The future of top Bordeaux wines
Although I take but a passing, philistine’s, interest in Game Theory, I thought that the basic premise of Professor Bruce Bueno de Mesquita‘s model on predicting world events might suffer to have the great Bordeaux wine market passed through it. De Mesquita is lauded with being able to predict, with around 90% certainty, the effects of political and foreign policy.
Admittedly I do not have (a) de Mesquita’s program, model, or algorithms, and nor do I have (b) a very clear set of data to work from. Those wanting great scientific rigour in this can contact de Mesquita’s company and contract him to do it – as I’m sure the majority of top Bordeaux buyers these days probably run pension funds or hold mining rights to half of Kenya, the costs of such an exercise might be irrelevant.
So we’ll have to be a bit slipshod with the academic rigour and go with what we know. I say ‘we’ because I welcome all additional comment, information and debate on this – please advance your own theories on ‘my’ analysis of the situation.
Let’s get down to business. De Mesquita’s model, we know, is based on five major points:
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Who are the players?
What do they want?
How influential will they be?
How focussed are they on the issue?
How resolved are they?
In the first instance, the high-end Bordeaux wine market has five main players: the châteaux; the negociant system; the wine merchants; the journalists; and – almost an afterthought – the consumer.
What do they want? Well, crediting them with speaking the truth, the châteaux are relatively consistent in that they want to make the best wine possible. This – we all know – comes from good terroir and good viticultural and winemaking practises. And if you want to make the best wine possible, you have to maximise all three aspects. Only one thing can help you do that: money. Even your terroir can be improved through good marketing or simply buying more land – both of which involve cash.
As to their influence, I would argue that gérants (estate managers) are not very influential. Perhaps one could advance the theory that people like Charles Chevalier (Lafite), Christian Moueix (Pétrus, etc.), Pierre Lurton (Yquem, etc.), Paul Pontallier & Corinne Mentzelopolous (Margaux), Fédéric ‘don’t mention North Korea’ Engerer (Latour), and so on, are strong personalities in the wine world. Nonetheless, they are not influential in that they do not dictate the market. Even their winemaking, by their own admission, is to let the terroir speak.
As to their focus and resolve, well, we should probably look to examples of where these people take action. I would argue that they are very focussed in two areas: protecting/reinforcing the image and protecting/reinforcing the price of their wine (the two go hand-in-hand). Look, for instance, at what Christian Moueix did when Diageo USA said it would sell off its stock: he bought back all his wines in order to preserve their price. What did Fédéric Engerer do when Decanter ran an April Fool’s story about Kim Jong-Il buying up the whole allocation of Forts de Latour? He got the story retracted. What did Lafite do when the Chinese market opened up? They whacked a Chinese symbol on the bottle. What was Paul Pontallier doing last month? He was in China, saying this:
“I hope the Chinese can get to know our high-quality wines with their own food, through their experiences combining Chinese cuisine and French wines. We are not pretending to sell more wines here. It’s all about our long-term commitment to marry the Chinese cuisine icon with French wine, and our long-term understanding on how Chinese culture marries French culture.”
Cheap Talk? I’ll get onto that. But I would strongly argue that these people are not influential – if anything that is not expected of them. Their job – as the human embodiment of the château they represent – is to be almost self-effacing but to (a) maintain the level of money coming into the château and (b) rigorously maintain the image/price of its wine.
And what of négociants and brokers? Who they are is quite simple: a collection of Bordeaux companies. I’m not sure that I know of a négociant that isn’t Bordeaux based. Anyone?
What they want is also quite simple. Their job is to shift the châteaux’s wines from their warehouse to someone else’s – normally a merchant’s. Because they are traders, their job is simply to keep making money. They are beholden to châteaux to prop up the image and price (that combo again) of the brands they are trying to sell onto their customers. Therefore their influence down the chain is almost nil because it would be too dangerous to mess with a brand someone else is doing a very good job (let’s not deny it) of holding up.
However, their influence back towards the producers might be interesting to examine. I believe that while things are going well, the négociants don’t complain. But as it might become increasingly difficult to shift stock, I can’t discount the possibility of blowback towards the châteaux. Therefore I believe they are fully resolved in selling and trading these wines at the best prices they can get – or at least a price that keeps them in business – and they are almost non-active players. Except, of course, when it becomes very difficult to shift the wines.
One step down the pyramid, what about the merchants? What do they want? Well, I’d argue, pretty much the same as the néociants: a healthy, profitable business. They are perhaps more influential than négociants because of their contact with the end consumer. However, while this is some of their influence, much of it is taken from wine critics when it comes to recommendations. Throughout the year, merchants use the notes and scores of magazines and critics in order to push the wines they have in stock. So perhaps not a great deal of influence there.
I’d like to think that, like négociants – perhaps even more so – merchants can hold some influence on the pricing strategies of the châteaux. But any examination of the evidence regularly proves this to be false. UK merchants are well known for telling châteaux to bring their prices down prior to En Primeur. Whether this is a traditionally British pre-tasting ritual or whether it is actually meant makes little difference. The calls regularly go unheeded. So much for influence.
But how focused are they in what they do? Very. Let’s look at probably the most famous UK wine merchant: Berry Bros. & Rudd (BBR). Its long list of Directors includes HSBCs Sir Simon Manwaring Robertson, whose job title is listed as ‘investment banker’ and who is reported to go skiing with the Royal family. In 2009-2010 BBR’s turnover was £293m (€347m ,$476m) and it made a pre-tax profit of just over £6m. Let’s also look at Farr Vintners – another major UK merchant. Similar story: a turnover of £85m and pre-tax profits of nearly £10m in 2009.
But delving into financial figures is a bit like performing an autopsy on a freshly-killed beast: you end up elbow-deep in the squelchy innards but you can’t tell the spleen from the scrotum. I’m just using it to show where their real interest might lie. It is – no surprise – in making money. But it might be interesting to note just where these companies perceive the danger to their business. Let’s look at what BBR’s Chairman, Simon Staples, said last year:
“Our wine business is also holding firm through difficult times. Not surprisingly, sales of the very top-end red Bordeaux and Champagnes have reduced, reflecting the greater level of uncertainty about asset values and lower consumer confidence. Although this part of the business has in recent years been a very profitable sector for us, it is recognised that it is by nature more volatile than other parts of our business as it is reliant on both economic confidence and in particular upon the quality of the wine vintage available in the relevant financial year.”
Thus we have the two factors that play upon all of this: the quality of the product and the economic perception of the product. I would therefore submit that (while it is obvious their main objective is profit) everyone’s main focus, from the producer to the person that sells you the wine, is on selling you a good quality product and maintaining, unflinchingly, it’s image.
Now to the wine critics. Who are they? Well, in this sector, we’re talking Robert Parker, Jancis Robinson MW, James Suckling, tasters for magazines and other publications like Michel Bettane, Steven Spurrier, Michael Schuster, Jeannie Cho Lee MW, and so on.
What they want is more interesting. Ostensibly, their role is to taste wines so that you, the consumer, can make an informed decision. They want to recommend good wines for you to buy and enjoy. Whether that is actually true or not, we have no way of knowing. But might I add to this by suggesting that wine critics, above all, want popularity; they want to be the guru that people go to? Given that we are all more-or-less self-interested: the more readers they have, the more potential money they make. So I would suggest that wine writers want to be popular.
And how do you get to be popular? Well, look at the Parker model: you get popular by praising and finding great wines and vintages. In this case, it essentially comes down to saying a wine writer’s job is to reinforce the economic perception of a product. Do wine writers really want to expose the bad value wines out there? Probably not. There’s no list on the last page of the Wine Advocate that tells you the worst wines of Bordeaux 2009; even with the likes of 2007 or 2008 you still find the usual phrase ‘there are good wines out there but you need me to tell you what they are’ (which is essentially the wine critic reinforcing her/his guru status – remember, they never tell you what to absolutely avoid); no one says ‘don’t buy such-and-such’.
The critic’s regular gambit when it comes to En Primeur and Bordeaux wines in general is a great wail and moan about the rampant speculation and prices that some of these wines attain. To believe most wine critics (and château owners too), they want to put a stop to wine as a speculative product – an investment model. But Game Theory has a phrase for this: it’s called Cheap Talk and, if I understand it correctly, it’s a communication that doesn’t cost the speaker anything but increases the potential payoff (in the wine critics’ case, it increases their popularity – which is, we have established, their main object).
To abolish the notion that any critical attack on speculation is Cheap Talk, a wine critic would have to actively do something to stop it (i.e. start castigating estates for coming out with such high prices; encouraging people not to buy any Bordeaux this year, etc.). I would argue that this tactic might work in the popularity stakes – more middle class (for want of a better demographic) people might follow the said critic – but high end wine might already have passed them by so I suspect wine critics will maintain the current order of things: criticise speculation but praise expensive wines while throwing the rest of us a morsel like a ‘top ten good value list’.
[In fact, Simon Staples understands it better than most: the key issue with wine speculation (as it is with any speculation) is confidence. Destroy confidence in top Bordeaux (i.e. say it will never last past five years or just say 'I don't think these wines are worth it') and you can do away with speculation.]
And what of the top end Bordeaux consumer? Who are they? What do they want? You know as much as I do. If it’s the Chinese, it’s not your average Chinese; it was probably never your average American either; the days of schoolmasters drinking luncheon claret are perhaps well over. So what’s in it for them? Well, if they are the very well off (and I might suspect they are, given Jane Anson’s recent comment on Twitter that a wine shop in Macau’s sales were 25% First Growths – by volume…it’s unlikely it was the instigators of the Jasmin Revolution that were stocking up on top claret) they aren’t particularly interested in letting something they regard as a status symbol become more obtainable. Even if you’re a hotshot investment banker in the City, you don’t spray Prosecco around the room to celebrate your bonus, you spray Dom Pérignon or Cristal or Krug. The people that spend big money on these wines have no desire for these big wines to become cheaper because then where’s the interest in owning them?
But it’s relatively obvious that the consumers’ influence is the most powerful of all – if we all stopped buying First Growths, it would revolutionise the sector. So the Bordelais, logically, try to diffuse any negative influence (driven by the poor economic situation in the ‘West’) and court the positive: China and the Far East. Where we have a chicken or egg situation: are the likes of Pontallier in China to try to ‘educate’ those showing a growing interest in top Bordeaux – all in the name of heightened appreciation – or are they there to increase the growth under the guise of showing people that their culture can be ‘married’ with very expensive wines?
All of which leads me to believe and deduce (aside from the obvious: that most players in the game are driven by money and that the two main variables in the Bordeaux wine market are the weather and the economy) that as long as it doesn’t rain constantly in Bordeaux for the next five years and presuming that on a global level we remain economically stable (stable enough to keep Bordeaux buyers in cash), I can’t see the price of Bordeaux wines ever returning to earth. Mainly because no one along the chain from producer to drinker has any real interest in wishing it so.
A great piece. Hard to disagree with any of it, especially the concluding paragraph. More so, I think, given that Robert Parker looks like he will be spending more time on Bordeaux than before. For example, his schedule shows that he will be publishing his review of the outstanding 2009 vintage in bottle in December this year. Unless I’m mistaken, that’s four months ahead of his ‘in bottle’ reviews in the past. He’s spotted a weak link (as others like James Sucking strive to be there first after bottling) and is correcting it – and this can only add fuel to the fire. Advantage Bob.
Yep some good points. Especially in relation to analysing why you can’t expect the market in Bordeaux to necessarily behave in the same cyclical nature of a normal economic market.
However, if prices continue to increase the number of people in the consumer base will fall (i.e. the First Growths will go to fewer and fewer very wealthy people). The consumer profile will become more homogeneous and susceptible to fads.
This could potentially create a very sharp crash, if, for example, one day whatever section of society is buying these trophy wines decides that Burgundy or Piedmont is really where it’s at…. just a thought.
One thing I read on January 10th in Financial Times is an article entitled, “Fine wine investors suffer crude awakening.” subscriber).
It discusses how fine wine investment is linked to crude oil prices, which would be an event outside all the major players described in game theory. A drop in oil has a percentage affect on wine. But on the whole, I agree with you there is no foreseeable drop in Bordeaux prices. This year, wine merchants (in London) have smiled all the way to the bank with Bordeaux.
Interesting article, thanks.
Juel
Interesting, thanks!
However, do you think “the competition” is another participant in this game?
For the aspiring nouveau riche, what they want to consume is not necessarily the most expensive, but “the best”. Which is defined as what the “old money” covets.
There is no reason for the popularity of LV bags in China apart from the perception and the believe that it is the bag of choice for the rich and successful in the West. There is a similar notion that this is what first growth Bordeaux stands for. Even the mighty Parker can’t convince the market that a 100pts Beaucastel is better than a 91pts first growth (not that it is …)
Crucially, this is a perception that with sophisticated enough marketing, can change.
The question is, whether Burgundy, CdP and Barolo are up for it?
Juel- It was an interesting piece and promted some discussion between myself and a couple of friends in trading.
Our conclusion was that pretty well all commodities will do this (i.e. rise and fall in line with global economic conditions). Similarities between the graphs do not suggest an actual link.
Some cursory research done on the FT graph with the help of Bloomberg revealed:
1.) The highest the correlation gets on a quarterly basis during that time period is 0.357 (if you use LIVEX and WTI Crude)
2.) Their daily correlation actually comes in negative over the last year at -0.293
3.) The annual correlation is quite high at 0.734, though this is pretty similar as that for other commodities such as corn.
Hong Kong has shown us some exciting results in wine and will continue to appreciate with Chinese exploiting tax free benefits in SAR with an asset class which has shown stable growth for 100 + years no matter what stocks, commodities or currencies are like. John Kapon at Acker rightfully mentioned that fine wine in Hong Kong in more then just a quality product or commodity, he says that its personal status to be part of this lucrative market with increasing demand. I truly agree with his words.
There is a fairly new and exciting platform for Wine investors and collectors coming from Hong Kong to the world of wine traders. Wine Investment Advice allows networking and publicizing on a specialized platform for free. I am already addicted as i have already found 2 buyers for my wines this month without having to pay commission.
http://www.wineinvestmentadvice.com/promotion_pla18/ Add me!
Excellent article, Oliver.
Just as all but one national economy has been overtaken by China, the “traditional” fine wine markets in London and New York might feel as though it is the end of their world. They have had to hand over the keys to the cellars of the Quai des Chartrons in Bordeaux to the Asians.
By 2010 and the aftermath of the 2009 releases, it was no longer a matter of securing en primeur wines at the least expensive price – it was a matter of securing allocations that could be sold on for even higher amounts. The still unbottled Lafite 2009 made HK$300,000 (US$39,000) at an October 2010 auction in Hong Kong. In the future it is possible that the Bordeaux en primeur campaign could be conducted via auctions. The châteaux and negociants could set the reserves and estimates to their satisfaction – that is, as high as they like – and watch a bidding war break out. The short-selling of Lafite 2009 on Liv-ex in June 2010 caused “outrage”. People had better get used to this sort of thing. Wine has become a commodity, albeit non-fungible, and it will be traded as such.
Incidentally, to answer your question “I’m not sure that I know of a négociant that isn’t Bordeaux based. Anyone?” – Richards Walford in sleepy Rutland is a Bordeaux negociant, the only UK company to do this (maybe the only negociant not in Bordeaux itself).
Thanks Stuart,
It’s great to hear that there is a UK-based negociant – and in Rutland! Brilliant news.
O
Agree with the story for the TOP wines, but luckely there are still many very good Bordeaux wine’s for sale at reasonable prices. Should keep them however out of view of investors and snobs.
Oliver, your posting inspired me to write a follow-up on Bordoverview Blog: http://bordoverview.blogspot.com/2011/02/future-of-top-bordeaux-wines-continued.html – Cheers, David
Clearly, much of what is said here would find resonance with the wider public (consumer) interested in drinking accessibly or relatively accessibly priced Bordeaux classed growths. Nonetheless, in the context of the different and contradictory interests within the Bordeaux trade and those involved in its promotion, it is perhaps not quite realistic for one to expect trade actors to initiate change themselves (although I do not discount this possibility as in the efforts cited on this site of Jancis Robinson MW to address this). However, the market may.
Possibly the most likely area to affect a questioning of how top Bordeaux wines are marketed is the development of the ‘fine and rare’ wines market itself. Currently, top-flight Bordeaux accounts for 90%+ of volume and fully 95% of value in this market, should it not quite develop in the intended way exposure is significant.
As we know, there has been quite a bit of conjecture as to the emergence of a bubble in the fine wine market, in particular of course, where first growths are concerned, the lynchpin of en primeur. Moreover, an IMF study of earlier this year – which has been cited in various media/blogs etc – concluded (although this has been popularly questioned) through its study of commodity price formation that fine wine has entered a new stage. Whereby, it has moved beyond traditional supply-side economics to be linked more closely than before with the cyclical nature of the real economy, specifically to that of newly emergent economies.
If this were true then, the suggestion is that a sudden drop in industrial production or GDP in China – for example should the country not quite be able to cool its overheating property sector (remind you of anywhere?) – would have a greater effect on prices at top chateaux (indeed of course the market overall) than say if they were to report a 30% drop in harvest yield, this latter factor being the case for 2010.
Moreover, as is apparent, what is occurring continually in this market at the moment is the search for value, as prices go up other chateaux or vintages appear cheaper and buyers, Asian or otherwise, chase value until these wines themselves reach a new price ceiling, at which point other chateaux and vintages appear cheaper. This is notable in vintages such as 2002, 2006 and 2007, as buyers (Chinese) – less concerned than the traditional Western collector and investor with vintage – chase the brand and other buyers (British and American) chase the brand to sell on to the Chinese!
The extremely high-priced en primeur campaigns are about the re-positioning of certain chateaux for new markets, where their traditional public is a widely-commentated secondary concern, as is the traditional investment opportunity afforded by stellar vintages. If we look at 2009, a broad basket of chateaux currently trades (in the British market) at around -2% of its London release price one year ago – not much for what some appeared to consider the greatest vintage of all time – whereas off-vintages such as those cited earlier, in particular 2002 plus 2008, have posted returns that have outperformed all other indices.
Therefore, another high quality and high-priced vintage is unlikely to have investors in mind, at least in the short-term. Rather, record release prices would appear to have the aim of determining the new price ceiling to which all back vintages are measured, consolidating the average market prices of the leading chateaux.
In time, in particular should any price shocks occur, as other fine wine regions enter the fray and a new public (consumer) becomes more discerning, could a loss of market quota lead to a re-evaluation of pricing strategy, or indeed a crisis? Or is it that this re-positioning will allow leading chateaux to achieve their apparent aim of leaving their traditional market base to create an ultra-luxury French brand for a new and more global public?
As a final note, conscious of placing too much conjecture on chateaux policy, much has been made of the chateaux increasing prices. However, the Ex-négociant release price for Lafite 2009 was £550 per bottle, which at the time equated to roughly £5,500 per case. Its London release price was £13,500. Where has this 45% increase come from? It isn’t at the chateaux.
With regards to the fine wine and crude oil prices, as noted by Juel Mahoney, the basic findings of the IMF working paper behind the article are indeed intriguing. In fact, the brief for the two economists who produced the paper was to research price formation in commodities, in the form of extreme fluctuation in these over the past 20 years. Fine wine and oil were not the subject, therefore, but simply the control.
However, the findings led to characteristics observable in price formation for fine wine. The most significant of which being that fine wine prices may have moved beyond traditional supply-side – i.e. price as a reflection of production e.g. a lower yield would mean a higher price – economics, ‘a new phenomena’. Rather, price formation would now appear to be more effected by significant new demand from newly emergent economies.
This was also observable in oil, hence, the similar price formation pattern and thus a correlation between the two rather than fine wine prices being linked directly to the price of crude oil. Were this true then, rather than looking at production volume for a given vintage for a clue as to where prices may be going, we would, the paper suggests, look at figures such as Chinese GDP or industrial production figures, or indeed its currently overheating housing market. Any sudden drop in these, if the economists are right, could represent a price shock, and there’s a lot of stock around at the moment.
Interestingly, the trade appeared to be a little dismissive of this paper, even though there is very, very little academic or empirical work in this area. This contrasted with Liv-ex, the wine exchange, who took up the findings rather enthusiastically in their February 2011 report, being the same report the trade uses.
With top chateaux for the Bordeaux 2010 harvest down in yield by about 30% and prices set to increase 5-15% on average, it is a good moment to put these theories to the test. Were the IMF economists right? What is the biggest factor on price formation here, supply-side – yield, or significant new demand in newly emergent economies? Many would argue the latter.
If that is true the implication is that fine wine may have definitively moved into the realm of mainstream commodity, albeit, luxury. That is unless a price shock occurs and brings us all back down to earth.