Sherry cartels and Bordeaux negociations

Jancis Robinson was both right and wrong when she said she felt sorry for the Sherry ‘cartel’ (the Jerez Nine?) who were in news this morning for being fined nearly €7m ($9.2m, £5.8m) for breaking competition rules. ‘Poor sherry producers – massive fine for fixing price of anyway ridiculously cheap own label stuff’, she said on Twitter. Indeed, she was right – Sherry is in a terrible place at the moment (cheap, misunderstood and unloved by the majority) so why not try to beef up the prices a bit? One can quite easily forgive Sherry for doing this. But of course, price fixing and running cartels is wrong isn’t it?

But my initial thought, before I’d even finished reading the story, was: what was the competition Sherry was undermining? Surely, through the EU’s own rigorous application of appellation rights, Sherry does not have imitators anywhere else in the world. Of course, though, it was just this that made what Sherry was doing so illegal: by clubbing together, the Jerez Nine had a monopoly on low-cost Sherry sales, thus could dictate prices. And yet, surely, while every lobbyist and his doting aunt is clamouring for a minimum pricing policy on alcoholic drinks, here we have the perfect way to implement it: let every consejo, every syndicat, every regional body sit down and agree a minimum price for their wines. Wouldn’t that stick a lump of deep shag in the supermarkets’ pipes? And they’d have to smoke it. But oh no, competition laws say you can’t do that. Which, for the likes of the poor Sherry producers, is a bit of a shame really.

And then I looked up ‘Cartel’ on Wikipedia, thinking that surely other cartels in other spheres of global consumption existed. I ended up reading the points of EU competition law:

1. The following shall be prohibited as incompatible with the common market…and in particular those that:

(a) Directly or indirectly fix purchase or selling prices or any other trading conditions
(b) Limit or control production, markets, technical development, or investment
(c) Share markets or sources of supply
(d) Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) Make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of such contracts

And once through this passage, I wasn’t thinking about Sherry, I was thinking about Bordeaux.

Back on my old hobby horse, certain similarities – shall we say – became apparent.

Point (a). Now, I’m not accusing them of price fixing but is it not curious that, in general, the Bordeaux First Growths come out with their En Primeur prices at around the same time and at around the same price (once again, you should note that First Growth prices are not the same, just in the same ball park). The châteaux in question admit they do talk to each other but refute any allegation that prices are mentioned in these conversations.

Not just alluding to the First Growths, does this system of releasing prices over a long period of time not give most châteaux a good indication of what price they should be asking for? And why do the First Growths rarely undercut or overcut each other to any significant degree? There might well be a case of tacit collusion here, whereby:

…there may be unwritten rules of collusive behavior such as price leadership (tacit collusion). A price leader will then emerge and sets the general industry price, with other firms following suit…

One can only speculate, but the similarities are there, albeit in reverse where the market leaders (the First Growths) generally release last.

Point (b). It is quite clear that most top Bordeaux châteaux limit or control production in the making of their top wine. This is ostensibly a quality issue in that, they say, only the best grapes from the best sites go into the top wine. The rest is devolved into the estate’s second wine. But this isn’t the only limitation. If we regard the reports that top châteaux are holding onto more and more of their wines (and therefore releasing less and less) – is this not also a form of production and market control?

Point (c). With the relatively public exception of Château Latour, most top estates deal exclusively through a collection of Bordeaux negociants, merchants and brokers, collectively known as La Place (has Latour returned to the fold, anyone?). These are, effectively, the sources of supply, and they are shared by most top Bordeaux producers. If you want an example, visit the Millésima website – you can see Yquem, Lafite, Cheval-Blanc, Margaux, Mouton, all advertised as being on their portfolio. Compare this to, say, Barriere Frères’ Grand Crus list and you have the same wines.

Point (d). As a consequence of point (c), I don’t know what other trading parties the top Châteaux – or the likes of Latour – deal with. Were I not a part of La Place would I be able to deal in these wines too? If my offices were in Madrid, would I be offered the same deal as if they were in Bordeaux? I don’t honestly know.

And lastly, Point (e), the conclusion of contracts subject to acceptance of supplementary obligations. Well, as far as I know (and has been widely reported), attempts to buy cases of a château’s first wine often come with the requirement to buy supplementary cases of its second wine. I can’t tell you at which point up the trading river this begins, whether it is between château and broker, broker and negociant or negociant and merchant – I have no idea. Or is it simply that ‘two cases of first wine and six cases of second wine’ is the deal (in other words that the second wine is not supplementary, but part of the package)? Again, I can only speculate.

So while it might be very difficult to accuse Bordeaux and the Bordeaux system of being a kind of cartel, there are scary similarities in the way it all works. Which makes one think that perhaps the Jerez Nine could have been a bit more clever.