Why are some champagnes so expensive?

Krug Rose label 19th Feb 2010At practically every champagne tasting someone asks me this question, or a variation:

"Why are some champagnes so expensive?"

 “Is Cristal really that good?” “ Am I getting value for my money if I  buy Cristal / Dom Pérignon / Krug / ... fill in the blank?"

In this article you’ll not only get a glimpse into the workings of a champagne house to understand how the prices are arrived at, you’ll get an appreciation of why expensive champagnes can still give you great value.

When people ask why prestige cuvée champagnes are ‘so’ expensive perhaps they really want to know what each constituent element costs so as to arrive at the price in the shop, or in the bar, but of course, it doesn’t work like that.

The real reasons why some of the prestige cuvée champagnes are very expensive is that

- they can be

- they have to be

Let’s look at each of these in turn.

In the normal world of buying and selling it is generally true that the higher the price of the product on sale, the lower the sales volume will be.

Louis Vuitton storeHowever things are sometimes reversed in the rarefied world of luxury goods. Some products are said to be ‘Weblen’ products. That is to say that the more the price goes up, the more desirable they become and the more sales go up as result.

A ‘Weblen’ product is the holy grail for brands that operate in the luxury sector and  consequently Rule No. 1 for luxury brands is never to justify the price with logic; for example:

Part A costs $X, part B costs $Y, add in the cost of labour, transport, profit margin etc. etc. and you can see that the price in the shop should be $Z

Although someone within each luxury brand could undoubtedly explain things in this way, it’s an absolute NO NO to even think about revealing this to customers.

After all, and taking champagne as the example, it’s not a bottle of wine that people are looking for when they buy a bottle, it’s a dream, an emotion, a memory, a feeling, a status. Each of these things has a value all of its own that is unique to each buyer and cannot be precisely measured – it’s beyond value and the bottle of champagne is just the vehicle by which all this is delivered. Above all, to buy anything less than an expensive product would just not match the image that the buyer has of the person he or she is, or wants to become.

So the first reason why the price of some prestige cuvée champagnes is high is because it can be and that’s what customers expect.

However, there’s another driver behind the price - most expensive champagnes cost what they do because they have to.

In order for you to understand what I mean by this I should explain a little about the economics of the champagne industry.

The area in which champagne may officially be produced is quite small, ( it covers about 35,000 hectares or  86,000 acres ), and it’s also rigidly controlled.

Everything that happens within the champagne region is regulated:  from the number of vines you can plant per hectare, to the weight of grapes that you are allowed to harvest from one hectare, right through to amount of juice you may press from each kilo of grapes harvested. If you want more grapes, you can’t just go out and plant more vines. That’s not allowed.

All this is done in a bid to maintain the reputation and high quality standards that are associated with champagne and you have to admit that, by and large, this has been achieved. However, it also means the amount of champagne that can be produced each year is limited; it’s just over 300 million bottles per year, in fact.

What’s more, the amount of bottles that each champagne house can produce is limited by the amount of grapes it has available, either from its own vineyards, or from supplies it can purchase from growers who do not make champagne themselves and prefer to sell their grapes.

So when sales reach the limit of what can be produce the only way for a champagne house to increase annual turnover is to increase the price of the bottles it does sell, but this is easier said than done.

Most houses sell a ‘ flagship’ non-vintage brand – these sell in the UK for  between £30-£40 (probably between $40 - $70 in the USA), but this segment of the market is crowded and competition is tough so it’s hard to raise prices.

2 bottles of CristalThis is a major reason why houses also sell a prestige cuvée – the likes of Cristal and Dom Pérignon to cite just two well-known examples – that sell for multiple  times the price of a ‘flagship’ champagne even though the cost of production does not increase in anything like the same proportion.

It’s the generous profit on these prestige cuvées that drives the profitability of a champagne house.

Of course there is money to be made in selling non-vintage champagne if you sell enough of it, but champagne houses usually re-invest a large part of the profit on non-vintage in advertising, marketing, distribution and all their other business activities. On the other hand,  a much greater proportion of the profit on the more expensive prestige cuvées champagne goes straight to the bottom line.

So, from the commercial point of view, prestige cuvées are the engines that keep the business going and that’s why all champagne houses are looking to develop their own iconic prestige cuvée for which consumers are prepared to pay very handsomely.

So the price is what it is because it can be and it has to be.

Phew! After all this talk of prices and profit, it’s important to take a step back and pause a while.

It’s certainly interesting to take a peek ‘behind the veil’ so to speak, and to consider the commercial aspects of champagne, but to focus only on that would be churlish and unnecessary. After all, champagne is all about pleasure, not just numbers, so my advice, whatever champagne you are buying, is not to think too much about the price, but just to enjoy the experience, the dreams, the emotions, the memories and all those other good things you are getting for the price of the bottle.

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