On my flight from London to Hong Kong last week, I dedicated a great portion of my twelve hours in transit to reading commentary on the continued rise of fine wine values and, in particular, the value of Chateau Lafite-Rothschild. Many of the individuals who penned these articles described the market as approaching a "bubble-type" scenario. Having carefully read the material and having drawn a few conclusions of my own from personal experience, I thought I might relate some thoughts on the reality of the market and whether this "bubble" actually exists.
First, I think we need to define what this term actually means. According to the Collins English Dictionary the definition of "bubble" reads "a film of liquid inflated by air or another gas." The principle feature of this definition is that if the bubble bursts, it evaporates into nothing.
In financial terms, a bubble is described as "a price level that is much higher than warranted by the fundamentals."
In recent history the dot-com bubble of the late 1990s saw many online companies with little or no revenue traded on the NASDAQ at values far greater than their intrinsic worth (which was fundamentally proven to be almost nothing), a situation which ultimately lead to the market difficulties of 2000/2001. In the 17th Century the Dutch economy suffered through Tulip Mania, a speculative bubble which was created when a single bulb reached a price ten times that of the average worker's annual salary. This portended the eventual, total and utter collapse of the tulip market.
This raises the question of whether the rising value of fine wine is due to market speculation or market fundamentals and whether we are or are not reaching a "bubble".
Asia and Market Fundamentals
It doesn't take looking much further afield than Asia to recognise some of the major market forces currently at play.
As I am writing from Hong Kong I decided to see if I could find a proper representation of all the talk surrounding the "Lafite Bubble", and finally I located a suitable image! As you can see it has a hard skin which required a knife or fork to crack into it. Inside the bubble was a rich desert prepared by a Michelin-starred chef, rather than the air or gas I was expecting. Breaking it did not result in a total collapse but a piece by piece treat. Truly, bubbles are unpredictable phenomena.
Contrary to common belief, China is not exactly a new starter in the wine market. In fact China is ranked the seventh largest producer of grape-based wine in the world. It is a market of one billion people but currently its per capita wine consumption rate is only 0.5 litres per person per annum. For comparison, the average consumption per person per year in the USA is 18 litres and in France it is 55 litres.
According to the latest figures from International Wine and Spirit Research (IWSR) as commissioned by Vinexpo, the consumption of wine by China and Hong Kong increased by over 100% between 2005 and 2009, from 46.9m to 95.9m cases. IWSR predicts that this figure will increase by a further 20% by 2014, to 126.4m cases. If just 10% of the Chinese population starts consuming wine at the same level as consumers in the USA, then this would suddenly create a new market that is double the size of the French domestic market.
Every day now our Hong Kong office receives visitors, enquiries and orders from new clients and the numbers are accelerating. One noticeable change with our Asian clients is transaction size. Compared to when I started this business over 20 years ago (when a $20,000 order was something to celebrate) this new breed of client does not hesitate to place early stage orders which are ten times that size. Be this as it may, it is also pleasing to see that every day brings new consumers who really love wine; enthusiastic clients who pull corks and drink the wines they purchase.
Other emerging markets are displaying similar dynamics. Brazil and India, both countries with exceedingly high import taxes, are still showing a significant uptick in the import of fine Bordeaux wine. Earlier this month The Antique Wine Company handled another record-breaking transaction supplying a single bottle of exceptionally rare white wine for a sum exceeding USD 100,000 to a restaurateur in Indonesia! But more on that later...
The American Fine Wine Market
On the other hand, we have seen a severe contraction in the US market. I do not believe that this is a result of a change in fashion or appetite, but simply a consequence of austerity. As fine wine merchants we should be thankful for this trend. Had the US market maintained the pace of the previous decade we would now be looking at prices far north of where we are today. Now it seems likely that the American market will return, probably in line with their greater economic recovery.
The Global Market
The wines that have been subject to such significant increases in value cover perhaps 30 top chateaux/domaines. These estates are entirely French and are strictly limited in production. In fact, quality focus means these wineries are producing less today than at any time in their 200+ year histories.
Therefore, I don't think we are looking at a value situation which lacks the support of a fundamental market condition. This fundamental is obvious – there is a static level of production that is faced with soaring demand - and I find it hard to foresee any circumstances that will change that fundamental.
When we explore further, we continue to find data to support the view that the current value of fine wine is unlikely to simply burst and evaporate.
An IMF Viewpoint
A working paper recently produced by the International Monetary Fund entitled "A Barrel of Oil or a Bottle of Wine" suggested the value of oil and fine wine were correlated. I'm highly sceptical about comparisons made between a commodity of need (oil) and a commodity of desire (wine) that is purchased by consumers entirely from discretionary income. We should also bear in mind that oil is pretty much the same stuff with no variation of quality in its crude form no matter where it is extracted from.
Wine however has considerably diverse levels of quality, style, and appeal with the commodity being fragmented into different origins and brands. Each of these individual brands is associated with various degrees of costs, appeal and market position. Even in the upper-echelon Fine Wine category these differences create internal micro-economic fluctuations within the sector itself. Ultimately, the report concludes that:
"Demand is the dominant factor in determining the price of both." A rather obvious conclusion!
Of greater interest to me was an exercise performed by Liv-ex which rebased its Liv-ex 100 Index of Investable Wines against various global currencies and commodities. Their results demonstrated that the market has only just now reached its pre-2008 highs (when compared to the Euro) and it still remains under water when rebased against the Renmimbi (see graph), Yen and Gold.
Speculation or Consumption?
Just like a field of mushrooms, new wine storage facilities are springing up around Hong Kong on a daily basis. Wandering around these new facilities, with their hundreds of meters of racked Original Wooden Cases, novices might be astonished to see this and wonder how long it will take the market to actually consume all this wine.
Personally I don't see this as being much different from when I first wandered around the London City Bond facilities twenty years ago. Wine is, and has always been, a commodity that is matured and consumed over time. Its changing nature provides enthusiastic collectors and consumers with the interesting pastime of tasting vintages at various stages of their maturity. The fact that consumers in Asia are now experiencing this joy is no different from what has occurred in more advanced fine wine markets for the past three centuries.
Increasingly we have also seen wine funds being established. These are proving quite successful and it means that the nature of wine merchant's businesses has changed. Traditionally, merchants played the role of purchasing en primeur and holding stocks long term for future release. These duties have now been replaced by large investment funds and been made somewhat redundant by en primeurs being sold directly into the market. The Wine Investment Fund, which was established in 2003, recently paid out its latest returns on funds raised in 2005 and it successfully provided its investors with a 15.2% per annum growth rate. Over the same time period the FTSE100 provided an average return of just 0.48% per annum.
The Wine Investment Fund, which was established in 2003, recently paid out its latest returns on funds raised in 2005 and it successfully provided its investors with a 15.2% per annum growth rate. Over the same time period the FTSE100 provided an average return of just 0.48% per annum.
As recently as this week I received a new London Stock Market AIM flotation prospectus intended to raise €30m to invest only in wines more than twenty years old. Collectively, European-based wine investment funds now have a combined asset value of approximately £300m. Currently I am engaged as a consultant by another Asian-based fund that intends to raise $300m purely from Asian investors. These stock holdings seem relatively modest when compared to the estimated global fine wine stocks of €5bn-€6bn held conventionally by merchants, negotiants and the chateaux themselves.
In the emerging markets, without a doubt the strongest demand is for the First Growths. What effect does this have upon their siblings further down the classification hierarchy? It is feasible that the second wines of the Firsts, (Pavillion Rouge/Carruades/Forts de Latour, etc.) and other aspiring chateaux of appeal to Asian buyers will continue to see rising demand. However, demand for the other classified growths is also now rising in these markets. It is therefore likely that the extreme successes of these upper-tier classified growths (and their associated brands/labels) in emerging markets will inevitably lead to other markets 'trading down' to lower classifieds.
The fine wine business should also be kept in perspective and reviewed alongside other luxury goods, although these goods certainly have the enviable position of much greater supply elasticity. During the past five years the Asian market sales of Hermes leather goods has risen from €305m to €495m. Further, the Louis Vuitton Moet Hennesy group have increased their physical presence in Asia from 338 stores to 495 and the high-end Swiss watchmakers are all doing great business in the region. The demand for luxury is all part of a lifestyle product growth trend.
No Cooling Off
As we move into 2011 and the "Year of the Rabbit" there is no sign of the market cooling off. The value of wine auctions in Hong Kong reached $120 million in 2010, almost double the $64 million achieved in 2009 and four times the amount generated before the city cut duties on wine two years ago. In the run up to the Chinese New Year, we've already sold four more cases of the treasured Lafite-Rothschild 1982. These cases have each achieved just short of £50,000 apiece. Per usual these prices are less than recent auction prices but they are certainly not showing any signs of a price decline. In fact, they were sold at an all-time high.
For me, all of the above points support the view that it is highly unlikely that the value of fine wine will suddenly fall, and it makes me certain that even if it does, it will not evaporate into nothingness. Hence I don't consider the description "bubble" to be applicable to the present market conditions.
Personally, I am still very much in the market to buy Lafite Rothschild, and will be maintaining a strong stockholding position on all of our Grand Crus for the foreseeable future. If you are tempted to sell, I encourage you to contact us now.