The Lafite love affair continues…

Quite how it came to rise above rivals such as Mouton so conclusively no-one quite knows, but the absolute dominance of Lafite-Rothschild in Asia is likely to persist. Geraint Carter, investment analyst at Bordeaux Index considers the trend.

In the first of a regular series on the leading investment stories in the fine wine market, we take a look at the two themes that, more than any other, have come to dominate the character of the fine wine market: Asia and Château Lafite-Rothschild.

Of course it is more than a little crude to view Asia as one cohesive market when in reality the neophyte China has very little in common with the likes of Hong Kong, Singapore and Japan, all of which benefit from well-established wine cultures, widespread retail availability and (in the case of Hong Kong) tax-free status. But in the interests of narrative, the generalisation works well enough.

In a manner reminiscent of the arrival of the US market in the late 1980s, Asia is fast establishing itself as the dominant force of the fine wine scene. While aggregate figures are impossible to come by, it is instructive to compare Bordeaux Index’s year-on-year figures for an insight in to the rate of change.

Our numbers show Asian bound turnover increasing from 35% in 2007, 40% in Q2 to 50+% so far in 2009. Will we be looking at 60% this time next year? I certainly wouldn’t bet against it. Much of this relative expansion can of course be explained by the divergent growth patterns of Asia and the US/EU in recent years (a trend set to continue), but this only goes part of the way to explaining the dramatic change.

Fine wine is one of those products that has benefited from the rise of an aspirant nouveau riche in the communist East to such an extent that it could be seen as a symbol of emergent consumerist culture. Like most new arrivals, Chinese wine knowledge is partial and buying habits are skewed towards a small number of well supported brands, none more so than Lafite-Rothschild.

Explanations as to how the Lafite family (including Carruades and to a lesser extent Duhart-Milon) acquired such a prominent position in the Chinese fine wine market vary from the prosaic to the bizarre – pronunciation, marketing, labelling etc. What is clear, however, is that a self-reinforcing loop has imbued the brand with the status of primus inter pares of the first growths.

For all its dominance, the ascent of Lafite is actually a recent phenomenon. One need only go back to 2005 to see that prices stood broadly in line with its first growth peers. Indeed, for the comparable (Parker 100) 1986 and 1982 vintages it was Mouton not Lafite that held an absolute price premium. The Lafite premium for these wines now stands at nearly 250%.

Looking across the broader sweep of contemporary Lafite vintages we see that since 2005 Lafite has outperformed its fellow first growths by over 50%. Moreover, in absolute terms Lafite stands alone in recording real price growth in a period in which the market as a whole has remained broadly static.

Indeed, more recently, as the Lafite 1982 has disappeared from circulation there has been a flurry of activity around both the 1986 and 2000 as importers stock up on those vintages that they believe are best positioned to replace the iconic “perfect” Lafite. This year’s mid-autumn festival should give a useful insight as to which way the consumer is leaning. Both 1986 and 2000 vintages are now trading well above their long-run ratios to 1996 and 2003, making these latter vintages of particular interest to those with a longer-term horizon.

Given the tumult in the world economy and the dark clouds that continue to loom, it is little wonder that investors are focusing buying decisions firmly on those wines that are underpinned by real consumption-driven demand. In short we can expect the partnership of Asia and Lafite to continue to drive the market for some time to come.

Geraint Carter, 10.09.09