Published 10th December 2013
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II. Market Summary
III. Bordeaux and The Great En Primeur Predicament
IV. A Changing Landscape
V. Ongoing Trends - China
As everyone has penned their end of year round ups, I wanted to take this chance to summarise too, but more importantly to consider the prospects for this year. This issue of the Market Report will highlight some of the key points to emerge in 2013 and consider the potential offered by 2014.
II. Market Summary
2013 will be noted as a year in which the wine market struggled to gain traction and direction. This is, however, an oversimplified comment. As we mentioned in the last Market Report, Left Bank Bordeaux has dominated most indices and it is their progress that has dragged the market down, with prices remaining soft. Unfortunately, the Left Bank includes some of the most abundant and noteworthy wines produced, so for any form of recovery to take place, the wines of these châteaux have to be in the mix.
The following graph is perhaps the easiest way to show how the market has faired since 2011 as it illustrates the progress of five main categories.
The Liv-ex Fine Wine Indices - 2 year performance
The brighter categories certainly included the Super Tuscans and Vintage Champagne, which have benefited from a narrower range of prospects; favourable (and affordable) release pricing and growing demand. If the huge Bordeaux market wanes, other categories clearly benefit. The sluggish Bordeaux market has led buyers to reconsider the composition of their portfolios and take a less blinkered view – whether their aim is consumption or investment. The wines of Domaine de la Romanée-Conti have also proven to be a safe haven this year, with values surprising many and continuing to grow, even if at a slower rate. The ongoing DRC debate is, given such price growth on an already expensive, rarefied set of wines, whether the domaine is appealing to an ever more select audience.
While Left Bank Bordeaux values have wavered, the prices for Right Bank châteaux have shown greater resistance. This can possibly be attributed to their lower production volumes and the fact that they are perhaps less of a standard target of speculation. For completeness, please see below for details on the performance of the various component indices that form the Liv-ex 500 (the broadest index that Liv-ex produces). This illustrates the resilience of Right Bank Bordeaux.
If we look at First Growth Left Bank Bordeaux in isolation, the price slide looks fairly dramatic. Just consider the fall since late June of this year as represented by the Liv-ex 50 shown below. The index has fallen from just under 320 to a current level just in excess of 295. This is not far off a 10 per cent drop in six months and wiped out the early year gains which had led many to conclude that the market was steadying.
This results in a flat performance over the year – a trend found in all of the major Bordeaux-led indices, as revealed in the following table.
All of this is less than inspiring for those buyers with extensive Left Bank Bordeaux holdings; the very same buyers who are mulling over whether to cash in some gains on historic purchases – even after a fairly significant decline in market price. Who could fault the logic of taking advantage of recent trends? I would stress however that any falls in value have steadied; consider that the Liv-ex 100 fell 15% in 2011, 9% in 2012 and 1.4% in 2013.
There is, of course, another pool of buyers, who have limited exposure to the market and are therefore considering taking advantage of soft Bordeaux prices as this is, after all, the third consecutive year in which the Liv-ex 100 has registered a fall. There is a case to be argued that now is a good time to buy into the market (a theme which I will expand on below). Buyers are considering whether the moment is ripe and this could influence the early months of 2014.
It seems that, after a fairly unremarkable year, the market is returning to type. It is reminiscent of the early 2000s long before the great surge of interest and speculation which propelled the market to new heights in 2010 and 2011. I recall that, back in those early post-millennial years, the market was a fairly serene place with a gentle ebb and flow to price and trade. However, it should not be forgotten that the fine wine market has matured in so many ways; broader global demand and greater transparency are both now factors. As new markets come on board and mature, there are bound to be periods of volatility and changing targets. Now that 2013 has drawn to a close, it is also worth considering that three years of negative returns (as measured by the Liv-ex 100) is uncommon. If you look at the last 25 years of data, you have to run the clock back to 1991 and 1992 for a similarly desolate period. As one of Liv-ex’s directors recently said to me, ‘Three years is quite an achievement, so what chance of a fourth (negative year)?’
IV. Bordeaux and the En Primeur Predicament
Since the 2010 Bordeaux was released onto the market at prices which were generally higher than those of 2009, I have harboured increased scepticism as to the value of buying En Primeur. At Atlas, we barely entered the fray with the 2010 vintage, bought nothing more than a handful of cases in 2011 and advocated that our clients should steer clear in 2012. This advice was not borne out of concern over the quality of the wines produced, as there were successes in each vintage (although far, far lower peaks in either 2011 or 2012). Our concerns related to fair pricing as our view was that prices had not come back sufficiently to entice purchasing in 2011 and 2012 – even if purely for general consumption. When we set up Atlas over three years ago, we had assumed En Primeur would be a significant part of the sales mix and yet, in reality, we have been unable to endorse it.
This en primeur campaign has shaken the market considerably. Merchants who habitually purchased to maintain their allocations now hold stock with a real value that is far less than cost – whether or not they have chosen to acknowledge it by writing down stock in their annual accounts. The concept of year-on-year allocations and ‘building a position’ has largely fallen by the wayside as there is so much unsold stock in the market. Clients of major en primeur merchants have also become disenchanted as they have been sold vintages where the quality to value ratio has not stood up under scrutiny.
I found the following chart produced by Liv-ex and published on their blog quite interesting. In the below they look to show the return from en primeur on a specified pool of wines from 30 leading Châteaux across vintages 1995 to present day. It shows just how prices have increased and returns have fallen. I will add that plotting the two graphs on the opposing axes makes it look a little more dramatic… artistic licence perhaps!
Having not purchased significant en primeur, we are now able to pick off stock at below cost to offer it at more favourable levels to clients as and when we see an opportunity. Prices for 2010s have softened on account of the market and the volume of available stock, but when the market does come back in force, I feel these will be amongst the first targets for collectors. The initial gain is likely to be made from having bought after prices softened, only for them to bounce back.
En primeur: returns
Bordeaux faces another very difficult year of trading and, despite the effusive statements from various parties, I harbour concerns that the next vintage will fail to sell, even if the pricing of the 2013s (due to be released in May and June 2014) is at the ‘right’ level. If a vintage is ordinary and the historic prices for superior vintages have softened, then why buy early? Where is the compulsion to stay on the treadmill? The 2013 vintage is said to be a poor one even with all the accoutrements of modern technology at a winemaker’s disposal. Some commentators have said that it is the worst harvest since 1991. If this was a historic vintage, it would have been a disaster given the weather pattern. If it has been saved, it will have been saved by modern technology.
Back in September, I was amused to read a comment from a Laithwaites’ wine buyer, Jean-Marc Saboua who said that ‘people will have to learn to love 2012.’ I have taken his comment out of context, as he was commenting on lower end wine, where the low quality of 2013 is magnified still further, but he may have a point. If Jean-Marc’s comment made me smile, a comment from Bordeaux oenologist Stéphane Derononcourt made me laugh out loud. Derononcourt is one of the leading consultant winemakers in Bordeaux and has been responsible to some degree for the re-invigorated fortunes of châteaux such as Clos Fourtet, Beauséjour-Duffau Lagarosse and Pavie-Macquin. When asked in a recent interview about his views on Bordeaux’s 2013 vintage he commented:
‘I think it will be very complicated. It’s a very difficult year. I have hopes for the people who can spend a lot on very high-quality viticulture. But I don’t have much hope for the producers in the smaller appellations. The most complicated bit will be to bring the raisins (grapes) to maturity without botrytis (rot). There will be some good wines, but it’s a shit year.’
Such frankness already emanating from corners of Bordeaux suggests that even the Bordelais’ spin machine will struggle to slap a coat of gloss over this one. It is also worth bearing in mind that, with the two ‘failed’ campaigns of 2011 and 2012, they will not want to risk a third. Perhaps 2013 will mark a return to realistic pricing even if the compulsion to purchase is not prevalent.
V. A Changing Landscape?
Via the Market Reports we have brought you commentary on the evolution of the fine wine market and the changing trends we have witnessed. The year could be summarised, in bullet point form, as follows:
- The general market has bumped along the bottom for a year (early gains matched by late falls), with various clients and merchants re-balancing their stock.
- Chinese influence (whether direct or indirect) has diminished for the time being, but looks set to return in a more stable form.
- There is a trend across the most common Liv-ex indices and, losing the peaks between 2008 and 2010, the market is largely where you might expect.
- There is a drive towards value and rational purchasing which has led to a broadening of tastes, which can only be healthy for the market as a whole.
- The Left Bank of Bordeaux has taken the biggest hit and has tugged down the major indices, with First Growth values bearing the brunt.
- The £1000 to £2000 per case category has proven to be very active as a consequence of more rational purchasing based on value judgements.
- Red Burgundy continues to witness demand with the wines of Domaine de La Romanée-Conti still maintaining/ growing in value, despite significant price moves.
- Vintage Champagne has certainly stepped into the limelight with recent successful vintages well-followed and some speculation about new market activity.
- Italy has been a focus for many clients and merchants who have sought well-priced, high-quality wines, where quality is ahead of market price.
- The Right Bank of Bordeaux (St. Emilion and Pomerol) has performed well in the market this year, with lower production and greater stability and focus after re-classification (Angelus and Pavie).
It is reassuring to see that each of the trends we identified has been picked up in The Drinks Business’ annual assessment of the market in conjunction with Liv-ex. While one can scrutinise the methodology and more than likely find points of contention, it is an interesting attempt to analyse data to recognise trends. The report aims to factor in price performance, critical acclaim, trading performance (volume and value), the number of different wines within a brand and the average price of wines within the brand. The full report can be found in The Drink’s Business December 2013 issue.
VI. Ongoing Trends - China
A report last year by Morgan Stanley on global wine market trends made for interesting reading (The Global Wine Industry, October 2013). It is too easy to become overloaded with information from numerous graphs, each highlighting data from a different angle. It was after all an in-depth 78 page report. I have chosen to show some of the more instructive charts here and to make some comments alongside.
There has been much talk in the UK about a troubled Chinese market, with a number of setbacks cited. A general economic slowdown, previous oversupply, concerns over fraud and high pricing have all been mentioned by commentators. Moreover, a clampdown on corruption and bribery has clearly had an impact on gift-giving; a practice in which fine wine had been a major beneficiary and Lafite-Rothschild in particular. However, this temporary dip in fortunes aside, the Chinese market is becoming stronger and is growing in diversity and it is hard not to be optimistic about the longer term trend.
The graph below shows the growth in per capita consumption in China which in comparison to European consumption, is dramatically low (for reference, research by the Wine Institute sites that the French drink 45.61 litres per capita per annum). Such data suggests that it is just a matter of time before home consumption in China becomes a major force in the fine wine market as this would be realised by only a gentle shift upwards.
Per Capita Consumption (litres)
This highlights the point that China is not a question of ‘if’, it is more a case of ‘when’.
Data cited in this report is suggestive of a gradual growing trend that will come to bear on the fine wine market as opposed to the surge in price growth that we witnessed between 2008 – 2011. This rapid increase was brought about by speculation as to where the market was headed on the back of Chinese demand, but as significant as the gift-giving of fine wine might have been, it was only ever to be a false dawn. No market matures as quickly as the data seemed to imply. Everyone was looking at the promise of tomorrow. The market supply got ahead of itself.
Crucially, the Chinese market is changing and we await the emergence of a broader, less brand-driven market that is dictated by home and restaurant consumption more than it is dictated by exchanges between the wealthiest individuals. A leading Chinese importer, ASC Wine, recently commented as follows:
‘Chinese consumer knowledge about wine continues to increase, and they are more and more people interested in wines that are of good quality, and which represent good value for money, so there will be increasing opportunities for entry to mid-level priced wines. This is an encouraging sign that a substantial consumer based wine market will start to develop.’
Matthew Gong, ASC as quoted in The Drinks Business 2013 Trends Supplement.
The structure of the Chinese market is nascent, to say the least, with Shanghai, Beijing, Guangzhou and Shenzhen all expected to develop significantly as individual markets for wine. As the interest and the enjoyment of fine wine spreads to second and third tier cities, we are sure to witness stronger growth from the Chinese market.
Import value per case ($US)
Consumption (million unit cases)
It is also interesting to consider the stories of woe emanating from UK merchants with exposure in Hong Kong and China. The graph above on the left shows that the average case value imported between 2011 and 2012 has – if anything – edged marginally ahead, suggesting that higher priced fine wine is this market’s current focus. The graph to the right shows that consumption increased considerably between 2011 and 2012. While it should be noted that each graph above corresponds to all wine categories, the figures shown are indicative of the trend for fine wine.
It will be interesting to view 2013 alongside these two graphs in due course. The data suggests that value per case has been maintained, although within this it is fair to assume categories will have fluctuated. Bordeaux has clearly lost some of its sheen in this market, and consumers seem to be seeking out value in a more broad-minded way than was previously the case. Burgundy and Tuscany have clearly been two of the major beneficiaries in this respect, yet the key to general market recovery is still dependent on Bordeaux as the largest player. What steps will the Bordelais take to bring their wines back into focus? The market awaits the pricing of the 2013 vintage with interest. Whatever way you view it, it will be a fascinating year ahead.
Simon Larkin MW
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