US and Italy by 2010. Today, only 32 million French people consume wine (about half the French population) and only 21 percent aged 15 or more consume wine regularly. This has a major impact on the amount consumed which in the last four decades has gone from 160 litres per person per year to about 67 litres today – and it may be no coincidence that the latest figures from the FEVS (Federations Export Vins et Spiritueux) show that one of the two French regions with runaway success, Cognac, is over 90% export (the other, Champagne, is still around 50/50, although with exports rising fast).

The market structure of Bordeaux is unlikely to change, partly because of the vested interests in the system. For a start, power is concentrated – overall, 70% of Bordeaux wine is sold by the 400 negociants on the Place de Bordeaux. In 2003 (latest figures available at the Union des Maisons de Bordeaux), their total turnover was €3.3 billion (€1 billion for export, with sales in over 160 countries), and in 2004, 44 wine merchants had a combined turnover of €2.1 billion, accounting for 84% of the total turnover of the Place. And just 20% of courtiers account for 80% of transactions. Almost all wine merchants also own chateaux, and have exclusive deals to distribute others, meaning that the structure cosily supports jobs and historical relationships within the region itself. It also means that the focus of Bordeaux continues to lie not on large brands but on chateaux, whether the prestigious names or the smaller properties. The biggest brand in Bordeaux remains Mouton Cadet, with annual sales of around 1.3 million cases, but sales in the US have reportedly dropped 300,000 cases per year since 1992, and in a world where Yellow Tail sells over one million cases, can Bordeaux hope to ever have a truly international brand?

Pascal Loridon, marketing director for the CIVB (Conseil Interprofessionel des Vins de Bordeaux), comments. ‘The organisation of the trade in Bordeaux will not allow a brand of 10 million bottles. Maybe as cooperatives start working together this will happen, but globally it just doesn’t correspond to the structure of the Bordeaux vineyards. I wish there could be more, but very few companies are really dedicated to brands. They don’t have that mindset, they are dealing with grand crus and petit chateaux, but their business model is not fully brand minded.’

Bill Deutsch of WJ Deutsch & Co, the US’s fourth largest wine importer, annually importing over 9 million cases of wine, including YellowTail, import Andre Lurton’s range of wines from Bordeaux, including Chateau Bonnet. He is blunt about the region’s chances of creating an international brand. ‘Frankly, don’t bother. A Bordeaux brand will never happen. You could never sell 100,000 cases in the US for the simple reason that Bordeaux doesn’t make the kind of wine that large numbers of people want to drink. Any successful brand must contain a merlot, a cabernet sauvignon and a chardonnay, and besides the lacking grape, Bordeaux just can’t deliver a mass market taste profile; it’s too acidic, too tannic, too lean for majority tastes.  You need at least 500,000 cases to be a player in the US market, at a maximum of US$7-8 (in the UK that figure would be closer to 50,000 cases). To achieve that, you need to spending at least 10% of the retail price on ATL marketing. The figures just don’t stack up from Bordeaux. Even if producers can meet the price point, they would have no money left over for marketing.’

‘And then there is the labelling. Chateau Bonnet is sold as a Sauvignon in the US, or as a white Bordeaux, or as an André Lurton. But never as an Entre deux Mers. The Bonnet white taste profile works in this market, but if Bonnet came from California they would sell 100,000 cases, not 10,000 – the origin is so key.’

James Ryland, the marketing director for André Lurton, comments, ‘This doesn’t mean there’s no opportunity for Bordeaux, just that chasing after bigger production in itself won’t work. The only route is bloody hard work. Concentrate on the US$10-15 range and try to push hundreds of 20,000 case properties.’

Can the smaller properties make real inroads into the market? ‘The problem,’ says Thierry Arnaud of Chateau Puy Arnaud in Cotes de Castillon, ‘is the fractured nature of the market. The small producers find it harder and harder to work with négociants, who just are not interested in taking on wines that they have to work hard for, and the négociants are incapable of working together to build a brand that will work on a large scale.’

Bur this may in fact drive many smaller producers to take control of their own marketing. Arnaud, despite his words above, bought Puy Arnaud in 2000 after selling Chateau Pavie, as a property selling almost the entire production in bulk. He has since raised the profile and entered into the Place de Bordeaux in just five years, a very difficult feat for a small property. Other small chateau owners take the view that direct selling offers great possibilities, particularly if they emanate the approach of bigger structures. ‘Increasingly,’ says Loridon, ‘there are brands which are chateaux: Chateau Pey de la Tour is a brand, Chateau Bonnet is a brand, Chateau Tour de Mirambeau is becoming a brand. These chateaux are treated as a brand with the authenticity of a chateaux, and that is a model that more and more properties should be following’. The CIVB is helping this approach by underlining the word chateaux in its ongoing ATL advertising campaign.

Gilles Laurencin, owner of a small property in the Premieres Côtes de Bordeaux, launched in 2005 a branded wine known as CABS, a blend of cabernet sauvignon and cabernet franc, with a London black taxi cab on the label. ‘I had heard the word ‘cabs’ referring to a blended wine when in California,’ says Laurencin. ‘I thought of developing it for the English market, but it’s in the US where it has really taken off.’ Today he sells through Beverage and More stores in the California, and is thinking of buying in grapes to expand production.

There are other signs that Bordeaux is freeing itself up in certain areas. The Côtes – Castillon, Blaye, Premieres Côtes de Bordeaux and Côtes de Franc – traditionally seen as among the most rustic appellations, with many entry price wines, are now working together, creating one overall appellation as opposed to four separate ones. This means, importantly, that there will be 54 appellations in Bordeaux as opposed to the current 57 from 2008. Côtes de Bourg has so far been unwilling to join, preferring to keep its own identity. Christophe Chateau, president of the Union des Côtes de Bordeaux said, ‘This association will make things simpler in the eyes of the consumer – one overall appellation, with the communal names retained for a sense of place. The aim is to have access to greater stocks of wine, so we can create effective brands. Overall, we have nearly 10% of the production of Bordeaux, which gives us great negotiating power.’ They are concentrating largely on the French market – where there is higher recognition of the appellations – but are looking to expand beyond their current 10% export.

The other key indicator of change in Bordeaux is in its approach to working with supermarkets, an area that traditionally it has been weak and is of course essential for any successful strategy in the modern retailing world. Jonathan Evans, Managing Director of Summit, the CIVB's UK Promotions Agency, says, ‘There is a healthy market for small, ‘hand-crafted’ niche wines. Even UK supermarkets are strengthening their ranges at the £5+ price points to encourage consumers to try new styles and of course to trade-up in price.  One could argue this is where it's counter-productive to be a global brand. Better to be a small, chateau label with the pulling power of the Bordeaux region behind you.

I think this can only help Bordeaux. In marketing terms, the top end, aspirational wines create a positive ‘halo’ over the rest of the wines from the region. In the UK we see the real opportunity for Bordeaux in £5 - £15 wines. In order to command this price premium, Bordeaux average price is currently 30% higher than the average UK still light wine price, image is critical. Bordeaux's top end provides this much needed image factor.

‘But in supermarkets, the cost of display is prohibitively expensive for smaller producers such as most of those from Bordeaux and has often been the domain of large brands. However, assistance from the CIVB and increasingly other generic bodies, means smaller brands and products can benefit from the huge sales surge display can deliver. We are now in our third year of funding display at major supermarkets, at key times on behalf of a significant range of Bordeaux wines (around 90 wines in 2007). Participating wines are then responsible for funding the price discount.’

In UK supermarkets, Bordeaux has seen two years of increased sales, standing at +11% in volume. From January to August 2006, there was a rise of  +5% in volume and +8% in value. The average selling price has gone from £4.87 at the start of 2007 to £5.22 today. This seems to be the most likely scenario for the future of Bordeaux. The sub 5 euro wines will cease to have a market, while the rest – either mid range or premium – have a real opportunity to prosper. Promotions such as 100 Everyday Bordeaux has a real opportunity to cement this idea.

 

Progression of sales from 2006/2007 per appellation

Pomerol, Saint Emilion and Fronsac +3%

Medoc and Graves +2%

Les Cotes -4%

AOC Bordeaux Rouges -6%

AOC Bordeaux Superieur -5%

Bordeaux whites +2%

Bordeaux moelleux + 7%

Bordeaux liquoreux +2%

(source CIVB: IRI France)

Top Bordeaux Brands

Mouton Cadet 1.3 million cases

Malesan, Castel – 1.06 million cases

Baron de Lestac, Castel, 750,000 cases (no 1 in terms of growth)

Dourthe No 1  150,000 cases

Marquis de Chasse, Ginestet, 125,000

Yvon Mau Premius Exigence, 75,000 cases

Calvet Reserve 85,000 cases (+50% from 2006, and the majority of that in the UK market)

Sirius by Maison Sichel – 80,000 cases

Mascaron par Ginestet, 25,000 cases (higher quality brand)

Michel Lynch by Jean Michel Cazes