By | December 1 2013
The fine-wine market remains sluggish at best. After green shoots in the first quarter, prices flattened out again and stasis prevailed through the summer, with downward movement in September and October. Even the high-flying Super-Tuscans lost momentum in October, to be outdone by the Dow Jones year to date. Only the indices representing Italy, Champagne, and Burgundy outperformed crude oil. Any wine investment would have been preferable to a position in gold so far this year.
The Liv-ex 100 achieved positive growth of 1.7 percent over the period, closing at 265. It seems highly unlikely the index will achieve the further 7 percent uplift to reach the 284 predicted by Liv-ex’s members in a survey held in September. However, respondents were overwhelmingly hopeful (prior to the recent decline), with 87 percent predicting the index would close higher than August levels.
Corney & Barrow is less bullish. "Prices have firmed up but not really risen," says Will Hargrove, head of fine wine. He adds that only very rare wines and the Bordeaux Right Bank are outperforming, "which works quite well for us."
As exclusive agents for the likes of Domaine de la Romanée- Conti and Pétrus, Corney & Barrow represents some of the fine wines that have been less hard hit. Sales director Oliver Hartley points out that "the Liv-ex 100 is heavily weighted to top wines," echoing the argument made in these pages over the past year that the index misrepresents the wider market. This is even more the case now, since Bordeaux represents less and less of the overall volume of fine wine traded, hovering at around 80 percent compared to a 2011 high of 93 percent. First growths alone accounted for almost 70 percent of trade on Liv-ex in mid-2010. This fell to 55 percent as the market peaked in 2011, and now first growths make up only around 35 percent of trade.
"This recession is about the first growths," asserts Liv-ex founder James Miles. "It’s Left Bank Bordeaux," adds cofounder Justin Gibbs. In September the Liv-ex 50 index, made up entirely of first growths, suffered its largest monthly drop since July 2012. The top five fallers during the month were all first growths and all recent vintages (’05 or younger). On the other hand, the top five gainers were two Super-Tuscans, one Champagne, and two older Bordeaux, only one a first growth (Lafite ’97). When I argue that Liv-ex’s benchmark indices – through their heavy proportion of Left Bank Bordeaux and especially first growths – are painting a misleadingly negative picture, Gibbs maintains that "it’s a pretty real picture of the wine market." However, Liv-ex will soon be publishing a new Liv-ex 1000 index to represent the wider market.
As Gibbs puts it, "The broadening is actually very narrow," citing Grange ’08, Sassicaia ’09 and ’10, Guigal’s "La La" 100-point wines, and Opus One as the handful of wines being traded in any volume outside Bordeaux. For example, in September the United States accounted for a record 2.6 percent of trade due to the release of Opus One 2010.
Italy had a market share of 7.4 percent, but this was nearly all down to trade in recent vintages of Sassicaia (5.7 percent). Even the staunchly Bordeaux-centric Fine Wine Fund run by Wine Asset Managers developed a small position in Sassicaia over the summer.
Miles emphasizes the point that a small number of wines dominate the exchange platform with the statistic that since Liv-ex started trading, the top 20 producers represent 85 percent of the business. "And we trade 1,600-1,700 different producers," he adds, which means no more than 1.25 percent of producers listed make up 85 percent of trade on the exchange – the best proxy we have for the fine-wine secondary market.
Despite Liv-ex members’ wishful thinking, the market refuses to budge. "We continue to await the elusive recovery," state Wine Asset Managers in their September monthly report. I ask Gibbs when we might expect said recovery to show its face, and he replies, "The negativity is so profound, and the news flow so relentlessly poor, that something has to give." Liv-ex doggedly tries to counter the market’s bad news by producing encouraging statistics. On the exchange itself, active markets have reached 4,248, their highest level ever and a 50 percent increase since June.
However, they acknowledge that this is largely down to increased supply. On October 16, the bid:offer ratio reached its lowest since August 2012, at 0.30. As at October 31, this had risen to 0.32. Liv-ex has noted a correlation between the bid:offer ratio and the Liv-ex 50 with a two- to eight-week lag before prices start to slump as a result of a falling ratio.
China is failing to come to the wine trade’s rescue as gift-giving remains stifled by the new political regime. It’s not just wine that is suffering as Xi Jinping cracks down on corruption. A Beijing-based friend told me that mooncake sales are down. The pastries are traditionally given as a gift during the Mid-Autumn Festival. She has also noticed restaurants that used to be frequented by those in power are now empty. Officials are reluctant to be seen indulging. A survey by the Guangdong Tea Procession Association found that sales of high-end tea had dropped by nearly 50 percent year on year in the run-up to the festival, "mainly due to the government’s policy to limit luxury spending," said the secretary-general of the association, Zhang Liming, quoted in the China Daily.
Don’t look a gift horse…
The giving of gifts nonetheless remains an integral part of Chinese culture. "Gift giving accounts for a significant share of millionaires’ total expenditure," says the Hurun Wealth Report 2013, and red wine is the second most common gift to give men after watches. Lafite Rothschild comes in at number 10 in male millionaires’ top brands for gifting. (Seventy percent of China’s millionaires are male.)
The report found that the number of Chinese millionaires increased by 3 percent in 2012, a deceleration for the second year running. Of the 1.05 million millionaires, many cite "drinking good teas" as a favorite pastime, while 50 percent are "connoisseurs of red wine," according to the report. Millionaires living in first-tier cities are more likely to enjoy wine tasting, while tea sampling is more common in second- and third-tier cities.
The Hurun Report Chinese Luxury Consumer Survey 2013 also found that wines are the third most popular collector’s item behind watches and Chinese classical art. Now 29 percent of Chinese millionaires are collecting wine compared to only 17 percent in 2011. Almost half cite red wine as their preferred alcoholic drink, far ahead of runners-up whisky and baiju. Champagne comes in fourth, preferred by 12 percent of respondents, with Perrier-Jouët voted the best Champagne brand. Bordeaux remains the preferred region overall.
Ringing the changes
Bordeaux may still be China’s darling, but Wine Asset Managers’ Miles Davis believes the region’s producers need to return to their traditional buyers. China alone is not buying enough to make up for lost custom in the West, where recent overpriced en primeur campaigns have put buyers off. Counterintuitively, the news of a sorry harvest in Bordeaux has been welcomed by some as perhaps being the much-needed trigger to prompt restocking. Davis believes it could be a "game changer. The system can’t continue to support the châteaux and not everyone else," he declares. He says that "Bordeaux is not priced in a way it will sell through," and so, he says, it’s staying mostly in Bordeaux with the négociants.
Unless something changes, "the system will begin creaking, and the négociants will go bust," he predicts. In others words, prices need to come right down for the next en primeur campaign. Maybe a vintage de merde is just the gift the fine-wine market needs. It certainly seems that the status quo will not generate the much-awaited resurgence. With high prices and low demand, it is questionable how long the Bordeaux distribution system can continue to sustain its many players. In the last issue I looked at what négociants and courtiers do to earn their cut. In this, the third part of the series on the Place, I return to the uncertain future faced by négociants.
PLACE DE BORDEAUX, PART 3
The first thing Frédéric Engerer did when he was appointed president of Château Latour was to assess what the négociants bring to the table: "What service are they offering – for example, storage, logistics, sourcing, advice – and what margin are they taking?" For Engerer, the catalyst for change came during the 2009 en primeur campaign, when négociants raised the price of Château Latour in the second and third tranches, adding ¤100 per bottle to the château’s release price. Engerer was unimpressed. "I said, ‘This is crazy; this is beyond reason.’" The margins enjoyed by the négociants were out of line with their "value-add."
En primeur is simply "take and pass," reasoned Engerer, so the négociant is not liable for the storage, splitting, and administrative costs that might be associated with selling older vintages.
This thinking culminated in the announcement in 2012 of the château’s withdrawal from en primeur. However, prior to this Engerer had already restructured Latour’s use of the Place, reducing the number of négociants it sold to, and asking for information about where the wine was being sold. Maison Sichel, for example, was dropped from the list, and Sichel tells of Engerer’s inflammatory language at the time, saying he referred to courtiers and négociants as "parasites." "I was quite astounded at the fact he would think that, seeing that négociants – including Maison Sichel – have contributed to the distribution and visibility of Château Latour for a very long time, and much longer than he has been at its head," recalled Sichel, still reeling from the accusation.
Engerer categorically denies ever having used the word "parasites," saying, "You have to be quite insane to use that kind of language for your customers." He adds that if he really had said that, he should have started to sell direct to importers immediately. "The Sichels, like many others, live in an ideal world where ‘nothing would change and, everything would remain,’" remarks Engerer, evoking Tancredi during the Italian Risorgimento in Giuseppe Tomasi di Lampedusa’s Il Gattopardo. Only Tancredi recognized the necessity of change: "Se vogliamo che tutto rimanga come è, bisogna che tutto cambi."
Engerer advocates change, but not exactly Bordeaux’s own "revival." He has probed and questioned the system, making clear he feels négociants shouldn’t be opaque and that they must add some value. "In my view, they need to listen to what the producers want and how they’d like their wines to be distributed." However, as we saw in Part 1, he has nonetheless made categorical assurances that Latour will continue to sell via the Place.
We also saw that some members of the trade have interpreted Latour’s departure from en primeur as the first step to abandoning the Place altogether. Even Philippe Castéja, managing director of négociant Borie-Manoux – who clearly opposes Latour’s move – can see that the decision is entirely within Latour’s rights to take. "I think it’s the risk we take," he declares, accepting that "everyone is free to have their own distribution."
The Place to be?
Engerer maintains that négociants play a necessary role, acting as salespeople on behalf of the châteaux ("I wouldn’t want to call and try to sell the wine myself") and serving as a one-stop shop for buyers ("The smaller buyer from Azerbaijan or Mexico can’t call every single château"). But what is strange about the system, he muses, is that the négociants have, in some cases, allowed those underneath them to become bigger — for example, Berry Bros & Rudd and Farr Vintners. Does this put the bigger importers into a position to circumvent the Place de Bordeaux, possessing the resources to deal directly with the châteaux?
It can be done: Corney & Barrow is an example of a UK importer specialized in forging exclusive agency relationships with producers, including in Bordeaux, where it represents numerous properties on the Right Bank – from Trotanoy in Pomerol, to Bélair-Monange in St- Emilion, and more recently a few on the Left Bank, such as Château Peyrat in the Graves and Château de Lamarque in the Haut-Médoc.
The Union des Maisons de Bordeaux (UMB) estimates that up to 30 percent of Bordeaux trade takes place outside the Place. This is particularly common on the Right Bank, due to lower production levels. L’Evangile’s estate manager Jean-Pascal Vazart tells me that there’s so little of Pomerol second wine Blason de L’Evangile that it’s sold before it’s even made — for example, to French retail chain Caves Nicolas. However, the majority of wines in the Rothschild stable are sold via the Place.
Going it alone
Vazart reassures, "We don’t have any wish to say to the négociants, ‘You’ve been involved for centuries, and now we’re carrying on without you,’" adding, "They’re our privileged clients." However, he puts this down to loyalty rather than necessity. "We could do it without them, but we don’t want to," he argues, explaining, "There’s a trust between us, and they’ve always helped us, and we will help them, too."
Engerer doesn’t seem worried about what would happen if all the négociants refused to sell the older releases. "We could do it," he says tentatively. "We know how to do it; we do it already at Domaine d’Eugénie and Château Grillet," he says of selling direct at Latour owner François Pinault’s other properties in Burgundy and the Rhône. It is quite conceivable that Latour could pay for its own distribution team with the hefty profits being paid to négociants. "At Eugénie we have no négociant, and we sell to about 50 customers around the world," explains Engerer, but "in Bordeaux we would need to cover 600."
These 600 would be largely made up of importers and merchants globally. When I suggested there might be other methods of reaching the end customer, he was unforthcoming, saying, "We sell very little to private clients – just a handful of Pinault’s friends." He argued that anything more and "their buddies will want to do the same, and then the retailer will call and ask why we’re selling directly to their client." It’s one thing doing without the négociant layer, but quite another to upset the merchants themselves. This would mean reaching many thousands of private individuals worldwide rather than 600 intermediaries.
Since this initial conversation with Engerer, Pinault, through holding company Artémis Group, has acquired Araujo Estate. In the model of many high-end Napa wineries, Araujo Estate sells wine directly to private clients via a mailing list. The website states that more than half of the estate’s wine is sold this way, while the rest is available at fine restaurants and selected wine merchants across the United States, Europe, and Asia. So, direct sales can work without enraging retailers to the extent that they refuse to stock the wine.
When I asked Engerer later about Araujo’s mailing list model, he agreed that "this is going to be very interesting to follow," citing in particular "rate of loyal customers, turnover, logistic follow-up, et cetera" as worthy of analysis. However, he countered, "that doesn’t mean we have any idea of extending it for the other properties." He explained that at Eugénie and Grillet "we concentrate our efforts on restaurant presence." And in Bordeaux, of all places, the mailing-list model would perhaps be harder to introduce than anywhere, where there are certain unspoken rules – developed and reinforced over centuries on the Place – that even the hard-nosed and contrarian Engerer will not ignore.
In any case, Engerer didn’t seem convinced that selling direct to consumers works in wine. He says that in wine, as distinct from other luxury products, "we have a different logic." A group such as Artémis (which, through its stake in Kering, owns luxury brands such as Gucci and Bottega Veneta, as well as its vineyard properties) or Bernard Arnaud’s LVMH (châteaux Cheval Blanc and Yquem) can sell a handbag direct to the customer in shops around the world. At Kering management meetings, Engerer has to explain over and over again to colleagues that fine-wine distribution doesn’t work in the same way. There can be no network of shops dedicated solely to one property’s wine.
However, Latour does have access to a business-toconsumer sales channel in the form of auctions, which can take place at the press of a button, "because we have our own auction house," says Engerer, referring to Pinault’s ownership of Christie’s. In May 2011, Christie’s held a Hong Kong auction dedicated to the sale of Château Latour where 100 percent of the lots were sold, for a total of HK$59.7 million ($7.7 million). The timing was impeccable, since first-growth Bordeaux prices peaked the following month before falling by one third over the next year. Christie’s had previously held a sale in November 2008 featuring more than 100 lots of Latour, but this is not a regular distribution channel for the château.
All good things
Whether or not Château Latour ends up forging its own path outside of the Place, only time will tell. It is undoubtedly one of the best-placed producers to do so, given the financial backing and potential distribution channels of its parent company.
Questioning the Place is nothing new, according to Sichel. "I remember seeing some customers here in the ’90s," he says from Maison Sichel’s offices on Bordeaux’s Quai de Bacalan, "who predicted the end of the négociant." These customers, bowled over by the dotcom boom, asked "why would they still buy from négociants when communications would be so easy and transparent and they could buy direct from the châteaux," recalls Sichel.
A couple of decades later and the Place de Bordeaux is still intact. "If you take the past 50 years, there have been lots of changes," says Castéja, a key and long-standing member of the Place. The négociant system "works very well at the moment," he affirms, concluding, "but nothing is made to last forever." Bordeaux’s very own Risorgimento could be just around the corner.
Third-quarter wine-auction revenues held firm year on year, at $50.4 million, an improvement of 2 percent. This helped bolster the year-to-date performance slightly after a more listless first half. By the end of September, global live-auction revenues were nonetheless down 18 percent compared to the same period last year, driven largely by a softer market in Asia. To September, Asian wine-auction revenues were 31 percent lower than during the first nine months of 2012. By contrast, the figures for the United States and Europe dropped by a more modest 9 percent each.
Sell-through rates in the third quarter averaged 92.7 percent globally – up a percentage point from the first half of the year. All three continents contributed in equal measure to this rise. Similarly, each region’s share of the revenue pie remained unchanged after the third quarter, with the USA claiming the largest slice at 42 percent.
Asia is perhaps set to make up some ground to December, with six Hong Kong auctions scheduled versus seven in the USA, where the average revenue per sale is two thirds as much ($2.6 million compared to Asia’s $3.9 million). Lot prices in the two regions are even more disparate, with the average lot put up for sale in the USA still costing only half that in Hong Kong, and Europe’s almost half again.
Acker Merrall & Condit retained its number-one spot for the nine months to September, despite Zachys and Sotheby’s having brought in more revenue over the third quarter. Acker’s nine-month total of $40.5 million was 25 percent below its 2012 level (fig.3, below). However, Christie’s — Acker’s uncomfortably close competitor of the first half of 2013 – lost some vigor during the summer and let the gap widen a little, to give Acker $4 million breathing space. Acker sells the most expensive lots, averaging $4,492, while Christie’s holds the most auctions and has the widest geographical reach, with sales in New York, Hong Kong, and various major European cities.
Acker still derives 60 percent of its revenues from Hong Kong auctions, a higher proportion than any of its serious competitors, which could explain why its revenues are down more steeply than those of Christie’s and Zachys. Sotheby’s lost the most ground of the major players, having already seen wine sales decrease by 25 percent in 2012. With an $11-million gap, it will unlikely be able to catch up with arch-rival Christie’s by year end.
Further down the table, European houses Winefield’s and Artcurial are most improved so far this year, growing revenues by more than 50 percent, although both houses have low sell-through rates. Though based in Amsterdam, Winefield’s Singapore sales account for 30 percent of its revenues. J Straker, Chadwick & Sons confines its sales definitively to its Abergavenny saleroom in Wales, but this does not stop buyers from around the world taking advantage of the abnormally low buyer’s premium of £7.05 ($11.30) per lot. At their August sale, there were 52 people in the room and ten times as many absentee bidders. William Chadwick, the company’s principal, noted, "Claret easier, Burgundy firmer." Straker Chadwick’s sales were flat year on year, as were Steinfels’, whose MD Marc Fischer is positive, reporting that "trade clients were very bullish and seem to have sold a major part of their stock over the summer months."