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.

How Wine Investment Works

This post is the first in our series “Is Wine a Good Investment?“.

Money in a wine glass

Wine Investment is an alternative investment (AI), like investing in Art, Antiques, Coins or Stamps. Simply put: it is the purchasing of a finite commodity, a case of wine, then realising the gains after the price of the commodity has risen.  While that definition is succinct, it doesn’t thankfully cover all of the intricate nuances that makes Wine Investment such a rewarding challenge for those who want to look beyond the FTSE or the S&P 500 and diversify their portfolio.

Why Fine Wine?

Fine Wine has several advantages over other AI’s:

  • Consistent decreasing supply through consumption - whilst someone may buy and enjoy a Picasso or a 1955 Jaguar XK Roadster, a bottle of Mouton Rothschild 1982 is gone once enjoyed, and the car or the painting can always be resold.
  • Ageability – Fine Wine matures with age, improving and is often more pleasurable to drink, over time; thus commanding a premium.
  • Vintage Variation – Given the nature of the marginal climate in which the best wines are produced, the quality of the wine varies quite substantially year on year; so too the price. For instance 2005 is a sought after Bordeaux vintage, while 2007 less so.
  • Influential Critics - Respected industry experts like Robert Parker Jr or Allen Meadows have trained palates and judge new vintages and rescore old ones year on year. With this score variation, so too does the price change. The most stark, recent example was in February when Robert Parker rescored the 2009 vintage, giving 15+ wines a perfect 100 point score and causing those wines to jump in price.
  • Historically Proven – Anecdotally, top wines have always commanded a premium. There are writings from Pliny the Elder in 60BC, where Falernium from the fabled Opimian vintage of 121BC was opened in honour of Julius Caesar’s recent Spanish victories.

Tax Benefits

  • Wine Investment can be tax-free – when stored at an HMRC Bonded Warehouse, the wine is considered in-bond and will not incur V.A.T or UK Alcohol Duty.
  • Furthermore, as a tangible asset with a life-span it is classified as a “Wasting Chattel” and can be exempt from Capital Gains Tax.

The Nuts and Bolts – Buying and Selling Wine

The actual system of buying and selling wine has always been your traditional retail model:

  • Buying – In the past the only way to buy wine was to go to a wine merchant, either a stock-holding Trader or a Broker. Both types would often have exclusive arrangements with regards to supply and availability of wine and explicit price control. Vinetrade now allows members to buy wine from other members at prices set by the sellers.
  • Storage – As Fine Wine merits impeccable storage, as soon as your case of wine has been purchased it should remain in a bonded warehouse. The U.K. has several major players all with similar structures and brokers can often arrange storage on your behalf.
  • Selling – As with buying, traditionally the only way to sell your wine was through a merchant who will charge commission anywhere in the range of 7%-20%. So whilst your wine may have increased in value by 15% over time, you may lose 10% whilst trying to realise that gain. Platforms such as Vinetrade now allow members to list their wines for sale at a price they like – providing wine investors with more flexibility and the ability to cut out the middle man, achieving a better price for both parties.
  • Unregulated Market – Unlike equities or bonds, investing in Fine Wine is not regulated by the  Financial Services Authority. The simple implication of this is, you’re buying a physical case of wine that might gain or fall in value and there are the pros and cons as listed above.

As you’ll see in our follow up post, wine investment like any AI is subject to market forces and the prices can fall as well as rise. We hope you’ll continue to follow our series and see why in our next post Wine Markets – A Recent History.

For any queries relating to the above, please don’t hesitate to get in touch: Arthur@Vinetrade.com or send a tweet to @vinetrade

Is Fine Wine a Good Investment? – A Six Part Series

Over the next few weeks we’ll be running a series of posts looking at whether Fine Wine is still a good investment, both in terms of it’s own individual worth and as part of a diversified portfolio. We’ll be looking at where the market was 10 years ago and how we came to where we are now, with the premium on Lafite falling off  and people looking beyond Bordeaux, and ultimately to where the Fine Wine market is heading. More specifically:

  1. How Wine Investment Works
  2. Fine Wine Markets – A Recent History
  3. Emerging Markets and Other Factors Affecting Wine Prices
  4. Buying Wine En Primeur
  5. The Future of Wine Investment
  6. Summing Up – Final Thoughts

We hope that you’ll find this series as interesting as we found researching it.