To Drink or to Invest: that is the Question - Brief Introduction to the Wine Investment Market

 

Bernard Noblet (chef de cave, Romanee-Conti)

Thinking about investing in some fine wine? With the instability of many other luxury commodities over the past few years, the value of wine has also taken its share. In this article James Dawson MD of Humble Grape discusses the fluctuation of the Bordeaux market and his own experiences as a wine investor.

The first investment wine I purchased was a 2002 Margaux at £730 per case. Not a stellar vintage, but this case is now worth about £4200. Since the days of Samuel Pepys there has been an age old idea that one could buy three cases of Claret, sell two and drink the third for free.

It’s not quite that simple now though. Prices listed by the merchants and Live-Ex, the online trading platform, are not realistically the prices you can expect to achieve. You also pay 10% of the nominal to brokers. So, say you buy a case for £5000 which appreciates by 20% to £6000: if you can get the listed price you sell this for the full £6000 but immediately lose £600. You only make a gain of 10%. With zero % Capital gains on perishable goods this may still look like a good deal but not all wines will appreciate by 20% in a short period.

Some of the cases I bought back in 2003 (case in point, the lovely Beauregard Pomerol 1999) make a beautiful drinking wine now but have barely covered the storage costs £8/year, the cost of capital and inflation so Caveat Emptor.

 

Bordeaux En Primeur 2009 and 2010

The prices of the 09s and 10s were so much higher than equivalently rated vintages, like the 2005, that the traditional buyers of first growths have been priced out of the market. This is where we start to think of the fine wine market, Bordeaux especially, as potentially being in a bubble.

We have been here before; the equity market crash in the late nineties, the dotcom bubble in 2002-3, the credit crunch in 2008-9 -  every time the general retort is 'it’s different this time'. We are experiencing a new paradigm. So what if these stocks are trading 100 x earnings? The new model will continue to go higher in value. Look where that thinking has got us!

I am an avid black cab user, and feel these gentlemen are the best weathervane for a bubble in any asset class. When the taxi driver tells you to buy equities or property, or wine, for that matter, it’s time to get out. The lemmings are headed for the cliff face and nothing will stop them.

One night, on the way home from the city a few months ago a cockney accented fellow, (yes there are still a few of them left on the fair shores) told me he had bought a case of Grand Puy Lacoste 2010 for his son’s birth year. This is a wonderful tradition I adhere to strongly both for myself and clients. I asked him how he knew about Grand Puy Lacoste or investing in wine. He said, ‘I know nothing about wine, I don’t even drink it’.

A friend of his brother in law lost his job as a salesman for a big investment bank and was now plying his trade in the fine wine market. Justice, I thought. Didn’t the Liffe traders all end up in Black cabs…?

So, is this the sign of the latest bubble or will things really decouple this time?

 

Signs for this Bubble Bursting

Bordeaux 2010 prices were 20% off from the peak in June just after the en primeur campaign.

Humble Grape sold 2010s but openly advised clients against ‘filling their boots’ as prices were likely to soften. This did not stop me from personally buying 2010s as there is such an emotional connection with many of these wines that one just has to have them. The exception being that for the wines I have been supporting for years like Rauzan Segla, who bumped the 2010 price up by 40% on the 2009s, I did not take my 5-case allocation and neither did any of my clients. 

After the last 2 years of vigorous growth, Bordeaux is slowing down considerably. First, growth prices especially the 08, 09 and 10s are looking too costly. The 10s look especially vulnerable with Lafite almost down 20% from the en primeur peak of £12500 to £10500. The older vintages look more stable and of better value.

 

Signs Against the Bubble

Burgundy is still going strong and maybe the ultra rich have cellars full of Bordeaux and so are now looking for something new. Domaine de la Romanée-Conti has seen astonishing recent demand and price rises - the bulk of which is coming from Asia. According to Live-Ex, the basket of DRCs 6 Grands Crus from 1995 to 2008 rose 39% in 2010 and 27% to the end of July. DRC at these levels is due to iconic status, tiny production levels and unmatched quality. It’s very hard to pick up a single bottle for under £4800 these days. Whether this will continue is uncertain in these testy times.

 

A Third Possibility

The wine market is cooling off with a disparity in prices between what trades as a commodity and what is now seen as a luxury brand - namely the first growths and a few of the super seconds. The Chinese government has just approved the first ever Chinese investment fund specialising in wine; The Dinghong Fund (Dinghong means 'In Red') plans to invest in €110m on wine over a five-year period starting this year and it is highly likely they will only be looking for First Growths and Super seconds.

So then why invest in vineyards?  In the last three decades, some of the top French vineyards have been taken over by international firms either directly or through their founders: Chateau Latour with PPR, Chateau Cheval Blanc with Bernard Arnault and Albert Freres, Champagne Krug and Chateau d'Yquem by LVMH, Chateau Montrose by Martin Bouygues, René Engel by PPR to name a few. Their buyers or investors may all have a common passion for wine, but moreover they know that they are investing in brands. Some of the luxury wine brands are also legends and these canny Billionaires did a great trade, saving money whilst holding an appreciating asset at the same time!

As most of the star wines are produced in very small quantities and, as the world demand for them is growing, their price can only go up along with the price of the vineyards themselves. Unless wine merchants and the owners of "brands" can control the price increases of their wines, the top wines will become legends as well as luxury products.

Clients can of course shift markets, when they think prices become ridiculous. Would it be worth buying Petrus or Domaine de la Romanée Conti today for these billionaires if they could buy them?! What we do know, is that these two domains have increased in value due to these billionaire investors.

We can also thank some star wine critics who transformed the wine industry into an international wine market through their grading systems, with the support of communication channels like the Internet. This new generation of wine owners have transformed some wines from a commodity into a luxury product. The prices of these luxury products no longer track the market in general and here we are again at the paradigm shift.

 

Back to Reality

As we do not pretend to be so rich, and if we look to wine as an investment, we should only invest in the so called "luxury brands" if we can get the information and more importantly the allocations. And for all the other excellent wines (and their winemakers who only wish to stay so!) we should just enjoy tasting them, and regularly use the advice of the professionals you trust to select your wines: one of the rules to discover diamond wines!  

 

Many thanks to Shekha Vyas for editing the article on behalf of Jardins Florian.

James Dawson thanks Georges Liurette, the famous French wine consultant, for his input. 

www.humblegrape.co.uk

PICTURE SOURCE www.romanee-conti.fr

http://en.wikipedia.org/wiki/Domaine_de_la_Roman%C3%A9e-Conti