En Primeur Motor Cars

Imagine you are a Bentley enthusiast and treat yourself to the newest model every few years.  Every time you go to buy a new one the increase in price gives you a shock; but you accept that the inflation in the price of luxury items seems to have little to do with RPI and more to do with the number of multi-millionaires in the world, so you always go ahead.

 

On one of your trips to the dealer, after you have purchased your latest car, the salesman offers you a deal.  He can offer to deliver you the future prevailing newest model in ten years’ time at the same price as the one you have just bought but you have to pay now.  Given the increases you are used to seeing over the years this looks like a good deal.

 

What if the offer was at a slight premium to the current price?  You might still be tempted since the decision comes down to two factors: firstly, what you expect a new Bentley to cost in ten years’ time and secondly the cost of paying up front – essentially a matter of interest rates.  The point to note here is that you might be perfectly happy to go ahead even if the cost was higher than the price of today’s new car.  In fact, strictly speaking the decision has only a second order connection with the cost of a car today – a new car today cannot be a new car in ten years’ time – there is no arbitrage between the two.

 

So what has all of this got to do with the wine market?  Well the proposition above is essentially an en primeur deal.  Change the Bentley enthusiast to a wine lover.  The new Bentley is now a mature wine which is drinking perfectly.  For example, let us say we like to drink a certain wine which we shall just call Chateau A.  Our wine merchant recommends the 2003 and sells us a parcel for £1000 per case.  This will keep us going for a while but we start to think about how we are going to satisfy our thirst for mature Chateau A further into the future.

 

Our friendly wine merchant has a suggestion:  we can pay him £1000 today and he will deliver to us in ten years’ time a perfectly drinking mature Chateau A.  This will be somewhat different from the 2003 which we are enjoying now - a different “model” if you like – but should be just as delicious.  This wine is of course the 2014 Chateau A.

 

Do we berate the wine merchant and tell him he is trying to rip us off?  How can he possibly charge the same price for a wine which will not be drinkable for 10 years as one which is perfect right now?  If we go back to the Bentley example, we can see that this would be most unfair.  It just does not make sense to compare the two.  They are not fungible.

 

We will be developing this argument in later posts.  We believe there may recently have been too much emphasis on the notion that a primeur “should” be priced significantly under the price of a comparable mature vintage.  Primeurs simply are the mature wines of tomorrow.  Are the commentators and analysts (and the consumers they influence) expecting too much?  Next time you go to buy a new Bentley, tell the dealer you would like to pay him now for the one you will be purchasing in ten years’ time. Then tell him you want to pay him 25% less than what you just paid for the current one.  I wonder what he will say?