Corks are popping in champagne country as demand bubbles over

Big producers such as LVMH and Laurent Perrier reap rewards of good harvests and a strong export market

The European Union recently announced a series of measures intended to tackle over-supply and falling demand for French wine. But champagne is bucking the trend.

"One can see a certain prosperity spreading throughout the Champagne region," said Etienne Auriau, finance director of the producer Laurent Perrier. "We have had good harvests in 2004 and 2005."

Prices paid to the small vineyard owners across the French region where the champagne grapes are grown have soared in recent years, and are now at a record €5 per kilo, up from €4 in 2000. Some champagne makers, however, especially those without their own vineyards, are having to pay €6 per kilo for smaller orders.

Growth in the world economy is driving champagne's success, together with the willingness of American, Canadian and Japanese consumers to pay high prices for premium branded products. As a result, exports are on the up, growing around 5 per cent annually.

The major beneficiaries are houses with international brands and marketing clout such as LVMH, Rémy Cointreau and Pernod Ricard.

LVMH's Moët & Chandon subsidiary is the largest champagne house. It has 770 of the 34,000 designated hectares where champagne grapes grow and owns Dom Perignon, Krug and Veuve Clicquot.

Profits have surged this year, boosted by strong champagne sales in the Far East. As Bernard Arnault, the LVMH chairman, recently noted: "It's a good time to do business in Japan."

LVMH treats champagne as a high-margin, luxury product. Take, for example, the limited-edition 1996 Veuve Clicquot, which comes in a Pucci box designed by Christian Lacroix. It costs $200 (£110) in the US. In contrast, supermarket chain Asda's own-brand champagne currently retails at £10.67.

Most expect the move upmarket to continue. Laurent Perrier - currently number four by sales volume after Vranken, owner of Pommery, and the family-controlled Boizel - has attributed its growth to the export of premium products. "We have raised our proportion of exports to 64 per cent and our premium brand bottles to 36 per cent," said Mr Auriau.

International drinks companies have also been attracted by champagne. United Breweries, the Indian drinks group, recently bid for Taittinger, which was eventually acquired for €660m (£460m) by a consortium headed by the Taittinger family.

Pernod Ricard, meanwhile, acquired the Mumm and Perrier-Jouët brands when it bought Allied Domecq last year in a £7bn deal. Lionel Breton, who heads Pernod Ricard's champagne business, has made no bones about its ambitions. "Our medium-term aim is to become the second champagne house."

However, supply is set to be an increasingly thorny issue. Few of the 150 large producers meet their own needs directly. They must negotiate with and buy from the 14,000 growers.

"You must expect, in the next 10 years, a battle among the titans for supply," said Bernard Beaulieu, regional head of the French union CGT.

With demand rising by 2 to 3 per cent a year, the growers are getting more powerful. Nearly all of the hectares designated for champagne grapes are already under cultivation. Many expect that new vineyards will be planted, but it is unlikely that increasing supply will reduce the price of champagne. Instead, given the trend towards more exports and premium brands, most expect to see less low-cost champagne in the coming years. Around 1.2kg of grapes go into a single bottle, meaning the production of cheap champagne is less profitable.

"I see no point in keeping bottles for three years to sell them at cost price to supermarkets," said Bruno Paillard, head of Boizel.