Brexit, Bordeaux en primeur and the fine wine market

The anticipation of Brexit, with or without a deal, is causing considerable consternation among wine-merchants, wine-brokers, and wine-lovers alike. At present, of course, we do not know whether Britain will leave the EU on 29 March (or a few months later) – and, if it does so, whether it will do so with or without a deal.

That uncertainly is itself already a problem, since it is of course difficult to prepare for a potentially imminent ‘known unknown’ with such potentially high stakes. The result is a certain amount of anxiety fuelled, at least in part, by a predictable combination of information and misinformation about the likely effects of Brexit. In what follows I try to sift fact from fiction and the more probable from the less probable – though that is no easy task.

So what might happen, what could happen and what are the stakes for Britain’s fine wine brokers and merchants in the run-up to the Bordeaux 2018 en primeur campaign of Brexit – and what implications does this have for lovers of fine wine in Britain?

How is the market likely to change over the next few months and what steps have leading wine-merchants and brokers put in place to protect both consumers and themselves from the potential consequences of the Brexit that they fear the most?

To help me answer these questions I spoke at some length to a number of senior figures in the London fine wine market – notably, Max Lalondrelle at Berry Brothers & Rudd, Stephen Browett at Farr Vintners and Patrick O’Connor and his team at Fine & Rare Wines, adding to the conversation my own thoughts and reflections as an academic political economist who specialises on wine markets.

What became immediately clear to me in my interviews was how differently leading actors in the market have positioned themselves with respect to Brexit – the possibility of a ‘no deal’ Brexit in particular. Some have put in place complex and costly contingency planning – pre-purchasing their euros for the en primeur campaign to come and using available storage (where they have it) to stockpile retail wines for the next months to circumvent any immediate Brexit disruption.

Yet others have done essentially nothing, biding their time and/or discounting the likelihood of Britain leaving the EU without a deal at the end of the month (or, indeed, a few months down the line). But what is also clear is that these divergent strategies are informed by a common understanding of the potential risks of Brexit for London’s place in the global fine wine market.

There are a number of factors at play, each with a series of associated risks.

 

Deal or no deal?

The first and perhaps the easiest to deal with is the question of import duties. While this has perhaps given rise to the greatest anxiety among consumers, for those I spoke to in the trade it is, and always has been, a non-issue. The reason for this is simple – the WTO’s default rate of duty on wine is low and linked not to the price of the good (a bottle or case of wine) but the amount of alcohol within it and the volume sold (duty is payable as a fixed price per bottle).

What is more, in so far as this was an issue, it has been resolved at least for the next 12 months by the UK government’s publication (this week) of its (hypothetical) tariff regime in the case of a no deal scenario. For this would set at zero the tariff level on all imported wine – reducing the cost of imports from, for instance, Australia and New Zealand (with whom the EU has no free trade agreement) and, more significantly, leaving unchanged the current trading regime with EU member states like France, Italy and Spain.

But it is not for this reason that several retail merchants have been filling their available storage with pallets of wine in the count down to 29 March 29. Here two rather different fears come into play. The first is the pervasive anxiety, hardly confined to the drinks business, about border disruption in the weeks and months following a cliff edge no deal Brexit (in March or subsequently).

Brokers, merchants and, above all, retailers (typically reliant on stock liquidity) simply do not know – and thus cannot afford to take risks with – the extent of likely disruption to supply chains and distribution networks that no deal Brexit would cause. What is clear is that the current fluidity of border crossings is at potential risk (especially, though by no means exclusively, at Dover).

Consequently, if one has the spare warehousing to do so it makes sense to hedge against the risk of anticipated disruption through pre-purchasing and stockpiling. That is what many have done. There is a great deal more retail wine sat in the UK’s ‘in bond’ storage facilities than there was at this point last year.

A further factor in this is the potential paperwork mountain that Brexit – deal or no deal – might produce for wines imported from the EU into the UK. Again, there is as yet no clarity on the point from the UK government – despite pressure from the WSTA. But the fear is that all imports from the EU will need to be accompanied, after Britain leaves, by a dreaded VI-1 customs declaration form (‘dreaded’ simply because it is time-consuming and labour-intensive to complete). Both anxieties are legitimate – though, somewhat ironically, there is no requirement in international trade law for Britain to insist on VI-1s for imports from the EU after Brexit – the ‘red tape’ is, in this instance at least, discretionary.

That, you might think, is bad enough. But it is only now we come to the really significant factors. Chief among these, and top of the list of anxieties for everyone I spoke to in the London fine wine trade (rather predictably), is the exchange rate – and, particularly, the exchange rate risk associated with Britain crashing out of the EU without a deal. Put simply, today £1 buys €1.17 on international exchanges.

In a no deal Brexit scenario, the pound is expected to fall, perhaps to as low as parity with the euro. That would represent a 17% loss, pretty much overnight, in purchasing capacity. And that, in and of itself, is a pretty good rationale for pre-purchasing and stockpiling at an exchange rate of €1.17 or thereabouts.

Or so it might seem. But there is an immediate problem. While a no deal Brexit scenario would, of course, produce a run on sterling, anything other than a no deal scenario would lead sterling to strengthen, increasing the effective purchasing power of UK brokers and merchants. And it would do so in the immediate run up to the Bordeaux 2018 en primeur campaign – precisely the time in the year at which they are most exposed to exchange rate risk.

Herein lies the dilemma. Does one hedge against the exchange rate risk of a no deal Brexit – pre-purchasing euros and opening credit lines in euros at a fixed exchange rate today; or does one wait and hope that no deal is avoided at the last minute? Different parts of the UK fine wine trade have resolved that dilemma differently, but they have all been asking themselves the same question.

How they have positioned themselves depends on a couple of factors. Those whose business models are based on the retention of large allocations of Bordeaux futures from one campaign to the next have, typically and perhaps understandably, tended to hedge against the exchange rate risk of Brexit, committing themselves in the process to an effective market position on the 2018 vintage.

From their perspective, they cannot afford the risk of having to purchase their Bordeaux futures at a euro-sterling exchange rate of parity or worse. Yet for those who are more flexibly placed vis-à-vis Bordeaux futures, willing in effect to pass entirely on the 2018 campaign if the price in sterling is not right, there is no need to hedge against an uncertain risk. Instead, they cross their fingers and hope for the exchange rate premium of a deal or a long delay in the Brexit negotiations. Only time tell who has got this right.

There is nothing much in the previous paragraphs that comes as a great surprise to someone who works on the political economy of the fine wine market and the political economy of Brexit. The UK fine wine trade is well-informed about the risks of Brexit (with or without a deal) and has put in place understandable, if somewhat divergent, contingency planning on the basis of that risk assessment. But this is not to say that I was not surprised by at least some of the responses of my interviewees. Two factors that I had simply not anticipated came out of our conversations. Both, I think, are fascinating and each has important implications for the future of London’s place in the global fine wine market.

 

The Japan Effect

The first of these surprised me the most and has, perhaps, the greatest potential implications. It is, strange though it might seem, the Japanese market.

The EU has just concluded a new trade deal (the Economic Partnership Agreement) with Japan. This came into effect on the 1 February 2019. One of its consequences is to eliminate the tariff on imports of European wine into Japan, which previously stood at 15%. This poses a big and immediate problem for London-based intermediaries in the global fine wine market.

For EU-produced wine stored under bond in the UK will, effectively, become 15% more expensive in the Japanese market in comparison to that stored in the EU the moment the UK leaves (with or without a deal). The same would, of course, be true for any other third country with whom the EU signs a new trade deal from the moment of Brexit onwards.

The implications are potentially profound. First, they reduce the effective size and significance of the UK as an international intermediary in the global fine wine market – reducing the relative share of the world market likely to pass through London.

And, secondly, they raise the interesting prospect of UK-based brokers and merchants making far greater use in the future of in bond storage within the EU – essentially, in France. This would change considerably the structure of the international market and potentially the place of UK brokers and merchants within it (a factor only reinforced by the greater volatility of sterling as a currency on international exchanges after Brexit).

The second factor, though rather different and arguably less profound in its potential implications, is also significant. It poses a major potential logistical headache for the UK fine wine trade. It is the anticipated need, post-Brexit, for UK slip labels on all wines exported from the EU to the UK.

At present, for as long as a wine produced in an EU member state remains in the EU there is no need for a country-specific slip label. In effect, EU law makes the producer whose name appears on the label legally responsible for its contents, throughout the union. But at the moment either the good or the UK leaves the EU this changes.

At this point, in international trade law, the purchaser of the good (in this case a UK-based wine broker or merchant) becomes legally responsible for its contents. The point is that the passing of this legal responsibility necessitates a UK slip label being placed on each and every bottle of wine that enters the UK – probably even before it arrives in a bonded warehouse.

Brexit, as the above paragraphs by now make clear, will be challenging for the UK fine wine trade in the short, medium and, indeed, the long-term. As the consequences of Brexit become clearer it will adapt and evolve and it will need to adapt and evolve.

There are clearly great opportunities for those first to adapt, as long as they get it right. But there are also great risks for those slow to adapt or who get things wrong – the stakes are very high indeed.

In 10 years time, the global market for fine wine will undoubtedlty look very different than it does today and London may play a rather different role within it. Brexit will undoubtedly be a key factor in that transformation.

 

Colin Hay is Professor of Political Science at Sciences Po in Paris where he works on the political economy of Europe, La Place de Bordeaux and wine markets more generally

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