As mentioned in our post on the recent history of the fine wine market, the arrival of Asia had a profound effect on the price of Fine Wine. Today, continuing our series looking at whether or not wine is still a good investment, we’ll be looking at this and other factors that have affected prices so dramatically.
Asia – One Man’s Definitive Decision
In 1996 Li Peng ,the fourth Premier of the People’s Republic of China, made the auspicious decision that only wine, and not spirits, would be served at State Banquets. His advisors suggested that the best wine that money could buy was from Bordeaux, and the rest they say is history. This state-approval of drinking wine, coupled with a dual rise in an overall westernised eating and drinking trend and a jump in China’s GDP from $856billion to $2.25trillion, made for a surge in demand for the best cult wines in the world.
The key point about the emergence of the Chinese consumer was different way in which he approached fine wine: bottles are mostly bought for either formal banqueting or as a gift. Neither of these involves the purchaser being directly interested in what’s actually in the bottle, and instead is seen as marker for the generosity of the giver, the more expensive the better. The most profound effect that this has had on the Fine Wine market is the diminishing effect on the role of the critic and their scores. In traditional markets, critic scores are a key factor in the price of a wine. With the new emerging consumers only concerned with brand, irrespective of vintage variation or score, there has been a levelling of prices across vintages.
Critics – More specifically Robert Parker Jr
Robert Parker Jr is one of the worlds most famed and respected wine critics, a man whose taste buds were so valued as to be rumoured to have been insured by a leading UK merchant. Most importantly for traditional markets, this man’s judgements can and do have a profound effect on the price and demand of wine.
His fabled 100point system, where 96-100 is the score given to a wine of extraordinary quality. Wines that attain the perfect 100 have historically cost over £3000 – a factor that has led to many wines jumping in price after being rescored. Most recently with his rescoring of the 2009 vintage where Chateau Smith Haut Lafitte, leapt practically overnight from £650~ to £1500~ upon receiving 100points. Whilst this kind of volatility in prices is rare and, thankfully, usually happens for the better, the role of the critic cannot be denied, despite the aforementioned challenge from brand-focused Chinese.
Scarcity – Rare as Hen’s teeth
As with all commodities, rarity commands a premium and due to several factors, such as the illiquid nature of Fine Wine combined with the age old problem of route-to-market, added to a limited production per vintage can lead to many wines being incredibly sought-after and rather pricey.
A change in the dynamic of a fine wine brand, particularly one with low production levels, can also lead to a movement in prices. Henri Jayer finished making wines in 2001, as well as only producing less than 300 cases of his top wine Vosne Romanée 1er Cru Cros Parantoux. Ten years later and a case from the 1985 vintage, cellared at the Domaine, was sold for $265,200 at Auction in Hong Kong.
Merchant and Producer Hype
Wine merchants and producers can often be found guilty of overhyping wines and vintages. The most obvious recent example is the over-hyped and under-delivered 2009 vintage – pitched as the 3rd vintage of a century within 10 years. Whilst many wines are of excellent quality, others haven’t been so lucky: Chateau Talbot 2009 has fallen from its en-primeur release price of £415 to today’s £350.
However, perhaps the most eye-opening examples was the decision of two of Bordeaux’s top Chateau to take advantage of the Chinese love of the number 8, with Mouton Rothschild commissioning Xu Lei to design their 2008 label, and Chateau Lafite Rothschild stencilling the bottle with the chinese symbol for 8. On the back of both of these announcements the prices for both wines spiked, with Mouton 2008 over doubling in price in a matter of hours. Thankfully these events are few and far between and as markets mature, such publicity stunts won’t likely garner so much attention.
En Primeur – Looking at Back Vintage Value
Traditionally the point of En Primeur, coming from the French “as being new”, was to ensure adequate cash-flow for the wine producer who would otherwise have to sit on assets for several years before realising the gains. Often referred to as Wine Futures, the practise of buying wine whilst it’s still in the barrel and then waiting two years before it’s released has worked for many years; the advantage for the customer is that they, hopefully, achieve a cheaper price by aiding the producer and being first to the post.
In recent years this model in Bordeaux Futures has distorted somewhat (we’ll address this in more detail in the next of this series) and the knock-on effect has been quite profound. Since 2001, when the millennial 2000 vintage was released at higher than expected prices, customers realised that value was to be found by looking backwards to equally good but less pricey back vintages; in the case of 2000, to the 1995 and 1996 vintage. The net result is that every time a new vintage comes out that, rightly, commands a premium, it pulls up the price of older vintages.
Emerging Markets – Looking beyond China
Given the surge in prices on the back of new and continuing demand from China, everyone is wondering where the next big market will be. Economists points to the other BRIC nations, Brazil, Russia and India, which all share similarities with China with regards to Fine Wine. Specifically:
- A growing hyper-wealthy class,
- A boom in demand for luxury goods,
- A loosening of import restrictions, combined with the signing of Fair-Trade Agreements.
As with Hong Kong in 2008 which dropped all import duty on wine, so too are there hopes for Mumbai the new financial hub of 21st century India, to become a significant Fine Wine consumer centre. If this demand materialises, prices are likely to only go one was as the supply is finite. Robert Parker’s 2004 prediction of First Growth prices peaking $10,000 a case, seems all too prescient.
Wine Prices then are only set to rise and the above factors will doubtless lead to higher prices over the next decade. We believe that there is still significant opportunity for the savvy wine investor. To recap:
- Increased demand from China has had a significant effect on wine prices in the past decade. The country’s economy is still growing at over 7% and there are now over a million millionaires,
- As Chinese and other emerging market consumers become more sophisticated, the appeal of brand will broaden and the dominance of wine critics will return,
- As new markets open up, wine allocations will drop in developed markets leading to increased scarcity and higher prices,
- En Primeur has over the past decade been a driving force in pulling up wine prices, and come the next “vintage of the century” we see no reason why this practise won’t continue.
We hope you’ll continue following this series as we look next time in detail at the En Primeur system, how it came about and where it’s going to.