How to Avoid Wine Investment Scams

With another story in the news of yet another fraudulent wine investment company disappearing without a trace, leaving customers high and dry, we thought it would be good to highlight the less savoury side of Wine Investment and provide some helpful pointers. More specifically, we’ll be addressing:
  1. The Wine Market.
  2. Market Members.
  3. Information is Key.
  4. Spurious Claims.
  5. Making the Most of Your Investment.

Bernie Madoff being led away by the authorities after being found guilty of a running a giant ponzi scheme. Wine scams are not as long lived or widely reported as Mr Madoff”s.

 The Wine Market – An Unregulated Market:

To recap, by unregulated market here, we’re following the FSA definition of an unregulated market, as one that is not covered by Financial Services and Markets Act 2000. The long and short of this is that, as wine is not a financial retail product, anyone can sell it or offer advice on it. However what one cannot explicitly do is offer specific investment advice on a particular wine, “this wine will make you X amount of money” or “investing in these wines will get you 300% returns” (which we look at in more detail below). Thus wine-investment is quite a grey area. For example we can recommend the 2001 Cos d’Estournel as an under-priced (v.s. its peers) vintage of Cos d’Estournel, and say that it’s price has risen from £650 two years ago to around £875 today, but we cannot recommend that it will continue this rise in price and be, say, £1095 in a further two years.

Market Members – From Funds to Fraudsters:

As we’ve briefly touched on before, the wine market has evolved from solely consisting of traditional merchants/negociants, to now include traders, brokers, funds and, to refer to them under their colloquial name, bucket-shops. Definitively a quick run-down of the distinctions between them for the uninitiated should show the differences, however the line between their distinct roles is blurred as many of the below trade and broker wines depending upon market conditions.

  • Traditional Merchants or Négociants have long established and storied histories, often with exclusive agency agreements with producers, usually making 10-40% margin in doing so.
  • Traders buy wine on the grey market, from other traders or brokers who have access to reserve stock, generally making 10-20% margin.
  • Brokers offer to place wines on their client’s behalf, taking a similar fee to the trader in doing so.
  • Funds buy wine from all of the above for a defined period of time and then have to sell the wine, sometimes at a loss.
  • Bucket-shops/Boiler-Rooms, such as the firm recently mentioned in the news, often don’t buy wine, offer imaginary stock to customers at 20-60% over the market price and then disappear with the proceeds. To avoid these two market members the key is information, and this is where Vinetrade can help.

Information is Key – Know your Wine Price:

As with everything in life, the more you know, the better position you’re in to make a decision. If someone calls you and offers you wine unsolicited at a certain price saying that this is a “one time opportunity”, the first thing you should do is check the “real” market price. Vinetrade tracks the real market price daily, on hundreds of investment-grade wines, and so will give you a clear indication if you’re likely to be paying more than you should. Secondly, check the company’s history, ignore testimonials on the website, and go straight to the official statistics provided by Companies House, or in an easier to read format, via Duedil. If the seller’s website states that they have years of experience and have been trading successfully for an equally long time, but the company was only incorporated last year, alarm bells should be ringing. A further check is to see what other companies the Director of your seller is also a director of. If they’ve been involved with either several dissolved companies, or offering land-banking schemes, you should likewise be wary.

Spurious Claims – A Case Study:

One of the most misleading themes that we often see on wine-investment guides or websites is the reference to the 2008 Bordeaux vintage, and particularly to the almost unbelievable price rises that occurred post En Primeur release. Often a website/guide will include a handy breakdown of the top wines of the 2008 vintage En Primeur release price, including Châteaux Lafite, Mouton, Carruades de Lafite and Pavillon Rouge, to name but a few and then their price in the following years.

Now, the key point is that these wines were all released mid-recession, when all of the financial markets were in turmoil, and the Bordelais and Chateaux owners were terrified that no one would buy their wines, especially from a less than stellar vintage. So as any distressed seller does when they have to sell their wines, they dropped the prices to pre-2005 levels and hoped that they would sell. Looking back at historic 2008 release prices from merchants, you could’ve bought a case of Mouton for £1950 and a case of Lafite for £3375; quite unsurprisingly the savy buyers out there snapped up these wines and made a killing as the markets recovered due to the stabilising effects of the G20 and QE. The other crucial point about 2008, specifically with regards to Château Lafite and Chateau Mouton was their decision to capitalise on the Chinese love of number 8, with both Châteaux adorning their bottles with Asian oriented designs. Wines that were released cheaply and then subsequently rose in price, spiked even further, Mouton 2008 rocketed almost over night from under £5000 to over £8000. The crucial point with all of this is that it was a one off event, driven by the economic turmoil and the huge rise in demand from the East.

Finally, concerning misleading claims revolving around the 2008 vintage, one often comes across handy price graphs showing the meteoric rise of the top 2008 releases inferring that all wine investment behaves like this. However, what they nearly all fail to show is the post April 2011 market correction – Mouton 2008 is currently trading at around £3600, and Lafite has fallen from its high of £15000~ to today’s £6100~.


Chateau Lafite 2008

The post April 2011 correction was not kind to those wines that had risen to previously unheard of prices: Lafite 2008 crashing back to earth with a bump.


Making the Most of Your Investment – due diligence, prudence and timing:

Clearly, if you bought wines from the 2008 vintage En Primeur, at release prices, and still haven’t sold your wines, you’re nonetheless in a better position than many who have invested in other assets. With the rate of inflation of under 5% average over the last 3 years and with only one year’s storage costs, the rate-of-return on your investment would be significantly pleasing. The gist of this, is that all investments merit prudent research and timing is crucial. Whilst I doubt we’ll see the likes of the 2008 vintage, and all it’s knock-on effects, for a while, stranger things have happened. Upon researching this post we came across a rather amusing post that in hindsight could not be more wrong.

Additionally, one should never forget the importance of context when looking at fine wine’s investment history/potential. Lafite 1982 has performed far better than anyone ever expected, least of all I suspect Chateau Lafite themselves,  but the fact that it would have offered 900% investment return in 2009, had one bought in 1983, does not mean that all Bordeaux performs in such a stellar way; to wit, such headlines are appallingly misleading.

Ultimately, wine is a proven asset class with regards to investment for reasons that we looked at in our previous series “Is Fine Wine A Good Investment”, either on its own or as part of a diversified portfolio. To avoid the dangers of companies like the one listed above the rule is simple: Do not buy from them – for if it sounds too good to be true it certainly is. If you like the idea of investing in wine Vinetrade is uniquely placed to help you, with regards to wine advice, storing your wines, supply at some of the keenest prices and helping you rationalise your investment without loosing a substantial amount in fees upon exit.

Is Wine a Good Investment? – Final Thoughts

In our series “Is Wine a Good Investment” we’ve looked at what specifically wine investment is, a recent history, the factors affecting the market, En Primeur and also where the wine market looks to be going; all with a view to answering that question. In this our final post we look to answer that question specifically as well as summarise the previous posts in the series. To whit:

  • An investment, but a good one? – Points to consider.
  • Which wines? – Longevity  Popularity
  • Selling Wine - The crucial exit.
  • Should I invest in wine?

    Prices of some Bordeaux 2009 wines rose dramatically after being given 100 point scores by critic Robert Parker.

An investment, but a good one?

As we discussed in the first post in the series, Fine Wine makes a very attractive case for inclusion in any investment portfolio, as it is a fungible, tangible, finite, tax-exempt (in parts),  sought-after and a historically proven asset class. There are several key points worth considering:

  1. What is the cost of the investment?
  2. What are the risks?
  3. Buyer Beware.
  4. What are the returns?

Firstly the cost of wine investment, beyond the initial outlay, are the financing and storage costs. Financing simply is how much capital you’ve got tied up in the wine, and also whether you’re paying interest on that capital. Storage costs are thankfully much easier to calculate and most bonded warehouses or storage companies will charge around £12-18 pounds per case per annum, including insurance.

Secondly, the risk is the condition of the wine you’re buying. One should always check the condition before you buy; that is, make sure the case is in-bond, in it’s original wooden case (OWC), that it doesn’t have foreign import-strip labels like US strips, and that the levels in the bottle are all into the neck. Thankfully Vinetrade only deals in such high calibre stock, so the main risk of the investment, other than price variation, is mitigated.

Thirdly, one of the less savoury aspects of wine investment are being offered stock by an unknown or an disreputable source. There are cold-calling companies and boiler-rooms that will try and force overpriced wine on unsophisticated customers at 20-50% over the market price. Leaving you with a wine that’ll never be realisable at the price you paid.

Finally, what are the returns? Ultimately that depends upon which wines you choose, how long you hold them for, and when you sell?

Which Wines?

Paramount to any investment should be research and due diligence. It is all very well going to Bordeaux saying that you’d like to invest in wine, only to end up with 100+ cases of Château Maucaillou 2008 (certainly not a bad claret as it will improve with age, but definitely not investment grade). A term often passed around in the trade and media are “blue-chip wines”, with regards to Bordeaux these are the top 50 or so Châteaux, and more importantly the First Growths (Châteaux Haut Brion, Lafite, Latour, Margaux and Mouton), that have the pedigree, high critic score and volume of trade, as well as agebilty and track record, to be called investment grade.

Outside of Bordeaux, and whilst they’re less readily available they are by no means less popular: the top Cote Roties and Chateauneuf du Papes from the Rhone valley, the likes of Domaine de la Romanee Conti and Domaine Armand Rousseau to name two from Burgundy, the wines of Aldo Conterno and Antonio Gaja from northern Italy, and Cult Cabernets of the Napa Valley like Dominus and Ridge Monte Bello, all merit inclusion in the set of “investment grade” wines.

However, as previously mentioned the role of the critic is a very important factor to consider when choosing your wine, as too is the vintage. Pichon Lalande 2005 is a classic example of both an excellent pedigree Château and a stellar vintage, but unfortunately showed badly in the eyes of Robert Parker, with a meagre score of 86 points, and so too in terms of investment performance. Thus the returns that one can make on wine investment all comes down to choice and timing. Taking a recent example, Château Lynch Bages 2009 was released En Primeur at around £900, upon physical release two years later, and rescoring by Robert Parker, the demand and price jumped to £1300, making it a 30% increase over two years.  Such sizeable price increases over such a short term are rare and the more common increase is usually less than 5% YOY, it does however entirely depend upon which wine you choose and, arguably, whether it is in vogue or not at the time.

Selling Your Wines

Possible the biggest vexation of any wine investor is realising the returns on their portfolio. Historically the only place to sell your wine was at auction, and in those days there was less of a market, or need to. With the rise of the brokers and Wine Funds on the scene, a huge increase in market liquidity has taken place and whilst it is much easier and faster to sell your wine, it isn’t without problems, primarily due to antiquated nature of the market.

Furthermore before the rise of the ubiquity of the internet, it was very hard for sellers to ascertain whether they were getting a good price on their wine from their merchant or broker, and although these days every merchant puts their price list on-line, a seller is still liable to lose 10-20% of the value in commission. Thankfully Vinetrade charges a minimal fee by comparison and allows you to list the price you’d like the case to sell for.

Should I invest in wine?

Although this blog is, of course, naturally biased towards the affirmative, we believe that with careful choice, an investment in wine is essential to any diversified portfolio. Both in terms of potential for gain and sheer enjoyment of this alternative investment, the wealth of history, content and information that’s available to be discovered. Ultimately if you’ve found your way here and have read this series of posts then you either do own fine wine, with an eye for investment, or you’re ready to. The key points to remember are:

  • Always buy from a reputable source and check that what you’re buying is in acceptable condition (Vinetrade offers both of these services).
  • Wine investment does not, currently, offer a quick return. Expect to speculate for 5 years or more.
  • Only invest in wines that are investment-grade, the best thing to do if you’re unsure is ask.
  • Due to storage fees and logistics it makes more sense to invest in fewer higher value cases than a large number of lower value cases, unless intended for a quick return.
  • And the truism that all wine investment guides say: “the worst thing that can happen with your wine investment is that you end up drinking it.”

Investing in Wine on Vinetrade

Investing in wine via Vinetrade is very simple and can either be done entirely online or with the help of our Sales & Marketing Manager.

  1. Decide how much and for how long  you want to invest, as well as how risk-averse your portfolio will be.
  2. Credit your Vinetrade account on-line.
  3. Start bidding on the wines you’re interested in.
  4. When your bids are successful, we’ll handle all the storage and logistical side of your wine investment.
  5. You can track the value of the wines using our Watchlist feature.
  6. Either upon advice, or when you feel the time’s right, you can place your wines up for sale, at a price you choose.
  7. When they sell, we’ll then credit your account with the funds, that you can withdraw whenever it suits you.

The Future of Wine Investment

As we’ve mentioned previously in this series, the history of wine investment is a relatively recent one, and predicting where the market might go, or even extrapolating where it’s come from with a view to future events is quite difficult. In attempting to see what the future of wine investment might be we need to consider the following:

A vineyard in Burgundy

A vineyard in Burgundy. Despite the Bordeaux crash that started in 2011, Burgundy prices have continued to rise.

Where we are right now – the state of the wine market

Currently the wine market is down from its unbelievable heights of 2011 where a case of Lafite 2008 would’ve set you back £13,000, a sizeable increase from two years earlier at £3,000. Many see this as a necessary correction of a rampant price bubble that had been blown out of all reasonable proportion, others as the waning demand from the Far East. Yet, to be specific, by wine market here we’re talking the more heavily Bordeaux weighted price indexes; Burgundy, Rhone wines, Champagne as well as new world cult wines have all gained in price, above the year on year vintage price increases, as the popularity for Bordeaux has apparently diminished. Whether this is down to a broadening of tastes in emerging markets, the knock on effect of the Euro-zone Crisis, or an over availability of stock in places like Hong Kong, it is hard to say exactly. What we can say for sure is that Bordeaux prices have dropped off: a case of Haut Brion 1998 from a reputable UK merchant cost £2850 in 2008, £3400 in 2010, £4600 in 2011 and today £3100.

How Wine Investment has performed to date – Bordeaux beats Spanish Bonds

Depending upon how bullish or position the person you’re speaking to about wine investment is in, you’ll get wildly different answers. On researching this post we’ve seen some utterly shameless graphs that depict a straight line to the sky of supposed returns on wine investment, or the, less obviously misleading, example of the Bordeaux-weighted index pre 2011 crash; the implication being that everything is still rosy in the wine investment market. Over the past 5 years, classed growth Bordeaux has risen by just under 15%, considering the state of global markets on the back of the financial crisis, is not a bad return. However, given that most classed growth Bordeaux does not physically mature in only 5 years, a longer term picture of say 10 to 15 years would be a better period to consider the returns.

The New Players moving the market – Wine Funds

One aspect of Wine Investment that we have yet to touch on, and probably deserve a post of their own, are the so called Wine Funds. These are companies and investment vehicles, set up with the sole purpose of  investing in fine wine with an objective of steady, high capital growth. Unlike the traditional merchant, who would offer wine as an object to be consumed, Wine Funds are solely interested in the capital gains of wine as an alternative investment, and such are regulated by the FSA. The net effect of these funds appearing on the scene has been twofold, firstly to increase the amount of capital in the fine wine markets, and secondly to provide liquidity, in terms of volume of trade. To clarify, as often is the case with investment vehicles a certain expiration date is mandatory on the wines. The long and short of this is that at times the fund has to sell the wines, unlike a merchant, even if it is at a loss; some closed funds only run for 5 years.

What Might Happen – Grexit, BRICs and other economic lingo

Currently you could argue that the volatility in global markets is due to an over-riding uncertainty, and that once we have an answer, or a base, or some kind of clue as to what’ll happen next, or even whether Greece will leave the Eurozone, then the markets will stabilise and prices rise, prosperity will boom etc. etc.. With regards to fine wine the same is certainly true – the prices of classed Bordeaux, specifically the First Growths, has been tumbling since mid last year and with no one actively calling the bottom and buying en mass, the prices keep falling. That is not to say that no one is buying however, new wine funds are continuing to appear on the scene and with their surge in demand, prices on certain wines will only rise.

There is also the case of the other emerging markets, particularly in the so called BRIC economies. China, one could argue, is now well established on the scene, with hopes that both Brazil and India will follow suit in the coming decade and demand for luxury items like fine wine will rise.

Finally, we should consider not just emerging economies but high net worth individuals (HNWIs). A report published on June 19th by Cap Gemini and RBC Wealth Management found that the number of (HNWIs) continues to rise, especially in the Far East. “The 16th annual World Wealth Report finds that the number of HNWIs in Asia-Pacific expanded 1.6 percent to 3.37 million in 2011, making Asia-Pacific the largest HNWI region for the first time, surpassing North America’s HNWI population of 3.35 million. North America remained the largest region for HNWI wealth at US$11.4 trillion compared to US$10.7 trillion in the Asia-Pacific region”.

SWAG – Safe assets? Silver, Wine, Art and Gold

Joe Roseman, a former headfund manager, has recently coined the term SWAG, a collective acronym for physical assests that all have the properties of being tangible, finite and less correlated with currency and stock market values. “I have read the views of many economists who tend to class SWAG-style assets as not ‘proper’ assets because they  have no income stream,” said Roseman. “ Such thinking is, actually, tremendously naïve.  To define an asset as needing an income stream fails to appreciate the very essence of an asset.” Roseman goes on to say that “SWAG assets (that) share a similar asset DNA. Assets that have risen in price materially over the last decade notwithstanding the bursting of the internet bubble, the subsequent recession, the credit crisis, the deepest recession in living memory and now the European sovereign debt crisis. Every investor needs to explore the benefits of having some SWAG assets as a part of their savings.”

The Future – Assumptions and Summary

The old economist’s get out of jail free card “past performance is not an indicator of future results” is maybe the safest, but certainly not the soundest of truisms for Wine Investors. Wine prices have come off the more renowned Bordeaux names, but that is more likely due to a surge in demand and a change in the model of Bordeaux-trading that had previously existed. However that is not to say that investing in Bordeaux is a loss maker, quite the contrary, it is investing in the “right wines” that is key. In summary:

  • Assuming there is a conclusion to the Eurozone crisis, we see prices will rise again.
  • As demand for the best wine increases globally, so too will the prices.
  • With prices seeming to rise, more people will want to be in on the action and we suspect more funds will emerge.
  • That is not to say that one can just “buy Bordeaux” and sit back, ill-researched investors will likely get burnt.
  • To this end Vinetrade will be commenting on three wines on a weekly basis with a view to buy, sell or hold.
  • With the growth of the end market, and the availability of some aggressively priced investment wines, fine wine investment remains a solid option for the diversified investor.
  • Ultimately we believe that wine investment is not a short-term investment and that a diversified selection of wines is essential to the prudent investor.

Buying Wine En Primeur

In the latest post in our series, we look at En Primeur, a term often banded around, but one that is far more complicated than a simple “Wine Futures” tag suggests. Specifically we’ll be looking at:

Wine barrels in the cellars of Chateau Calon Segur in Bordeaux

Wine barrels in the cellars of Chateau Calon Segur in Bordeaux. Some of this wine will be sold En Primeur.

What is En Primeur – A quick run-down of “Wine Futures”

“En Primeur”, for the man on the Clapham omnibus, is simply buying a wine before it’s been bottled, usually just after its finished fermenting and certainly far before its ready for drinking, primarily  for cash-flow reasons. The wine maker chooses to sell the vintage whilst it’s still in barrel and so doesn’t have assets tied up for several years and can avoid any financial worries involved with storing wine.

Traditionally En Primeur has only happened in the old world, more specifically Bordeaux, Burgundy and Rhone, although increasingly today for wines from Piedmont, Tuscnay, Ribera del Duero, Rioja and some of the cult new world wines.

How it Works – An Antiquated System

Historically, in Bordeaux, the vineyard owning nobility refused to deal with the unkempt merchant classes and so engaged a long supply chain to ensure their detachment, employing courtiers, straight brokers, to sell their wines to interested parties not merchants selling to the end consumer but rather négociants who would handle all of the shipping and blending. As these two parties performed a vital role in the system they were both entitled to a cut of the profits, courtiers taking 2% on either side of the trade, whilst the négociants got a more liberal slice of the pie, around 10 to 15%. Today this somewhat redundant system is still in existence, and known as La Place. Its continued existence in the modern global world of commerce is most likely due to French conservatism and the ability of the Châteaux to protect their brand, setting the release price, the prix de sortie, that the négociants can offer the wine on at.

Outside of Bordeaux, in regions such as Burgundy, négociants are still employed but to a lesser extent, with many of the top Domaines having exclusive agency arrangements with U.K. merchants. From a customer point of view, En Primeur’s benefit is supposed to be: that in supporting the wine-maker in taking the wine before it’s ready, the customer gets a better price, however in recent years, particularly in Bordeaux, this has not been the case.

Systemic Problems – Price Fixing, Allocations and Other Problems

The problem with any antiquated market place is the out-dated and anti-consumer tactics are often employed. The first of these is the perceived price-fixing done in the name of brand reputation: the Chateaux set the price that the negociants can offer their wines or risk loosing allocation. The négociants then pass this problem on to the merchant who does the same to the consumer, or the merchant/negociant tells the negociant/chateaux that the price is too high and that they can’t sell the wine. However in a recent example of such anti-competitive practises, one of the more renowned Bordeaux châteaux refused to deal with, and denied allocations for several negociants and U.K. merchants that were offering their latest vintage at a loss (just to get it out of the door). This example ties into the second problem of allocations, as the top wines are in high demand the négociants are forced to allocate the wines to their preferred customers with bias placed on those who take their allocations in the good years as well as the bad. With price variation no longer going hand in hand with vintage variation, several merchants have sacrificed future allocations for simple survival purposes; not tying up capital in overpriced under-demand wines. Finally, as mentioned previously there are more people involved in the Bordeaux supply chain than needed and so the prices are artificially raised, whilst in other regions this chain is generally shorter, the nature of the agency system is that both the merchant and the negociant will be taking rather large margins: 30-50%.

Why Buy En Primeur – Overpriced Wines Don’t Sell

Over the past ten years there has been a glut of good vintages, especially in Bordeaux and Burgundy, 2005, 2009 and 2010, this combined with the aforementioned emerging markets and the Bordelaise and Chateaux owners couldn’t help themselves but ramp up the prices to eye-watering levels on the back of media and merchant hype. The result of this has been a huge loss of faith in the En Primeur system, by customers and merchants alike. The 2010 sales campaign may have been the highest grossing campaign ever, but where once most wines would sell out, many of the best 2010 releases are still available on the open market at their original  release (or cheaper) price. Furthermore 2011 fell flat on its face, with a huge lack of interest from negociants, merchants and customers. Originally, where it was essential to buy En Primeur year in year out to secure a cheap allocation of the most sought after wines, more recent events have led to such a break down in the system that even some of the top château, like Latour, are no longer using the system.

The Future of En Primeur – Coping without Latour

When a model is so weighted in the Châteaux favour, free press and a seamless route-to-market, it might seem odd that one of the most sought after names in Bordeaux would leave, but given recent events such as their auction in Hong Kong , one can quite forgive them for wanting to circumvent this out-dated system and pocket the returns directly. Whether other properties will follow suit is anyone’s guess, although if they do we could quite see the biggest overhaul of Bordeaux since the phylloxera-blight. However even if more châteaux do pull out,  we doubt it will be the end of either La Place or the En Primeur system, with both being equally entrenched. Customers will also continue to look and hope for a return of the 2008 level bargain pricing, where mid-recession, the desperate Bordelaise slashed their release prices. Outside of Bordeaux in places like Piedmonte, the Rhone valley, and Burgundy, the use of En Primeur as a financial safe-guard will doubtless continue under it’s current agency guise.

Ultimately En Primeur was and continues to be a gamble, not just in terms of pricing or allocations, but also whether the wine you’ve ordered turns up at all.

Closing Thoughts – En Primeur in a nutshell

  • En Primeur came about as a way for wine makers to finance their production
  • Bordeaux En Primeur is an over complicated and often expensive way to buy wine,
  • Outside of Bordeaux, agency agreements dominate.
  • Securing or sacrificing allocations, along with higher prices make En Primeur troublesome and unrewarding
  • En Primeur is a gamble, and  for Bordeaux one that apart from the 2008 vintage, hasn’t been too beneficial a wager.

With En Primeur looking to be problematic and even some chateaux no longer taking part, it will be interesting to see what place it has in the future of wine investment, which we’ll be looking at in the next post in the series.

Emerging Markets and Other Factors Affecting Wine Prices

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.

Photo of Shanghai's Skyline

Shanghai’s Skyline – an image that show’s China’s growing wealth. Increased demand from China for Fine Wine has had a significant impact on prices.

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.

The Future

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.

Fine Wine Markets – A Recent History

In the latest in our series we look at the recent history of Fine Wine Markets.

Photo of the bronze bull near Wall Street.

Bull run – wine prices rose considerably in the 2000s.

For anyone who has yet to invest with us or for those who need a refresher we hope you enjoy the below. In terms of wine investment, a recent history of the Fine Wine Market can be put into three categories;

  • Pre-90s (A Time of Less),
  • 1995 to 2009 (Wine Boom & Bust),
  • 2009 Onward (Today’s Market):

Pre-90s – A Time of Less: A recap of the non-existence of an investment market for wine.

One easy thing to forget in today’s globalised world is the sheer availability of goods. Specifically with regards to wine, today one can buy wine from just about any wine producing country in the world, but it wasn’t too long ago that quality, and certainly fine wine, only came from the old-world. To wit there wasn’t an investment market per-se, certainly not in the way that there is today. Moreover there was no global market and certainly little buying outside of Europe or the United States. When buying Fine Wine, one could buy several cases of a particular vintage and then sell off a couple to pay for the other case or put the funds towards school-fees, holidays and the like; that was the sum of wine as an investment.

Economically the market was very opaque and illiquid. In addition to far fewer wines available, there were also far fewer merchants on the scene, and prices generally rose slowly as supply dropped. Often, the only chance to buy back vintages was at the time of newly released ones, when the merchant might have a tiny allocation of an older year from the Chateaux/Domaine. Unlike today, the auctions were dominated by merchants, as they were one of the few ways to access wine outside of the original producers.

With the end of the Cold-War and a new global prosperity taking hold, Fine Wine prices were poised to rise. Combined with a rise in the quality of wine being produced in places like Bordeaux and Burgundy, as well as a staggering climb in Global GDP from $1.35Trillion in 1960 to $29.99Trillion in 1995, it’s almost small wonder prices didn’t rise sooner.

1995-2009 – Boom & Bust: A rise in wine markets, prices, quality and availability.

The Boom: Between the mid-90s and 2009, wine investment outperformed all expectations: throughout this period Bordeaux wines yielded returns of around 200%; Burgundy also showed returns of around 200%, while investments in Rhone Valley wines yielded returns of around 300% over the same period. In their academic paper, Raise your Glass: Wine Investments and the Financial Crisis (2010), Masset and Weisskopf showed that auction prices of wines grew steadily over the period 1998-2005, while indices of companies listed on the US Stock Exchange experienced steep drops in 2001 and 2003. In their analysis, auction prices of fine wines in the US continued to grow throughout the aftermath of the terrorist attacks in New York in 2001 and the burst of the dot-com bubble. Masset and Weisskopf called the period from 2005 to 2008 “the golden age for wine”, as US auction-house prices doubled across the board. The arrival of Asia on the Fine Wine scene, and more specifically, Chinese thirst for Bordeaux First Growths, continued to lead the investment field for most of these ten years, although the appeal of Burgundy and Rhone wines continued to dent the Bordeaux’s dominance:

  • Returns for Burgundy were up 140%, while
  • Rhone Valley wines increased in value by 55% and,
  • Bordeaux prices jumped 63%.

The Bust: But by the end of 2008, the ignoble rot was starting to set in, due in no small part to the sub-prime mortgage/credit bubble. Bordeaux and Rhone wines dropped less sharply in price than Burgundy, where auction prices in the US fell by 39%, but nonetheless still shed 15% of their value on the back of the demise of Lehman Brothers. The Bordeaux-led Liv-Ex Fine Wine 100 index dropped nearly 20% in a precipitous slide in October 2008.

In sum:

  • Wine prices rose on the back of the arrival of new and emerging markets, especially China,
  • More wines and a greater global infrastructure increased liquidity,
  • An increase in merchants to meet the burgeoning demand resulted in greater transparency.

2009 Onward – Today’s Market: (un)Fortunately prices don’t continually rise forever.

Between July 2009 and July 2011 the market rallied, thanks to the global markets stabilisation effects of April’s G20 Summit. It looked as if the Liv-ex Fine Wine 100 would just keep rising after gaining 38% over its previous high, but then it dropped again from July 2011. To date, the index has currently lost over 25% of its previous peak value and is still falling.

Why the fall in prices? There are a number of factors that have destabilised the wine market of late:

  • Decreasing demand for some wines in the Far East,
  • Coupled with an over-supply of stock.
  • Poor handling of the En Primeur campaigns in 2011 and 2012,
  • Cash-poor, distressed investors needing to liquidate their portfolios,
  • Tied to the untimely termination of several Investment funds,
  • And ultimately, the necessary correction to a Bordeaux Bubble that had begun to get out of hand.

Summary: Unless there is a return to the global GDP of the 1970s we see no reason why the trends and markets that have emerged over the past 20 years don’t continue. Certainly we suspect that as the market gains in liquidity and transparency and is increasingly tied to global markets that there won’t be a further rise in volatility. There is still demand for Bordeaux and other wines continue to rise in price. We look forward to addressing this and the above factors that caused the recent fall in prices in the next post in our series: Emerging Markets and Wine Prices.