Sunday, June 19, 2011

Bordeaux 2010 and Football - the Missing Link.

In between pruning the vines, I have been keeping an eye on the Bordeaux 2010 Primeurs releases. We have been buying en-Primeur for the last 15 years and now Twitter and 3G Internet access have revolutionised the process - I can have the secateurs in one hand and an iPhone in the other! Whilst pruning the vines on Thursday morning, I managed to spend the equivalent purchase price of 2 hectares of vineyards on just 5 cases of wine!

The quality of the 2010 vintage has attracted much attention – deservedly so – and the wines will provide much pleasure in the years to come. But almost as much has been written about the state of the “market” and whether or not there’s a “bubble” in the prices. The much touted reason is that the Chinese are hoovering up vast quantities of Chateau Lafite (and other wines) creating rapidly increasing prices – Chateau Lafite 2008 has jumped from €180 a bottle en-Primeur to a current price of around €1,500 a bottle. If you’re an investor, then that looks like a pretty good return – and the spotlight has inevitably fallen on wine as an investment commodity.

The important thing to note about the Lafite example is that those increases took place after the wine had been released onto the market. A classic example of how supply and demand result in price variations. It’s also a good example of why to buy en-Primeur (ideally for drinking, not investment) as the wine should never be as inexpensive as at the opening release price.

However it’s difficult for the Chateaux owners – and these are mostly large corporations - to look at the increasing prices and not want a part of them. If the market places a value of €1,500 on a bottle of Lafite 2008, then why not release the 2010 close to current market value? And it’s not just Lafite – most Chateaux owners have looked at the current market prices of their wines and said “I want some of that action” and have steadily increased their release prices each year – estimating the maximum price that they can extract from the market on release and effectively taking all the potential for further short or mid-term increases out of the market.

So does this mean a “bubble” is emerging and prices will collapse? To be honest, I don’t think so – but let’s look at some of the potential pitfalls first…

a) Everyone wants a bit of the action:
Let’s say you produce 100 cases of wine annually, and you see that historically the value increases over time. You have had a couple of recent good vintages (we have had 4 Vintages of the Century in the last 10 years alone) and your bank account is very healthy. You decide you don’t need to sell all of your latest, greatest vintage and you can keep some back to benefit down the road when prices “definitely” increase. So you release just 50 cases to the Negociant. They in turn also want a part of the action, and sell only 25 on to their customers. There’s a mad scramble as so little stock creates big demand – and prices increase quickly. Bingo – everyone is happy! Except for the fact that 75% of the stock hasn’t sold fully through the system.

b) The undue influence of Critics:
I say “undue” possibly unfairly as critics play an important role in guiding purchasing choices. However, with Bordeaux Primeurs, their reviews are published in advance of any pricing on the actual wines, allowing the Chateaux owners to directly price their wines in relation to a correspondingly positive score. Except that the 100 point system favoured by the most influential critic, Robert Parker, has effectively become a 5 point scale, with the world clamouring for those wines that are in the top echelon of quality. Score 89 points (a very good wine) and you can forget about a price increase – score 96-99 points and you can bank an extra 30% on the previous year’s prices. So en-Primeur purchasers chase this top tier – and of course the prices rise for these select wines – and everyone is happy again!

c) The cost of financing:
The prices for the 2010’s currently being released are staggering across the bora d- it is the most expensive new vintage release ever. A decade ago the cost of 10 cases of Lynch Bages was about €3,500 – this year it’s about €12,000. Multiply that by the number of sough-after wines and the desire to hold some stock to benefit from “definite” future price increases and you soon see there’s a huge amount of money tied up in the system. The potential for the whole system to collapse is there if it were to fail at one point along the chain. It takes almost 10 times more capital to finance an en-Primeur campaign now as it did ten years ago – and that’s at Negociant and retailer level. If you take on too much stock and then can’t sell it, you’ll be looking at a very big bill. The stakes – and the risks – are high.

So what about the so-called “Bubble”?

What if any of the above was to go wrong – a Negociant defaults, or people continue to chase an ever diminishing group of top-tier wines at top scores? There would certainly be a hiccup (and some very angry customers), but would the whole system collapse? I don’t think so. The “slack” would be quickly taken up by someone else taking advantage of another’s misfortune. Wine – at a certain level – is becoming a brand-driven luxury commodity. The anecdotal feedback about the Lafite effect in China is that at the very top level of business, it simply wasn’t acceptable to put anything else on the table to celebrate the conclusion of a business deal other than a bottle of Lafite. These wines are in the same league as sought after artists, watches, car producers etc. Except that they are consumable – making them ultimately even rarer. Is it realistic to think someone would pay €1,500 for a bottle of wine? Absolutely – there are plenty of people in the world for whom this is not an excessive price – think caviar, perfume – plenty of examples of highly priced one-off consumables.

So rather than there being the danger of a price “Bubble” that will ultimately burst, I think we will see a significant change in the way wine is sold.

Anyone remember the uproar when the Premier League was established? There was much gnashing of teeth and wailing from the average football punter. But there were two significant factors at the time: a group of teams that felt they were better than the rest and crucially, the financing in the form of Rupert Murdoch to support the breakaway. Free-to-air coverage of the best teams became a thing of the past, and people said no-one would pay to see something they had previously got for free. But today, millions happily (well maybe not happily) pay Sky to watch Premier League football on TV.

So how does the football analogy apply to wine and pricing? The key factor not mentioned so far in relation to wine has been the new arrivals into the equation – the Investment funds that are apparently buying up huge quantities of the top wines. Unlike Negociants, they don’t have lots of smaller individual customers to keep happy – they just have lots of money, buy big chunks of wine from a limited group of “Brands” and then release them back to the market at a later stage through the broker system. These are the Rupert Murdochs of the wine world.

My belief is that these Investment funds will ultimately take the role of the Negociants in relation to the “Premier League” of wine producers – the First Growths, Super Seconds etc. These Chateaux will break away from the Negociant system and deal directly with the Funds – that’s 20% saved immediately! They don’t need critics’ reviews to influence their buying decisions – they are buying existing Brands in their own right.

The rest of the Chateaux owners will all eventually settle down and realise that their wines aren’t Bugatti Veyrons, Hermes bags or Patek Philippe watches. They will (finally) understand that they need to offer value to the purchaser. They will still deal with the Negociants, and retailers will still buy from the Negociants and sell them to you at reasonable prices. As yes, they will rise (and occasionally fall) in price much as they do now. Instead of Third, Fourth and Fifth Growths, we’ll have Third Division, Fourth Division etc.

In the Premier League of wine, the Investment funds will effectively manage the assets of the top Chateaux and slowly drip-release the wines to those that can afford them – creating sustained rising prices and continued demand. Every so often, one or two Chateaux will be promoted and demoted – and it will be fun to watch from the sidelines!

Bubble? No, just two very different Leagues emerging… and an exciting game to watch……


  1. Interesting analogy, but I think it definitely is a bubble, and the bubble will burst when China's economy hits a stumbling block (as it inevitably will). Demand will fall and prices will also fall until an equilibrium is reached.
    The vast majority of Premier League clubs are also living way beyond their means, most are technically insolvent and are being kept afloat either by billionaire sugerdaddys with more money than sense or else by banks too afraid to pull the plug. Either way, a day of reckoning will come for the Premier League as well...

  2. Hmm, to a certain extent I agree about the current financial fragility of the Premier League Clubs but their debts are in part due to the silly prices they pay for players. The TV revenues they get have always been strong (Murdoch/Wine Investment Funds) so as long as the top tier Chateaux don't blow it all on individual grape warmers for the vines, or perfumed mist, or self testing vines for phenological and physiological ripeness, or automatic optical grape sorting machines..... oh hang on, some of them do have optical sorting machines....

  3. yes but the point is that players wages are now at a level far beyond their intrinsic worth and a shock to the TV revenues (eg if Sky decide to reduce the payments) will bring wages and club valuations tumbling.
    Likewise, the Chinese are paying way above the odds compared to the intrinsic value of the wine. Proof of this is the fetishisation of Lafite, not trading at double even the other first-growths. Is it twice as good as Latour?
    It's bubblicious alright, but as you said, good fun to watch from the sidelines. I still say sell your Bordeaux in the next 12 months!!

  4. Or just go into a quiet, dark room and drink it all......