Fit for purpose? – Bordeaux en primeur

Ahead of the expected buying frenzy, Hugo Rose MW questions the relevance and efficiency of the en primeur market. The confidence of the Union des Grands Crus de Bordeaux, it seems, is not universally shared

The samples have been sniffed, slurped and spat, notes have been scribbled and internet news sites are buzzing. The international fine wine market has enjoyed the apéritif and is now hungry for the meal itself: Bordeaux’s 2005 vintage campaign, a campaign which is expected to break records for opening prices of the top wines and for volumes traded.

But with the four previous campaigns failing in smaller or larger part to distribute the stock beyond Bordeaux’s négociant fraternity the Place, can we say that the en primeur market is still up to the task? It is informal, de-centralised, unregulated (except by convention) and, according to Christian Seely, managing director of AXA’s Châteaux & Associés, “largely ungovernable” as a result. Nevertheless, it has been adopted by the Union des Grands Crus de Bordeaux (UGC) as the preferred route to market for each new vintage, and unwritten rules apply. Its members may not declare their prices before the annual UGC tasting in Bordeaux (3–6 April in 2006) and wine sales should be directed exclusively through members of the Place.

Négociants sell on to merchant clients around the world, who in turn distribute the wines among their own customers. Thus, a coherent chain of distribution is formed the principal aim of which is to enable the consumer to finance the holding of the stock until the moment of consumption.

The discount enjoyed for providing this degree of finance – or rather the frequent lack of discount – is perhaps the most important concern voiced downstream of Bordeaux. “The profit premium needed to support the cash flow of producers, and the risk, is not always present,” says Alun Griffiths MW, Wine Director of major UK Bordeaux buyer BBR. “Some proprietors adopt the view that their wines are luxury brands and price accordingly. Others are guilty of not paying heed to the market, for example those demanding excessive prices for their 2004s.”

Even within Bordeaux there is concern over the validity of prices that filter through the en primeur pipeline. Bill Blatch, owner and managing director of Bordeaux négociant Vintex, points to a lack of market realism. “The system allows châteaux to set prices. Most seek parity with their peers and the chain must follow. This would not be the outcome if each producer employed its own sales force, closer to the needs of the customer. Since 1996, with the exception of 2000, it has been difficult to claim that the end customer has spent his money wisely.”

If the trade downstream senses that, in all but the best vintages, en primeur prices tend to be unrealistically high, producers perhaps inevitably have a different perspective. Seely agrees that the system is not a competent price setter in the short-term but he has more faith in the market in the longer-term. He claims that Château Pichon-Longueville is frequently “under-reported” at en primeur tastings, the scores it receives from critics rising when tasted in bottle. He has encouraged CMGC, AXA’s négociant company, not to press stock onto an unwilling market in years like 2001 and 2002. It has subsequently sold them at a “more comfortable” margin. In fact, he asserts that CMGC does the majority of its grand cru business, between 55% and 66%, post en primeur.

For many merchants this appears to be an unrealistic position, particularly where there is concern that en primeur prices may be undercut later on by négociants, or producers, keen to unload stock. Importer Charles Taylor MW, of Charles Taylor Wines, believes that this concern has led merchants to aim for zero stocks at the end of the campaign. “In most years there is very little activity in the following months. We are still getting offers, from some of the smaller of the négoces, of 2001/2002s at a discount to en primeur prices.” Taylor cites shrinking margins as a chronic concern. “There is pressure from competitors who appear to have no interest in sitting and waiting. I understand why so many merchants have effectively given up offering Bordeaux en primeur,” he says.

Low margins can lead to insecurity and the risk of the supply chain breaking if a négociant goes under. James Miles, managing director of the UK-based Liv-Ex wine exchange, considers this to be one of the fundamental weaknesses of the en primeur market. “There is scope for the market to become much more grown up,” he says. “The two-year risk burden [until shipment] before title passes is unjustified.”

The UGC itself is less concerned. Current president, Patrick Maroteaux of Château Branaire Ducru, sees no cause for alarm: “Experience shows that this system is extremely reliable.” In fact, there have been very few notable business failures in the Place in recent years. Nevertheless, almost every merchant has adopted a risk-management strategy, either through careful selection of merchants to buy from, through spreading purchases among as many négociants as possible, or through seeking costly bank guarantees.

While the jury is out on pricing, what about transparency of market information – a cornerstone of regulated stock markets? Charles Taylor feels that more information concerning the volume of wine put onto the market could be forthcoming. “There is a suspicion that some suppliers are withholding information that could benefit the market,” he says. But whether the finger of suspicion should be pointed at the producers or the négociants is a moot point. Blatch believes that the relevant data is there for the asking. “Information on production and release is freely given. It is up to the merchant to ask,” he argues. Allocations among négociants normally conform to mathematical formulae, but Blatch senses there is less transparency over the tranche process (largely confined to the first growths). Nevertheless, a form of government by opprobrium applies. Lyndsay Hamilton of leading claret trader Farr Vintners believes it is the role of the professional to canvas opinion and to work out the numbers. In this sense Seely has it right when he says that en primeur offers “traps for the unwary, opportunities for the savvy”.

Risky business

For at least two centuries prior to the advent of château bottling, new vintages were sold to merchants in Bordeaux for ageing in cask and subsequent distribution. Proprietors maintained a hands-off stance, relying on specialist intermediaries, courtiers, to advise them on the best négociants to deal with on matters of price. The merchants’ annual round of the châteaux cellars, selecting the tanks they wished to have delivered to their own premises on the Quai des Chartrons, was the genesis of today’s en primeur market.

The annual campaign persisted after the shift to château bottling, the only change being the date of delivery of wine to the négociants – some 18 months later, and now in bottle rather than in barrel. A subsequent development, one at the heart of concerns over risk, is the participation of secondary and tertiary buyers – including ultimately the private buyer – at the primeur stage.

Bordeaux’s négociants have always financed the vintage, paying well ahead of bottling. The massive interest of consumers at the en primeur stage has encouraged the selling on of a large part of the crop almost immediately, with payment terms of up to 90 days maximum. Consumers pay up front, of course, delivering substantial cash-flow benefits into the supply chain. The corollary is the delay in delivery of the finished wine, well over a year after payment. Should a négociant fail, perhaps as a consequence of poor trading in the next vintage, there is a risk of non-fulfilment.

The consumer is protected up to a point by local legislation (in the UK, the Sale of Goods Act) but the position of the merchant is less robust. Few merchants from the export markets would relish the prospect of having to seek redress in the French courts in the event of supply failure.

The issue of sample integrity presents a potential “trap for the unwary”. While there is no discussion of deliberate deception – it is acknowledged that the cost to a château’s reputation of being branded a cheat is sufficient deterrent – journalists and merchants recognise the importance of not basing judgments on a single sample. Taylor admits to not being fully comfortable with some of the samples he tastes. “Some sexy samples are presented, leading to a degree of scepticism,” he says. “It is the task of the professional to see through this window dressing.”

The date that the sample was drawn is obviously significant, and variability appears to be endemic. Seely recognises that the young Pichon-Longueville can taste different from day to day. Griffiths ensures that he tastes more than once, to iron out variation, and at the property when possible. Of more concern to him, however, is the timing of the whole tasting process: “March/April after the vintage is rarely the best time to assess the wines. In an ideal world we would be assessing the previous vintage in the spring, after a year in barrel.”

There remains a widespread concern over the sometimes lengthy interval between the UGC tastings, the formal “launch” of the vintage, and prices being issued by the châteaux. The 2004 campaign is widely recognised as failing to reach its potential because of delay. “The Bordelais should be aware that there are other things going on in the trade. And customers would prefer to see the whole picture: drip-feeding prices over two months is a crazy way to carry on,” believes Taylor.

A question of timing
For the UGC, Patrick Maroteaux notes that there is little room to move on timing: putting the campaign back in the interests of more settled samples would clash with the holiday season. But players at all levels make the case for a faster route to market. “You simply can’t hold the world’s attention for two months,” agrees Blatch. While he is “temperamentally against regulation”, Seely acknowledges the potential gain from a more predictable timetable. “The market punished Bordeaux with the 2004s,” he says.

A frequently cited reason for the delay in releasing prices, apart from the sheer weight of public holidays in France in May with their associated ponts, is the tendency to wait for Robert Parker’s pronouncement on the vintage. While some merchants deal openly on the basis of Parker points, others see the obsession with critics’ notes as a growing weakness in the process. Taylor senses that the trade has “largely given up the role of buying on the basis of assessment. Most just wait for the leading press reviews and try to buy those. This is the biggest problem. It’s distorting the picture because the trade are not doing their job.” Blatch echoes this: “Parker is now Bordeaux’s salesman! It makes a nonsense of the tasting process.”

As a négociant, Blatch is largely constrained by the rigid structure of allocations, and he is obliged to try to find markets for the less-fancied wines as well as the front-runners. “The proprietors judge success by the extent to which their stocks have been sold to the négociants, but really success is determined in the secondary markets two years later,” he says. “With the exception of 2000, since 1996 the market has not been very successful in clearing stocks downstream.” He admits to being more exposed in lesser vintages, in part because the system can lead to lemming-like behaviour when it comes to decisions on prices.

But what about allocations of the fancied wines, the red-hot topic of conversation between négociants and their clients in the early days of the campaign? Blatch claims to be “constrained by fidelity” to allocate wines to his regular customers at opening prices. He notes that not all merchants adopt this posture, that some take a more speculative, free-market approach. But there is evidence of proprietor sanction here. “Producers don’t like it if négociants sell above opening
price, and they don’t like to see their wines being sold too cheaply to French supermarkets,” he comments.

The divergence of interest between the brand-owner position taken by more and more producers and the more transparent free-market approach sought by merchants and exchanges remains an enduring tension. Drawing on the stock market analogy, Miles asserts that château owners “try to maximise their receipts on issue, so that en primeur may not be the best time to enter the market. This reflects the financial markets, where new issues are hyped up. The arrival of professional wine investors will lead to greater demands for clarity.” Hamilton, whose Farr Vintners is seen as one of the most “savvy” operators, accepts that en primeur is not a commodity market. But he too would welcome a more market-sensitive approach from producers. “It is a cause for concern,” he argues. “The advantageous price for liquidity is not always there, and it has got worse in the last five years.”

Cash flow benefit
It is not hard to see why, as Maroteaux says, “The Unions des Grands Crus de Bordeaux wishes to perpetuate [the en primeur] system in the course of time.” The cash flow benefit is there for all to see, and the high degree of allegiance demonstrated by the Place as well as by secondary merchants appears to confirm its solidity. But its continued existence cannot be taken for granted. Even Seely accepts that the market is at its best when it is “animated”, and its ability to serve in lesser vintages is a major cause for concern up and down the supply chain.

A successful outcome to the 2005 campaign may be a foregone conclusion, but few outside the UGC are as confident of a positive result in the vintages that will follow. db May 2006