Wednesday 29 April 2015

Bordeaux Market - Recent History and Outlook

(This material is drawn from a marketing document of January 2015 relating to the issue of shares in Watermark Fine Wine Limited under the Enterprise Investment Scheme)

The last ten years in the market for top Bordeaux wines have been fascinating.  A boom, a bust, a bigger boom (perhaps even a bubble) and another bust have kept market participants on their toes or in some cases brought them to their knees.  The last three years have seen one of the most prolonged slumps in the prices of classified growth – and particularly first growth – Bordeaux ever seen.  But these are the most famous wines in the world which fully deserve, perhaps more now than ever before, their reputation as some of the finest wines produced anywhere.  So if the world fell out of love with Bordeaux for a while, it would be foolish to believe that this could be permanent.  We look at what caused the slump, why we believe it is over and why we see many trading opportunities in the current market.

Following the sharp drop in prices which was triggered by the collapse of Lehman Brothers in September 2008 the market recovered quite rapidly and by early 2010 was back at the pre-crisis levels.  The rally was driven by a surge of demand from Asia and in particular mainland China and was the result of an exponential growth in wealth amongst the middle and upper classes.  First growths – and in particular Chateau Lafite – had become a status symbol and the preferred choice for corporate gifts and old fashioned bribery.  Hundreds of new wine shops were established and many stocked up heavily to get ahead of ever rising prices.  European wholesalers and speculators also built up large inventories.
Against this euphoric background, Bordeaux was able to get away with eye-wateringly high en primeur release prices for the excellent 2009 and 2010 vintages, pitching them much higher than older and rarer wines.  But no sooner than the 2010 campaign was over, buyers were realizing that the pricing was illogical and regretting their naiveté while feeling a little duped by all the hype.  Also:
·         HK auctions were being swamped with consignments including several directly from Bordeaux chateaux themselves
·         Certain marketing ploys such as Chateau Lafite’s decision to add a Chinese symbol to their 2008 bottling, were seen as cynical and backfired
·         The top tiers of the Chinese establishment were increasingly critical of displays of excess and expressed a determination to stamp out corruption
·         Counterfeit bottles were cropping up with increasing frequency undermining confidence
As sentiment soured, official government anti-corruption measures in China started to bite and the bull turned with a vengeance.  Prices of all vintages, young and old, plummeted causing many of the nascent Hong Kong businesses to fold and stocks were dumped.  Other large stockholders around the world also became forced sellers and the rot truly set in.
If Bordeaux had a chance to turn things around quickly, it blew it.  Having made a fortune on 2009 and 2010 (witness the plethora of ambitious building projects at every top chateau) they could afford to make a magnanimous gesture when pricing the 2011s but did not. Their protestations that prices were at least much lower than the previous year were met with contempt.  The market took another dive and Bordeaux was losing friends rapidly.
Even that was not the end of it.  In 2013, another hopeful rally was brought to an end as modest reductions in release prices for the 2012 vintage were again seen as far too little too late.  In 2014 the market did not even bother putting in an early year rally.  The en primeur campaign was another flop but comments afterwards did suggest that perhaps Bordeaux was finally getting the message.
The Outlook

The causes for the slump of the last three years have run their course:
·       The frenzied buying in Asia has been replaced by a consumption-based demand which is more informed, considered and permanent
·        The distressed disposals have been completed and the stocks dispersed
·       Prices have fallen to a level which is proving irresistible to traditional western buyers particularly in the US where collectors are enthusiastically turning back to Bordeaux
·       The chateaux are implementing global marketing efforts to reinvigorate their brand
·       The counterfeiters are being locked up and measures to combat fraud are being introduced to the bottling process
·      The next en primeur release should, finally, be attractively priced and a successful campaign will do wonders for sentiment
It is therefore our view that the short to medium term outlook is one of increasing volumes accompanied by a steady recovery in prices. Indeed wine indices look to be turning a corner and other measures such as bid volumes and the ratio of bids to offers on online exchanges are sending bullish signals.  Our predicted scenario will provide many opportunities to capture trading profits while also enjoying an appreciation in capital values.

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