Notes from a sacrilegious oenophile26th February, 2014 by David Jackson
If you are a wine lover, then I beseech you to battle your better judgement and read past the following line – at least a paragraph or two.
I am the managing director of a wine investment business. There, I’ve said it.
I know, I know; it’s people like me, operating in this parasitical, grubby little corner of the wine trade, who are responsible for pushing the prices of the world’s most desirable wines through the roof and rendering them unaffordable. Well, what did you expect? Everyone knows that this space is full of hard-nosed, soulless sorts, who – in the words of Basil Fawlty – wouldn’t know their claret from their Bordeaux. But wine is for drinking, not for profit, you cry! Shame on me!
But is any of this actually true? Firstly, a bit about me: I am a wine lover; In fact, it’s my passion and you might even call me an expert. I don’t need to be either a lover or an expert to do what I do (I am surrounded of necessity by a team whose CVs sport names like Deutsche Bank and Merrill Lynch, but on which Berry Bros or Justerini’s are conspicuously absent), but I am both, and I am therefore qualified to pass comment on this subject matter. Particularly given that I too have been forced to change my drinking habits.
A decade or so ago I was still a regular participant in the hedonistic joy of Bordeaux first growth consumption. A particularly yummy bottle of 1990 was memorable not only for its visceral pleasures, but also because it was the first bottle for which I paid over £100. The year was 2001. Today, for a wine of similar critical acclaim and bottle ageing I might pay seven or eight times that: I am priced out of the market.
So is the wine investor to blame? It is a matter of fact that wine, one way or another, needs to be financed – bankrolled, if you like – from the moment it leaves the vine right up until the cork is pulled. And in the case of fine wine, this can be a very long time – ten, twenty; perhaps thirty years or more. So on the understanding that we all want to drink perfectly mature, jammy claret, but that it needs to sit in a dusty cellar for several decades first, who exactly are we expecting to bankroll the interim period for us?
The châteaux? Not a chance. The Bordelais distribute their wines though an age-old network of brokers who facilitate the sales some two years before the owners can take delivery: the en primeur system. They are unlikely to ditch this cash-flow friendly structure out of the goodness of their coeurs in favour of waiting decades to release their product to market in its final, perfect form (with the exception of Château Latour – more on that later).
The merchants? Here’s a great idea: why don’t we all demand that the merchants do the decent thing – surely they could buy the wine from the châteaux en primeur, but elect NOT sell it to us there and then, but instead hang on to it (at their cost) for twenty or thirty years before selling it to us all at the original en primeur price? (plus a modest margin I suppose – let’s not be unfair about things) Brilliant! And, of course, utter nonsense.
In fact, the merchant’s business is the polar opposite, and very clever. We’ve all heard the adage that the foundations of the wine investment market were formed by the landed gentry who bought twice as much wine as they needed, then waited for it to mature and double in value, at which point they sold half and drank the rest for free. Nice. But have you ever stopped to think what a great deal that was for his merchant too? The merchant got to sell the wine not just once for a profit, but twice – all he had to do was wait, insulated from stock value fluctuations, for the market to increase, until he got it back! Risk free! Well, half of it at least.
So the châteaux aren’t going to bankroll wine’s snail’s pace journey from vine to glass, and neither are the merchants. So it looks like it’s down to you matey – you’re the wine lover; you’re the one who’s going to have to fund this journey. It’s you who’s going to have to have to fork out en primeur and then be VERY patient whilst your pride and joy gathers dust under your floorboards.
But hang on a minute; you don’t really want to wait half a lifetime before dusting off your best Riedel glasses do you? What you want is the opportunity to drink the mature stuff now, now, NOW! Trouble is, that would’ve required stocking your cellar way back when. But what if your poorer, younger self couldn’t afford fine wine back then? Or what if such a purchase wasn’t even possible? I for one would relish the chance of quaffing a bottle of 1982 Lafite right now, but I wasn’t even of an age where I could legally purchase alcohol when it was first released for sale in 1983. Am I therefore to be denied the pleasure because I missed the boat whilst immersed in teenage angst and my favourite Ultravox LP?
Clearly a market mechanism is needed so that I, and the droves of other wine fanciers like me, can splash out on fully mature offerings should we wish. And so, when the Parkers and the Robinsons of this world extol the virtues of luscious, fully aged Bordeaux in one breath, then damn wine investment with the next, my eyebrows involuntarily raise above the physical limits of my forehead. Where exactly do they think it’s all coming from?
Yes, that’s right – investors. Who, in the modern supply chain, play the role once filled by the landed gentry. As a wine lover, the investor is your friend. He was happy to stump up the purchase price when you couldn’t (or wouldn’t). He was similarly happy to pay the storage and the insurance and all the other sundry costs attached to long term wine ownership. He was even prepared to carry the risk that his wealth may have actually decreased in consequence to his selfless gift to you. And all he asked in return was for his slice of the natural increase in the value of the wine over time.
And I choose the word natural in the last sentence carefully, because of all the criticisms thrown at our poor maligned wine investor, burdening him with the blame for today’s eye-popping prices is the most unfair. The investor does not cause the increases; he simply capitalises on them. Put it this way: wine increases in value due to the law of supply and demand. It starts at Price A, which is set by the chateau, and ends at Price B, which is set by the end consumer – the guy who finally pulls the cork.
In between the price will fluctuate as the market endeavours to anticipate Price B. But all things being equal, Price B will ultimately settle at a higher level than Price A because the wine became more desirable the closer it came to maturity (so demand increased), and because it began to be consumed (so supply fell). Both put upward pressure on the price, but don’t be fooled that it was the investor who influenced or controlled price B – only the final consumer had the power to do that. The investor neither increased demand (because he was never going to drink the wine), nor did he reduce supply – he temporarily restricted it. The nuance is important.
In a supply/demand market, the price is constantly tested, and by definition will only find a market at a price at which the buyer is willing. If there is no buyer, the price will fall until one enters the market. This is why the investor doesn’t have the power to control Price B: iron economic law.
When you think about it, the only thing that’s changed in consequence to the modern wine investor taking the place of the landed gentry is that the price fluctuations are more visible, and perhaps more linear. This is simply because the wine is traded more frequently. In other words, the journey from Price A – B is visible, whereas in the olden days the wine disappeared from sight altogether for thirty years, only to suddenly reappear, as if by magic, at Price B like an alcoholic incarnation of Mr Benn’s shopkeeper.
Here’s a thought: much like Mr (Sir?) Landed Gentry’s merchant making his profit twice from the same case of wine, the modern merchant might make his multiple times as the wine changes hand from investor to investor. This is because most investors still use the merchants for buying and selling (they shouldn’t – it’s against their interests, but they are often unaware of their options). Five re-sales at 20% margin = 100% profit from one case imported thank you very much – with someone else carrying the risk! A wine investor confronted by a sniffy merchant with his nose in the air might care to mention this.
But the real reason that wine is so much more expensive these days isn’t a consequence of regular trading – it’s far simpler: the world is a much richer place and there are far more people ready, willing and able to splash out on the finer things in life. Just ask Louis Vuitton or Range Rover. Similarly, there are many more who are willing to play the role of end consumer; to pull that cork. Demand for fine wine has increased dramatically on a global scale over the last decade, but due to the fact that unlike handbags and Chelsea tractors supply cannot easily increase to accommodate this, prices have headed north sharpish. There’s no need to complicate it further.
Certain observers of the wine market seem to regard investors as arrant speculators. But in fact, you can’t actually speculate, in the financial definition of the word. It reminds me of the Asian financial crisis in the ’90s. In July ’97 Malaysian Prime Minister Mahathir Mohammed introduced capital controls to protect the Ringgit from devaluation as a result, in his opinion, of the predatory machinations of speculators like George Soros, who earlier in the decade made billions out if speculating against Sterling.
The point is this: true speculation is only possible if there is a future market, in which you can sell something short. There are no futures or options to trade in with wine, so the market is not open to this type of manipulation. In other words, investing in wine is not speculating in this market controlling sense. It is end users who control the price of wine, and this supports my assertion that wine prices are related more to economic growth and disposable income than anything else.
I raise this point in further support of the wine investor. A speculator does not function as a valuable part of the food chain. A speculator in the property market, for example, buys and hopes. He is not (necessarily) a builder, a landlord, or an end user; he sits on the sidelines and watches. At worst, as in the Malaysian case, he can wreak havoc, and is therefore a destructive agent. Conversely, in the fine wine market, the investor performs a vital function – no one else is stepping up to the plate to bankroll wine – and is a therefore force for good. Consider this question: how could today’s fine wine market possibly operate in the absence of wine investors?
So next time you’re mourning the fact that a bottle Mouton-Rothschild costs more than your first car, and you’re tempted to curse those of us in the trade surrounded by algorithms rather than tasting notes, please have a little grumble instead in the direction of the chateaux. And the merchants. And most of all, in the direction of those rich guys who are prepared to part with sums of money few of us earn in a week on 75cl of fermented grape juice.
In fact, the only truly clean guys as far as I can see are the aforementioned Chateau Latour, who’ve seen through the lot of us and pulled out of en primeur once and for all. Chateau Latour now only offer their product to market once it is fully mature and ready to drink – a first for Bordeaux. But then again, Latour is owned by the French billionaire financier François Pinault, so I doubt their decision was entirely altruistic…
David is the managing director of Amphora Portfolio Management, a specialist London based fine wine investment advisory and portfolio management service, established in 2009. David also currently sits on the board of the Wine Investment Association www.wineinvestmentassociation.org