Lovely bubbly: a case for investment in English sparkling wine

Blazingly hot sunshine beats down on a June afternoon in Kent: it is the kind of summer that Charlie Holland, chief executive and winemaker at Gusbourne estate, has not seen for many years. He points a bronzed finger at the base of one of his grape vines. Toeing the ground, he considers the soil. “You’ll often hear that chalk or even sandy soil is a must for growing grapes for sparkling wines. But look here. We do just fine on clay.”

Rows of those green vines, just beginning to bud with fruit, stretch down a slight slope towards the bleak Dungeness coast. Over the Channel lie the foreign markets on which Gusbourne, one of the rising stars of English sparkling wine, will depend for its sales. A listed company, its overseas sales have benefited from a weaker pound and a rising reputation for the country’s wine.

Tipplers who favour this type of bubbly may well have considered putting some money into this expanding market. Once a novelty item for some restaurants and wine shops, English sparkling has won enough praise in the past decade to merit attention from serious investors, including City entrepreneurs such as Michael Spencer.

How to put any money to work — beyond buying wine — is another matter. To begin with, any investment in this nascent industry must be seen as long-term. Few producers of sparkling in the UK have more than 20 years’ experience. It is not so much a young industry — sparkling wine has been produced commercially in Britain for many decades — but one with a relatively short spell in the investment spotlight.

Where growth will come from

While international award winners did appear on occasion in the 1990s, English bubbly only received serious attention from the turn of the millennium with the rise of West Sussex producer Nyetimber. Its success has meant that it has changed hands twice via private sales since opening in the late 1980s.

While the obvious comparison is with French champagne houses such as Lanson or Laurent-Perrier, these makers have a history on their side. Most French producers are a century or more old. That means not only more winemaking experience but more developed distribution channels as well.

Better to compare the UK with New World regions. Consider the US state of Oregon (for still wine). In 1992, Oregon had 5,950 acres of planted vines and was producing 5.2m bottles, compared with 6,200 acres and 5.9m bottles in the UK last year, according to a recent survey by WineGB. By 2015, Oregon had lifted its sales by seven times to 37m bottles.

Two megatrends should give investors in English sparkling wine hope for the future. Global warming has meant longer ripening periods for grapes. That is important because the shift to using the traditional mix of chardonnay, pinot noir and pinot meunier — as used in the Champagne region of France — requires more time on the vines, which is not easy when cold weather sets in early.

As Sam Linter, head winemaker at Bolney Wine Estate in West Sussex, points out, “longer ripening periods are producing more complex” sparkling wines. Ms Linter, the daughter of founders Janet and Rodney, is more than qualified to comment on comparisons. Bolney has five decades of experience making wine.

A weakening currency has made it easier for English sparkling-wine makers to export to the US, Japan and Scandinavia, so far the biggest markets for this bubbly. Sterling has weakened not just since the Brexit vote but since the beginning of the global financial crisis. It has fallen by a third in a decade against the US dollar.

Currency weakness can work both ways for this nascent industry. Spiros Malandrakis at research group Euromonitor International says the English sparkling wine industry “can capitalise on its domestic alternative positioning even if rising production costs will also take a toll on margins”.

Routes to investment

Assuming one is convinced that English sparkling has progressed beyond novelty status for those keen to restrict their “food miles”, actually investing in this young industry is the next hurdle. One can either consider publicly listed companies, some sort of tax-advantaged Enterprise Investment Scheme or a less formal version of private investment.

Buying land speculatively might have once offered an option but land agents in the key growing areas, such as Kent, Sussex and Hampshire, are by now well aware of the interest in producing English wines.

There is a premium to land for viticulture in popular growing areas: easily double the typical £9,000 an acre for non-vineyard land. “At a time when agricultural land values have been cooling off partly due to Brexit, vineyard land has gone the other way,” notes Chris Spofforth, viticulture land expert at estate agent Savills.

For those less keen on private investing but interested in tracking the potential growth of the industry, one should consider the publicly listed English sparkling producers. To do that, we looked at their financial situation in comparison with some listed French champagne makers.

Sparkling and publicly listed

For some time there have been two listed English sparkling-wine makers, Chapel Down and Gusbourne. Both make award-winning bubbly in the increasingly sun-kissed Kentish countryside, about 10 miles from the south coast. That is pretty much where their similarities end.

Gusbourne began life in 2004 when founder Andrew Weeber planted the first wines near the site of the eponymous 15th-century estate. Nine years later the company completed a reverse acquisition in order to gain an Aim listing.

Its premium brand depends on creating lower yield, vintage sparkling wine whenever possible, and charging accordingly. To achieve this Mr Holland has targeted restaurants and upmarket merchants such as Selfridges and Berry Bros & Rudd.

The aim is to create a premium product range and to build volumes steadily. This has meant that, though Gusbourne’s top line has doubled in the two years to 2017, operating losses prevail mostly due to marketing expenses. In July it raised £5m in a private placement to its investors. That placing was made easier by the fact the shares have doubled over the past five years.

Gusbourne has understandably targeted exports, particularly to the US. Mr Holland expects these international sales to have accounted for about a quarter of sales last year. As a comparison, its much larger French peer, Lanson-BCC, which is listed in Paris, sells less than 3 per cent of its product to the Americas.

Smaller yields and higher prices define the strategy of a few of the award winning English sparkling-wine makers, including Gusbourne and the privately held Hattingley Valley. Other estates have decided that volume will be the key to success. Chapel Down has taken this route.

Although listed on the much smaller NEX exchange, Chapel Down has expanded aggressively. It has grown more quickly, by the equivalent of two Gusbournes last year. With more than eight times the sales of Gusbourne, its market value is accordingly larger — at £115m, it is five times that of its junior peer. Chapel Down has accordingly had a steeper rise. Its share price has quadrupled over five years.

Chapel Down has decided to offer a wider price range to accommodate its supermarket buyers such as Waitrose and Marks and Spencer. It has branched out into beer and spirits as well. About 60 per cent of its turnover comes from retail; much of the rest comes via restaurants and sales from estate tourist visits.

The average price of its bottles is about £25, considerably lower than the £35-£40 of niche producers such as Gusbourne and Hambledon. Prices for top English fizz don’t stop there, by the way. Nyetimber Single Vineyard Tillington retails for £100 a bottle.

Size is key to improving Chapel Down’s operating profit margin from last year’s 5 per cent. “We expect to improve as our scale viticulture improves and our marketing and sales efficiency improves,” says Frazer Thompson, chief executive.

But even Chapel Down is tiny compared with the French champagne makers such as Laurent-Perrier, Lanson-BCC and Vranken-Pommery. The operating profits alone of Paris-listed Laurent-Perrier, founded in 1812, are more than five times the sales of Chapel Down (founded in 2001). Average profit margins for this group, too, are about double that of the English producer, with Laurent-Perrier the clear leader.

In recent decades, the three French groups plus others such as luxury brand LVMH (owners of six houses including Krug and Ruinart), have consolidated France’s champagne production. Lanson owns the most with seven champagne producers. Eventually they may well provide a model of what is to come for English producers.

What is most striking about the French houses is that their lenders will allow a lot of debt against their stocks of wine reserves for working capital purposes. Measured relative to their cash earnings or their shareholders equity, it otherwise looks very high. The smaller English producers cannot take on the same debt, as local banks are uncomfortable with lending against future wine sales. Thus English vineyards must still fund themselves primarily via equity.

One owner of an English winemaker complains that lenders here usually cite circular logic to defend their refusal to lend on reserves. “Either they haven’t done it before, or they feel the loans are too small”, he says. Furthermore, despite the increasing popularity of these wines in the UK and abroad, loan officers worry how they can liquidate the inventory in the case of foreclosure.

Eventually, lenders’ attitudes towards English wine reserves as a bankable commodity should change. In the meantime, producers such as Chapel Down, Gusbourne and many others hold wine stock which should produce — prices permitting — predictable cash flows for several years. That in turn should give investors some confidence in the viability of these enterprises once they achieve sufficient scale.

Scale is necessary to help reduce costs. In France, analyst Olivier Lebrun at Natixis points out that with the cost of grapes, bottling and marketing, good champagne makers would struggle to cover costs below €20 (£18) a bottle. Even then, he says, only a few groups such as Laurent Perrier and LVMH have managed to sell as much to export markets, as a proportion of sales, as some English producers such as Gusbourne.

Champagne remains mostly a Franco-Anglo affair.

What do investors think?

Given their rising reputation, and relatively small free floats, it should not come as a shock that a little buying interest has gone a long way with the shares of Gusbourne and Chapel Down. The total share returns of both have far outpaced the FTSE All-share index, not to mention the three listed French champagne makers, since August 2013. The English makers do not yet offer dividends.

While in the past the largest investors in English sparkling wine enterprises have usually been the owners, this has started to change. For example, both Gusbourne and Chapel Down carry large institutions, such as BlackRock, and wealthy individuals on their share registers.

One of the latter is Michael Spencer, the billionaire City entrepreneur and wine lover. He admits that not so many years ago he was “sceptical on the outlook for English wines.” No more. He has become the largest shareholder in Chapel Down, accumulating 26 per cent of the shares.

Mr Spencer turned bullish as he realised he had let his snobbishness about English wines get in the way. As he puts it, he has a substantial cellar of the finest French wines, “enough to survive any possibility of Prohibition”. He now believes that parts of Britain have the terrain to compete with any other wine region, even if it will no doubt take time. He sees his holding as a long-term strategic position.

Follow the row of emerald grape leaves down the slope at Gusbourne and these intersect with history. The Saxon Shore Way runs across the estate, even though the Kent coast now sits miles away. England’s relatively new wine estates need a bit more history behind them, too.

As the sparkling wine industry builds its reputation and grows in scale, the potential for investment should improve as well.