LUXURY – FINE WINE: Never had it so good

With millionaires pouring out of the woodwork, fighting over limited top-name bottles, the fine wine trade is laughing all the way to the left bank and right bank, says Patrick Schmitt

F Scott Fitzgerald described the rich as “different”, and the fine wine trade, dependent on this privileged sector of society, is similarly far removed from anything else in its category. While most involved in the handling of wine are struggling with oversupply, increasing costs, static price points, and social responsibility issues, the most expensive wines in the world are experiencing escalating prices and increasing demand. Their only concerns are Parker points, and possibly counterfeit labels. In fact, presently, fine wine is an extraordinary market, one which, as the Liv-ex benchmark index highlights, is outgrowing other asset classes such as gold, copper and the FTSE (see table on page 36).

Why? It’s simple. People have more disposable cash than ever before. It might not be apparent in Tesco, although even this supermarket sells wines worth well over £100, but the number of rich is growing, and they are getting richer. As Forbes points out, while 20 years ago there were 140 billionaires, three years ago there were 476 and last year 691. This year there are 793. That means 102 new billionaires were added to the magazine’s list in a year and, together, these people are worth $26 trillion.

As many as 23 of the Forbes-listed billionaires reside in Britain’s increasingly cosmopolitan capital (although only 12 are British), enjoying relatively low taxation, political stability, and open financial markets. US banks are making more money in London than New York, believes James Miles, founding director of fine wine exchange Liv-ex, and bonuses in Britain are expected to be 30% higher than last year, according to Armstrong International. It is estimated that 4,200 workers in the financial sector will take home a bonus of over £1 million this year, compared to 3,000 in 2005.

And this explains why the fine wine trade is now so firmly focused on London – it is where so many of the super-rich reside. “If you want to find fine wine, the best place to start is London,” says Miles. What about the US? “The weakness of the dollar and the emergence of London as the global centre of finance has meant London has become the biggest consumer of fine wines without a doubt in the last two to three years; it’s not just trading, but where the wine is ending up.”

Many of course continue to buy direct from Bordeaux and there are “important merchants in Switzerland,” according to Miles. Furthermore, Russia is an expanding market and there is a lot of interest from the Far East, Hong Kong and Singapore, according to Stephen Browett, buying director at fine wine specialist Farr Vintners, which has an office in Hong Kong as well as London.

Top of the pile
But what are these super-rich buying? Well, look no further than the top 50 fine wine brands compiled by Liv-ex. Number one is Lafite – a result of its consistently high Parker scores, high levels of production and high prices, pushed up due to strong demand from Asian buyers. “Prices of Lafite have been driven by the Far East, it is the favourite brand there,” says Gary Boom, partner at The Vintage Wine Fund. “The Chinese in particular have an insatiable market for Lafite over the other first growths,” he adds.

The other reason Lafite tops the list is because more of it is produced than Latour and Margaux (the brands are ranked on production as well as other factors; see methodology). “All the first growths are pretty close [in price] but Lafite has a slightly higher production,” notes Farr Vintners’ Browett.

Hence, as Miles points out, “If the price of Lafite goes up, with around 20,000 cases at £3-£4,000 it will have a larger economic impact than Le Pin selling 300 cases at £8,000.”

Overall, Lafite has accounted for over 13% of trade through Liv-ex and, as Miles concludes, “There is a perception in the trade that Margaux and Latour are superior but it doesn’t stack up in the figures – Lafite has consistently made the best wines according to Parker and it has made 20% more wine than Latour or Margaux.”

Noteworthy besides Lafite’s premier position is the dominance of Bordeaux in the fine wine trade – over 90% of business is from the region. “The fine wine market is generally a Bordeaux game,” says Miles.

Many reasons for the region’s dominance exist, but as Mathieu Chadronnier, head of the grand cru department at Dourthe, explains, “The difference between Bordeaux and anywhere else is not necessarily that it has the best wines in the world but that it has more top wines – it is a question of volume.”

He also believes it is because the top tier of Bordeaux is “easy to understand”, that is, compared to Burgundy.  Similarly, Miles points out that Bordeaux’s dominance is due both to the quality of its fine wines and the large volumes produced. “With the top wines in Burgundy you struggle to find more than 200 to 300 cases,” he says.

Bordeaux also has Parker, and it is his influence that Browett believes partly explains the concentration of business among a few fine wine brands. “Certain wines have increased a lot in price recently because everybody wants the same wines – they follow Parker like sheep. Parker makes a great difference,” says Browett. His effect is felt year after year, whatever the wine. “2003 Pétrus was worth about half 2000’s vintage and that was because it got 93 versus 100 Parker points,” recalls Browett.

However, while “buyers look for Parker scores they also look for specific names,” says Chadronnier. “The times have past when garage wines, micro cuvées, could fetch huge prices based on high Parker scores. If you are unknown it will help you sell, but only if you remain at a reasonable price,” he says.

Outside Bordeaux, Chadronnier says, “Prices for wines from the Rhône have increased a lot since 2000.” Browett, on the other hand, is not so sure. “We haven’t got the same demand for the Rhône that we have had, it is a bit weak. This is partly because of a string of good vintages, and you can’t have a good vintage every year …”

Hence, in terms of economic impact, around 1,000 cases of Côtes du Rhône is worth the same as one case of Pétrus.
As for other wines, he records “a decreased interest in Super-Tuscans” among his company’s customer base. A change he ascribes to the fact these wines are “maybe not so in fashion”.

It might be surprising to note that there aren’t any Californian wines in the top 50. “People who pay high prices for Californian wines like Opus or Screaming Eagle tend to be American and it is very much a local phenomenon,” says Browett. Also, brands such as Screaming Eagle are produced in such tiny quantities the economic difference they make is small, despite high prices, points out Miles. He also says that although Liv-ex “does trade in Opus One, it doesn’t score particularly highly, although it would feature in the top 100”.

But has the market changed much? “Maybe if we had done the same survey 20 years ago there would be fewer names from outside Bordeaux, but in terms of big brands and the secondary market Bordeaux is as dominant as ever,” says Miles. “Two to three years ago 70% of our market was Bordeaux and now it’s 90%. It is ridiculously concentrated, not just in terms of names from Bordeaux, but first growths. The five first growths account for 40% of what we’ve done in the last year.”

Furthermore, the market has been “extremely active since September last year, not just in the first growths and super-seconds, but the top 50 or 60 names in Bordeaux,” says Chadronnier. “There are more and more rich [people] and they are richer and richer,” he continues. “Merrill Lynch and Cap Gemini show that the global high-net-worth population has grown tremendously. These are people with effectively $1m in disposable cash and the number of them has grown by 6.5% to 8.7m [2005]. These people spend £10,000 as we spend £1. They can afford any bottle of wine.”

And fine wine is “a play on wealth creation,” according to Miles. Hence, Farr has had its best ever year, according to Browett. And, according to Gary Boom at The Vintage Wine Fund, prices are spirialling not just because the number of millionaires is increasing, but because, “they all want to drink the same thing and supply is limited.”

 

Why invest in wine?

James Miles, founding director of Liv-ex, believes fine wine is an attractive area for investment because of “increased transparency in the market, and recent academic studies have shown that fine wine produces comparable returns to equities over the long-term.

“Moreover,” he continues, “low volatility means that the risks are relatively low, and a low correlation with other markets make it a good way to diversify a portfolio. For professional (City-type) investors this is a powerful mixture.”

Miles adds, “The market hasn’t done much over the last 10 years – it has increased about 60% in five years, and probably less than that since 1996. Although not bad it is not much over inflation.

“The professionals have invested less than £50m in the last three years – this is peanuts – and there will be much more to come.

“At the moment outside of insiders, almost nobody knows that there is a bull market in wine. For this reason I think we are still at a relatively early stage in the current bull market for wine.”

Download a pdf of the Liv-ex 100 – Benchmark Fine Wine Index vs other asset classes

Methodology:

How were the top 50 fine wine brands ranked? To begin, the top 200 wines tracked by Liv-ex were arranged according to four criteria: trade on Liv-ex, average prices, average scores and one-year performance. From this the first 50 were taken and then production weighted. Champagne and Port were excluded due to a lack of declared vintages over the period studied – 10 vintages between 1995 and 2004.

To analyse each criteria in more detail, firstly, the brands were ranked according to their percentage of total trade on Liv-ex. This gives an indication of the secondary market for these wines by volume, and therefore gives “a good indication of what people are really after”, says Miles. The wines were then ranked by price, which involved calculating an average of the current best price listed by European merchants in each of the last 10 vintages (1995-2004). This again gives an indication of those brands that are most sought after, and the better the brand, the higher the price.

The “score” refers to an average score out of 100 as listed by erobertparker.com for each of the last 10 vintages. Parker not only has a greater impact on price than any other fine wine commentator but this gives a qualitative angle to the other quantative measures of brand value.

“Performance” refers to the average change in price over the last 12 months for a basket of each brand over the last 10 vintages.

Lastly, “production rank” was derived by multiplying the average price across 10 vintages by the average production figures (according to Robert Parker, Wine Spectator and UK agents).

Where a grower is listed, the following wines were included:

Gaja – Sperss, Sori Tildin, Barbaresco
Guigal – Côte Rôtie Turque and Landonne
Roumier – Charmes Chambertin, Ruchottes Chambertin, Bonnes Mares
Vogüé – Musigny, Chambolle Musigny Premier Cru, Bonnes Mares
Boillot – Corton Charlemagne, Batard Montrachet
Drouhin – Montrachet M de Laguiche
DRC, Assortment – one bottle of Romanée Conti, three bottles of La Tache and two bottles each of Echezeaux, Grands Echezeaux, Richebourg and Romanée St Vivant

© db December 2006