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View http://proquest.umi.com/pqdweb?index=103&sid=3&srchmode=3&vins... Databases Document selected: Multiple databases... To Rule Champagne Market, LVMH Courts Grape Growers; Giant Offers Farm Help To Win Long Contracts; A Struggle for Growth Christina Passariello. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 2, 2008. pg. A.1 Abstract (Summary) The conglomerate, controlled by French billionaire Bernard Arnault, has managed in recent years to lay claim to the largest share by far of the Champagne region's limited grape output. Full Text (2159 words) (c) 2008 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. REIMS, France -- For Americans who toasted the New Year with champagne, the odds are about three in five that the bubbly was bottled by industry behemoth LVMH Moet Hennessy Louis Vuitton. The conglomerate, controlled by French billionaire Bernard Arnault, has managed in recent years to lay claim to the largest share by far of the Champagne region's limited grape output. LVMH has done that by assiduously cultivating the independent growers who raise most of the grapes -- including by offering them free farming help. The result is that LVMH, which owns six brands including Veuve Clicquot, Moet & Chandon and Dom Perignon, dominates the $5.4 billion global champagne market. LVMH doesn't break out its champagne sales, but its wines and champagne revenue in 2006 totaled $2.2 billion. LVMH had 18.6% of the global market for champagne by volume in 2006, according to Impact Databank, a market-research firm. The company had more than two-thirds of U.S. champagne sales by value and about 62% by volume. LVMH's strategy in champagne provides a window into Mr. Arnault's overall dominance of the global luxury-goods market. In fashion, France's richest man targeted small, family-owned businesses to build his empire, snapping up brands such as Fendi and Guerlain in the 1990s, from founding clans who wanted their names to live on. In champagne, LVMH focused on the needs of independent grape growers, allowing it to secure a long-term supply. As global demand for bubbly increases -- partly from booming sales in China and Russia -- LVMH's strategy leaves it in a unique position. Independent farmers own 90% of the vineyards in France's Champagne region -- the only source of grapes for bona fide bubbly -- and LVMH is the biggest buyer of their grapes. LVMH is also the single largest owner of vineyards in Champagne, possessing 4,077 acres, or 5%, of the fields available. The French fashion-to-spirits company has achieved a rare agricultural feat: sewing up much of the world's supply of champagne grapes. Yet each year, squeezing growth out of LVMH's champagne business becomes more difficult. Recently, sales growth has come as much from charging more for champagne as from selling more bottles. As they hike their sticker prices every year, LVMH executives are questioning how much consumers are willing to pay. Veuve Clicquot now tops $40 a bottle, while Moet & Chandon costs around $35. By controlling brands and raw materials, the company is shielded from competition and wields greater control over prices than rivals. Fueled by champagne sales, LVMH's wines and spirits unit is expected to have grown more than 10% in 2007. "Who holds the power when champagne demand is strong?" asks Jean- Marie Barillere, director of LVMH's champagne business. "The growers do." One such grower is Odile Dumon, whose family has been selling grapes to Veuve Clicquot for three generations. In the fall of 2006, the French champagne house, owned by LVMH, locked in Ms. Dumon's grapes for another two decades. Though a rival champagne brand offered more money, Veuve Clicquot offered field help, including pruning vines, measuring the sugar content of grapes, and pressing them into juice. "I couldn't do it on my own," says the 48-year-old mother of two, who says she's been struggling to tend her vineyard since she took it over from her parents eight years ago. Over the past few years, older baby boomers in the region have passed their vineyards on to their children, dividing lands up into ever-smaller parcels. Many in these younger generations are losing the ability, time and interest to take care of their parents' estates. LVMH's offer to these reluctant grape growers is a formula used in industries from autos to software makers: an after-sales 1 of 5 1/16/2008 11:48 AM Document View http://proquest.umi.com/pqdweb?index=103&sid=3&srchmode=3&vins... service. Technical services such as determining the presence of mildew and parasites and identifying which grapes are maturing the fastest are provided free. By law, champagne houses have to charge for field services, including grape picking; LVMH provides those at cost. "The objective is to develop loyalty," said LVMH point man Jacques Peters one recent afternoon over a steak lunch with one of Veuve Clicquot's grape suppliers. Mr. Peters, the 61-year-old son of a champagne farmer, created Veuve Clicquot's "relationship unit," to negotiate with farmers such as Ms. Dumon. The company's tactic to draw in farmers was calculated to bear fruit just as the supply of champagne grapes reaches its regulated ceiling. In order for bubbly to be labeled "champagne," the grapes used to make it must be grown in France's Champagne region. But the last acres of vineyards currently allowed in Champagne by French law have been planted in the past decade. France is planning to expand the champagne-grape-growing region. LVMH is in favor of that idea, as a way for the champagne industry to grow. Still, the expansion won't produce any new champagne for at least 15 years -- making LVMH's stronghold on existing grapes even more important. LVMH's hegemony in the region has met some resistance. Some grape farmers say that by doing their work for them, the company is diluting an agricultural savoir-faire that has survived for generations. By making champagne, a wine with rich tradition, part of one man's industrial portfolio, LVMH is creating a dependency that could undercut farmers' negotiating power in the future, they say. "It's dangerous for the equilibrium of the champagne industry," vineyard farmers' union leader Patrick Le Brun said in an interview during last year's September harvest, his fingernails stained red after weeks of picking and pressing grapes. "The growers' hands will be tied." Yet for many in Champagne, LVMH's presence is a win-win situation. LVMH's rise as a champagne powerhouse can be dated to 1990 when it bought the Lanson and Pommery brands -- and their 1,236 acres of combined prime vineyards -- from French food conglomerate BSN SA, later renamed Danone SA. LVMH already owned several brands, so the acquisition was aimed at accumulating grapes, rather than labels. In fact, LVMH sold Lanson, stripped of its vineyards, right after the acquisition and eventually ditched the Pommery brand as well. The purchase gave LVMH a significant amount of land for its champagne houses. But Mr. Arnault realized that to dominate the market, LVMH couldn't just rely on its own vineyards; it had to amass as many grapes as possible from the thousands of landowners in Champagne. That's where Mr. Peters came in. A third-generation member of a champagne-making clan near Reims, Mr. Peters left his family business after finishing university studies in oenology, and started working in one of the region's biggest farming cooperatives. There, as he brought grape growers and champagne brands together, he forged relationships with many of the region's families. farming "I'm a man of the soil; I don't like to be stuck behind a desk," said Mr. Peters as he wove his Audi sedan along the country lanes of Champagne to visit Veuve Clicquot suppliers. When he joined Veuve Clicquot in 1979, the contacts proved crucial at Veuve Clicquot, where, as cellarmaster, Mr. Peters's job was to make sure the champagne house rounded up the maximum number of grapes each harvest. To woo farmers, he organized tours and tastings in Veuve Clicquot's private cellars in the spring and invited growers on all- expenses-paid hunting trips in the winter. Thanks in part to Mr. Peters's efforts, Veuve Clicquot had become one of the most prominent champagne houses by the end of the 1980s. "In the past you didn't know whom you were selling to. At Clicquot, Jacques doesn't treat people as a number," says Isabelle Thevenet, a grape-grower who is a longtime supplier to Veuve Clicquot and also makes her own champagne. In 1990, the champagne industry underwent a major transformation that sowed the seeds of LVMH's strategy in the region. That year, the industry dismantled its decades-old system of regulated pricing in the name of competition, as ordered by the European Commission, the EU's governing body. Since 1959, champagne makers bought grapes from farmers at a fixed price via standardized multiyear contracts, coordinated by the champagne industry's governing body, Comite Interprofessionnel du Vin de Champagne, or CIVC. Starting with the 1990 harvest, however, the EU mandated that champagne companies purchase directly from farmers at individually negotiated prices. It was a boon for champagne farmers. Champagne houses began outbidding each other to buy growers' grapes, sending the average grape price per kilogram that year up 31% to $6.10 from $3.84 at the exchange rates of the time. 2 of 5 1/16/2008 11:48 AM Document View http://proquest.umi.com/pqdweb?index=103&sid=3&srchmode=3&vins... At first, Mr. Peters was confident that Veuve Clicquot's farmers would stay loyal to the champagne house, so he offered only pennies more. It was a big mistake; nearly 15% of Veuve Clicquot's farmers defected that year to rivals offering more money. Yet the opportunity to win them back was around the corner. By 1992, world-wide sales of bubbly had dropped to 214 million bottles from 249 million three years earlier. Grape prices per kilo fell to $4.26 at exchange rates of the time, as brands lowered prices to lure consumers. The drop in prices made farmers jittery about their future, so Mr. Peters made an enticing offer: The standard contract of the time between farmers and champagne houses lasted three years; he offered six. Though Veuve Clicquot was still paying lower prices for grapes than rivals, it guaranteed farmers an income for several years. By the mid-1990s, a demographic change was also sweeping Champagne. As grape farmers over the years had divided and passed on vineyards to their children, the number of landowners soared. As bequeathed parcels got smaller, owners could no longer rely on grape revenues as their main livelihood and took other jobs. Younger generations, especially, didn't know how to farm, and often preferred to find work in big cities. Rene Dessaint says he wouldn't have been able to survive on income from his vineyard alone. A retired teacher and current mayor of the small town of Pargny-les-Reims, Mr. Dessaint uses the $17,500 a year he gets from selling grapes to champagne houses as a way to round out retirement benefits. At 62, Mr. Dessaint has increasingly needed outside help for field tasks such as fertilization. "I hope to keep doing this for five more years, if my body allows it," Mr. Dessaint says. "Physically, it's hard." Mr. Peters thought the best way to lock in landowners such as Ms. Dumon and Mr. Dessaint was by helping them run their vineyards. In 1999, Mr. Peters began sending a grape technician from Veuve Clicquot on visits to vineyard owners for free. The technician would help determine what kind of fertilizer was best for their different types of soil, and recommended treatments when mildew risked ravaging crops. Mr. Peters decided to go further, offering to send farmers hired by Veuve Clicquot to help landowners with time-consuming field work: pruning vines, treating the crops, and harvesting grapes. Sometimes, Veuve Clicquot -- which owns about 1,273 acres of land itself -- sent farmers who worked on the company's own vineyards. When these workers were busy, Mr. Peters's "champagne relationship" unit acted like an employment agency, finding and vetting workers who could help cultivate vineyards. The strategy was a hit; vineyard owners across Champagne were happy to pay contractors certified by Veuve Clicquot to farm their lands. A rise in demand for bubbly ahead of millennium celebrations fueled grape prices, meaning champagne farmers had deep pockets. At the time, grapes were trading at more than $4 a kilo, compared with the $2-per- kilo cost of maintaining a vineyard. Today, more than half of Veuve Clicquot's 950 grape contracts use the champagne house's technical or field services. Based on Mr. Peters's success at Veuve Clicquot, LVMH is trying to build up its "champagne relationship" unit at sister champagne brand Moet & Chandon. Rival champagne houses that aren't part of the LVMH group, including the family-controlled Laurent-Perrier, are also offering similar field services. With less than two years before he retires, Mr. Peters is now taking one more step to lock in farmers for Veuve Clicquot. A year ago, he began offering grape farmers a 25-year contract with the champagne house, the longest ever seen in the region until then. He is sweetening the deal with a 7% signing bonus to the grapes price, which is currently around $7.50 a kilo across the region. Some union leaders, such as Mr. Le Brun, fear the new quarter- century contract will consolidate LVMH's supremacy in Champagne even further. Yet most grape growers are happy with the security it provides. One day before last year's grape harvest, Mr. Peters visited the village cooperative in Villedommange, near Reims, which controls 519 acres of vineyards. Before a crowd of farmers, he talked up his new 25-year contract, distributing bullet-point memos. When it came time to vote, the members accepted his offer right away via an overwhelming show of hands. "The final objective is that the grapes end up at Veuve Clicquot," said Mr. Peters after the meeting. "That's the return on investment." 3 of 5 1/16/2008 11:48 AM Document View http://proquest.umi.com/pqdweb?index=103&sid=3&srchmode=3&vins... Enlarge 200% Enlarge 400% Enlarge 200% Enlarge 400% Indexing (document details) Subjects: Classification Codes Companies: Author(s): Document types: Publication title: Source type: ISSN: Champagne, Fixed prices, Farmers, Family owned businesses, Expansion, Business growth, Wines 9175, 9530, 8610 LVMH Moet Hennessy Louis Vuitton (NAICS: 312130, 315212, 316991, 325620, 339911 ) Christina Passariello News Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 2, 2008. pg. A.1 Newspaper 00999660 ProQuest document ID: 1406276971 Text Word Count Document URL: 2159 http://proquest.umi.com/pqdweb?did=1406276971&sid=3&Fmt=4&cl ientId=17837&RQT=309&VName=PQD 4 of 5 1/16/2008 11:48 AM Document View http://proquest.umi.com/pqdweb?index=103&sid=3&srchmode=3&vins... Copyright 2008 ProQuest LLC. All rights reserved. For help, call the GVSU Library at 331-3500 (Allendale), 331-7331 (Grand Rapids), 331-3928 (Holland), or 800-879-0581 if taking classes elsewhere. 5 of 5 1/16/2008 11:48 AM

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