Allegrini 2018

Creating value with cohesion and responsibility in the supply chain: Prosecco at Champagne lesson

Maxime Toubart (Comitè Champagne): “fundamental balance and control of the supply chain”. Zanette (Prosecco): “responsibility and belonging are needed
Maxime Toubart (Civc Champagne) and Stefano Zanette (Prosecco Doc)

Align supply and demand as closely as possible to prevent over-availability from depressing prices or introducing risks of speculation. This is the challenge for all denominations, particularly those which, like Prosecco Doc, are facing tumultuous growth and which need to consolidate markets and stabilize their values. A challenge undoubtedly won by the Comité Interprofessionnel du Vin de Champagne (Civc), the powerful union of winemakers and producers that was born almost 80 years ago, an excellent example for the Veneto-Friulana denomination as it emerged at the meeting organized by the Prosecco Doc Consortium in Treviso in recent days.
“It is no coincidence that Maxime Toubart ( co-president of the Civc and president of the Vigneron Syndicate, ed.) is here - began Stefano Zanette, president of the Consorzio di tutela del Prosecco Doc - because we look with admiration at what Champagne has done over the centuries, the result of strategies that have been refined over time. We, on the other hand, have a short life behind us, 10 years in recent days, which have seen us achieve exceptional results of growth on a national and international level, even in unexpected ways. The year-end figures, up 4.5% on 2018 with 464 million bottles, speak of an increase of up to 485 million bottles. The market demand is close to 500 million bottles, however, we do not have to face the race to numbers, but the consolidation of the markets, increasing quality and the perception of Prosecco Doc, and with them the value of the bottle. We have a defined market that does not overlap with that of Champagne and Metodo Classico. Now we must distinguish ourselves from entry level products that do not have a denomination. Against a growth of 244% of bottles in 10 years, the income of producers has increased: the price of grapes per kilo has risen from 55 cents in 2009 to 1.20-1.40 euros. We have been lucky, but we have also been able to support it with all the tools at our disposal. Now comes the most difficult part: the comparison with the market”.
Governing growth paths means knowing the numbers that describe the scenarios. In this case, those of the Food Industry Monitor of the University of Pollenzo, based on a sample that has an aggregate value of 5.8 billion euros, comparable with the one used in MedioBanca’s calculations.
“In the comparison between Prosecco Doc, including Prosecco Doc, - illustrated Carmine Garzia of the Department of Business Economics of the Supsi Scuola Universitaria Professionale della Svizzera italiana in Lugano - it emerges that the latter has had a lower profitability since 2009, with a gap with wine that is increasing, and on the contrary a higher return on investment. From the “internal” comparison, Italian bubbles versus Prosecco Doc, the latter appears to have higher average revenue growth, lower profitability and yield. Productivity (value of production/material investment) is, on the other hand, decidedly higher”.
Beyond the structural differences between the two types of production, it is necessary to understand why the profitability of Prosecco Doc has a series of problems that it is important to solve for the entire wine sector in relation to the average export price.
“Consider - underlined Grazia - that a large part of the difference in average export value between French wine (in 2018: 6.69 euro/liter for 14.8 million hectolitres) and Italian wine (in 2018: 3.12 euro/liter for 19.9 million hectolitres) is due to the high positioning of the price of Champagne. The forecast of a 14.2% increase in exports of Italian sparkling wines from 2019 to 2021, compared to a 2.16% increase in still wines, shows how an increase in the value of Prosecco Doc, given the production figures, could affect the average export price of Italian wine. In the case of Prosecco Doc, profitability in relation to the number of bottles produced increases less than that observed for wine in general and bubbles. The size and investments in tangible assets therefore do not guarantee greater profitability. This is not a problem, but an opportunity, putting in place a strategy to control prices and margins, whether you want to intervene on quantities or invest in the valorization of the product”.
But strategies for coordinating production and supply of a designation cannot be put in place if the system is not transparent. This is a condition which is unlikely to occur in the Italian wine-growing world and which, in essence, is at the basis of the action of the Comité interprofesionnel di vin de Champagne.
“For profitable growth - explained Edoardo Mollona of the University of Bologna - companies must know what their competitors are doing. The asymmetries in cost structures, for example, the presence of small private individuals and large cooperatives, make it difficult to align prices and facilitate opportunistic behaviour, such as price reductions to take shares away from competitors. Demand elasticity and uncertainty about future scenarios reward aggressive policies in the short term. The complexity of private negotiations, discount policies and shipping costs make prices less comparable. The coordination of production and supply is facilitated by the presence of a demand observatory to continuously estimate demand, also to anticipate systemic shocks, such as increases in production capacity or reductions in demand. Finally, the monitoring of order queues in the supply-chain is fundamental to reduce delays in the production chain”.
This last “warning” does not seem to be related only to the industry, because it fits perfectly to the bubbly sector, where it refers to the supply chain that goes from wine to the finished product through refermentation, as it emerged from the report by Maxime Toubart, who illustrated the tools adopted to protect the Champagne supply chain and its numbers: 300 million bottles per year for 4.9 billion euros, equal to 10% in volume of world consumption of sparkling wines and 36% in value.
“Our strategy is in continuous adjustment - said Toubart - and is based on the balance between all the components of the supply chain represented in the Civc. Volumes have been growing for thirty years and we have almost reached the maximum, equal to 330 million bottles, which we will reach slowly, focusing above all on increasing value. We have worked a lot on quality, without which a good price cannot be obtained, and on “desirability”. We were the first to reduce our carbon footprint and we will continue on the path of sustainability to improve the environment. The Civc manages the supply chain completely to ensure the economic balance between producers and maison de Champagne, protecting it from fluctuations due to irregular vintages and even long aging times. We do this as a “Soviet organization”. We joke about this, but we control every detail from cultivation to market with different tools: the definition of the production for each vintage and the "inter-professional reserve”, the management of all data. The chain ( ed: 33,843 hectares; 16,000 vine-growers, 340 maisons de Champagne; 4,700 forwarding agents, 1,800 exporters) is completely traced from the identification of the vine-growers to the follow-up of production and sales. We supervise all contracts between the winegrowers, who own 90% of the vineyards, and the maisons, who sell 70% of the volumes thanks to a legal framework derogating from the principle of free trade. We carefully evaluate the number of bottles on the market so as not to run the risk of a fall in price or, on the contrary, of speculation due to a lack of product. Producers and sellers both serve the supply chain, which must be balanced in order to continue to work well. The price recognized to the grapes is 6-7 euros per kilo, since the maisons sell expensive bottles. The “inter-professional reserve” is a very important tool that allows us to face the important challenge of climate change, significant production variations between one year and another and also errors of assessment, and therefore to avoid market fluctuations. Constant volumes correspond to stability. The reserve varies from year to year, but is around 200 million equivalent bottles. In addition, we have sales stocks, which increase and decrease according to the situation, which we aim to increase to 1 billion bottles. It is easier to manage shortages than overproduction where you can be tempted to lower prices to sell. In certain vintages we have left 50% of production on the ground: we cannot compromise quality if we want to preserve value”.
In Champagne, it is important to remember, you can only produce Champagne. That is, there is no other possibility to make wine from the grapes of those vineyards. Unlike in Italy, there are no D.O.C. and Geographical Indications that can also give rise to “competing” productions.
“The extraordinary regulation of Champagne - began Michele Fino of the University of Gastronomic Sciences in Pollenzo - is carried out by an interprofessional organization which, representing the entire supply chain and the interests of all, by law is responsible for the control of production, a task that our Consortia do not have. The Italian way has been to dilute the responsibility for control by introducing political mechanisms: it is the Region that accepts the proposals of the Consortia, after consulting the producers’ organizations. Decisions are not taken directly by the side that risks the market in a sort of misalignment between responsibility and consequences. Then there are issues concerning the governance of the Consortia, such as the balance of the different components, which is already in the legislation, and the stimulus to participation that must be a limitation of the hegemony that can be exercised by the larger players. In Champagne, the balance between the maisons that have hegemony on the market by the quantity and the vigneron is guaranteed by the presence of two co-presidents. There is no correspondence between quantity produced and decision-making power, there is reasoning on consensuality and assumption of responsibility of the different components of the chain to protect and stabilize the market. On the other hand, with high remuneration for the grapes and high bottle prices there is satisfaction, contrary to what happens in many Docs in Italy. In these contexts there is internal price competition. In addition, companies with higher prices find it difficult to reduce production and even use their good reputation to increase economic return. Thus, the balance is struck, the price range is opened up and the “qualitative head” of the DOCs is disconnected from the rest. How do we avoid this perverse mechanism? It is necessary to study forms of individual satisfaction that do not undermine the entrepreneurial capacity of the individual, but allow him, for example, to gradually unblock the reserve to a limited extent against documentation that proves that this is not competitive behaviour. This would gradually help the growth of the value of the Doc and at the same time the individual company. These are the creative legal instruments we can think of for adaptation to contingent or specific situations. The 2016 Consolidation Act allows us to do so”.
“What distinguishes the reality of Champagne - concluded Zanette - is a great sense of responsibility and belonging. In the past, we have also proposed rules inspired by the same criteria, in particular on the communication of sales flows, but perhaps the time was premature to understand and welcome them. I believe that we must learn not to formulate precise and demanding rules but rather to develop a feeling of devotion to a Denomination that has taken us so high”.

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