Tom Wark has created a "must read" summary of what is a complex topic in his recent Fermentation blog post titled "The Three-Tier System and Consumer Access to Wine." Make sure you read the comments too.

Why you should read it

• If you're a wine collector or enthusiast and have problems buying wine out-of-state because of interstate shipping barriers, Tom's post provides the historical rationale for the 3-tier system and why it evolved the way it has to create such consumer access issues.
• If you're confused about why a winery can ship to you but a retailer in the same state cannot, you'll learn why.
• If you thought the 2005 Supreme Court decision, Graham vs. Heald, solved the consumer access issue once and for all, learn why it didn't.
• If you live outside the U.S. and don't understand why the U.S. regulatory environment is so complex, reading the post provides a good foundation.  Frankly, Tom's post should become required reading in any serious wine education program worldwide.

Sotheby's Wine department excellent results for the 1st half of 2009 provide further evidence of Asian buying power (read the press release).  The tables below provide more details but here are a few points to highlight:

• With only a single debut sale in Hong Kong in the first half (out of nine auctions), Hong Kong already surpassed the five sales in London in the same period and almost beat New York.
• Over 56% of buyers at all nine auctions (measured by value) were Asian.
• Among the top 100 lots by region, an astounding 88% were purchased by Asians.

WinePrices.com's most actively traded fine wine indexes were up from between 10%-17% in May 2009 based on global auction results (the Dow Jones Average was up 4.1%).  See full summary results page for all nine indexes.

What's going on?

As noted in my prior post, Asian wine buying influence continues unabated, I'm sure these prices reflect the impact of higher auction prices being paid in Hong Kong.  Of the 11 auctions held in May worldwide that we tracked, four were in Hong Kong and about 25% of the price data points derived from these auctions.  I'll be doing a separate analysis soon to try to quantify the "Hong Kong effect" although Asian buyers continue to be active in New York and London auctions.  Note that these results exclude the first mainland Chinese wine auction for reasons I will address in a separate post (the results would have been skewed upwards further).

The sharp upturn in The Conference Board's Consumer Confidence Survey during May (see press release) also seems to correlate with these May auction results.

California fine wine prices performing particularly poorly

The California 100 index has turned in the worst performance of the nine indexes since January 2005 (101.11 index versus 100.00 in January 2005).  The 2009 price recovery which has positively impacted all other indexes has largely skipped the California 100 with only a 1.2% increase YTD to May.  The lowest other index for the same YTD period is +9.1% for the Italy 25 and +31.3% is the highest for the Bordeaux First-Growth 100.

If anyone doubts that fine wine prices aren't set based on global demand and supply, read the following two stories:

• Asia dominates Sotheby's sale - This was a NYC auction but also held live on the Internet.  "The top five most-expensive lots were bought from Asia.  Nine of the top 10 revenue-grossing lots were claimed by Asians."
  
• Counting China's millionaires - A few key points: 825,000 mainland Chinese - or one in 1,700 - have a personal net worth of at least US$1 million.  "82% of China's richest have not made any lifestyle changes since the financial crisis hit.  The underlying reason is that their confidence remains high." 
  

Bottom line: It seems that fine wine prices have a serious underpinning of demand that will only grow over time with Chinese economic growth.

Bloomberg's Elin McCoy just published her article, Wine 'Spot Market" Puts Collectors, 12 Million Bottles Online, about Vinfolio's Marketplace.  I'm not sure there's much to add as she did a great job distilling the Marketplace into a concise story.  As of first thing this morning, it was already the #5 most emailed story on Bloomberg in Asia -- and that includes among all financial and political stories.

A few important points to clarify:

1. Marketplace goes live on July 7 - Since I started talking to Elin a few weeks ago, we've move the commencement date for "going live" to July 7 from July 1 to push it until after the 4th of July weekend.  UPDATE: I forgot to mention that interested sellers can start marking their wine for sale now to prepare for live bidding.  Here's how.
2. International expansion of Marketplace - There's no question that the Marketplace is applicable in both Europe and Asia but we need to "walk before we run."  The reference to "end of year" for the UK is clearly ambitious and not likely unless we partner with someone.  In Asia, my comment about the market not yet being ready simply recognizes the reality that regional collector-owned wine supply drives the Marketplace.  That will develop in Asia over time given the pace of buying and the emergence of more local wine storage options created by the elimination of Hong Kong wine duties last year, but virtually all supply being sold in Hong Kong wine auctions today is coming from the U.S. and Europe.

VinTank, the "digital thinktank" for the wine industry, issued a new Pulse Report yesterday on the launch of Vinfolio's Marketplace and its "potentially high" market impact for wineries and importers.  While the Marketplace is fundamentally about systematically aggregating fine wine supply from wine collectors and enthusiasts to create a scalable secondary market supply channel, it is equally applicable to the trade.

Marketplace helps the Trade optimize revenues

In particular, the Marketplace may be used by the trade as a low-cost, direct-to-consumer sales channel (via Vinfolio) for both new releases and library wines to optimize revenues.  For example, wineries or importers with allocated wines may decide to anonymously sell some portion of their wine at above mailing list or "official" prices when secondary market demand is strong. Or, if facing an oversupply of an item, they can discreetly choose to sell wine at below official prices without fear of negatively impacting their brand position.

Home state of Trade participant doesn't matter

All wine sold through the Marketplace must physically pass through Vinfolio in California.  If a winery or importer has no supply already located within California, Vinfolio's CA type 9 importing license provides us with a blanket right to bring wine into California from any jurisdiction within the U.S. (provided we pay CA import excise taxes and the wine is legally registered for sale within the U.S.)

Trade license of Marketplace sellers is not relevant

Anybody can sell using the Vinfolio Marketplace because it is operated as an auction in California.  The relevant statute permits wine sold by "any person" and removes all vintage-related limitations on what wine may be sold.

Why consumers benefit from Trade participation

Consumers will have access to more choices, including new releases, wines from closed mailing lists, and potentially bargains from wineries and importers looking to sell excess supply.

Bottom line: As VinTank's report says, "any healthy alternate route to market that causes margin release is favorable.  This is the case with the Vinfolio Marketplace."  If you're a member of the trade and would like to learn more, please contact trade@vinfolio.com.

WinePrices.com's new fine wine indexes were just updated a few days ago based on global auction results in April.  The summary results page provides further hard evidence that fine wine prices continue to climb as all indexes are up year-to-date (YTD) and the three indexes representing the most heavily traded fine wines are all posting double digit increases YTD (through April) despite still being down 25%-30% from 12 months ago.

• Fine Wine 100: +11.6%, but -30.5% since April 2008
  
• Fine Wine 250: +10.8%, but -30.6% since April 2008
• Bordeaux First Growth 100: +17.7%, but -26.6% since April 2008
  

This is what's driving stories like the New York Time's Investing in Wine: Now May Be the Time and Time to Invest in Wine? from the excellent blog, The Wine Economist.

Economics lesson

As The Wine Economist reminds us: "Prices fall when there is a surplus until the excess supply is gone.  Prices rise when there is a shortage until the shortage disappears."  What the data is telling us is that there is more demand than supply at current market prices (as proven by rising prices).

There is no doubt "excess supply" flooded the market in the financial panic as "forced sellers" were liquidating any asset they could to generate cash, including fine wine.  In my opinion, most of that activity is behind us which should lead to a return of less price volatility as market equilibrium is restored.  To quote The Wine Economist again: "The movement towards stable equilibrium is quite strong and predictable."

By the way, I don't think the economic concept of over-shooting which The Wine Economist suggests may apply to wine markets is relevant, mainly because there were good and explainable reasons for the sharp decline in wine prices (as cited above) even when normally they tend to be "sticky" (as with prices of most goods).

Should you invest in wine now?

Here's a short process I'd recommend you go through to answer this question:

1. Evaluate the hard data.  Frankly, part of the reason we launched WinePrices.com and its indexes was to make such data widely accessible (for free).
2. Consider your investment alternatives.  While fine wine prices have been increasing in 2009, the Dow Jones Average fell 6.9% in the first four months of 2009.
3. Determine whether you're a "pure" wine investor.  The Wine Economist story states that "a wine investor should buy what other people will want to own, which might have nothing to do with personal taste."  But most people who invest in wine are not "pure" investors seeking monetary returns only.  If one expands the measurement of "return" to include factors like having the option to drink something which matures better than expected or "eliminating" one's monetary loss by exercising the privilege to drink your investment at a fair value you were glad to have paid, then the real "risk" in wine investing tends to make it relatively attractive.

Your personal answers to these factors will help guide your decision.

Prediction on price trends

Getting back to the data, my personal view is that fine wine prices will continue their gradual climb but that it may take 18 months to 2 years for prior index highs to be reached again.

What's your opinion and why?

MAY 26 UPDATE

As a quick update, The Conference Board's Consumer Confidence Index for May was released today and it increased sharply (see press release) and is now only about 10% below the September 2008 level.  This leading indicator of economic activity provides further support for a continuing climb in wine prices.

Yesterday, the Vinfolio Marketplace debuted and today we're scaling up its market impact by announcing a very significant relationship with VinCellar's leading competitor in the online cellar management software space, CellarTracker (see Vinfolio announces partnership with CellarTracker!).

What it means

1. CellarTracker users will be able to sell wine in the Vinfolio Marketplace using CellarTracker as their "front-end" to Vinfolio's "back-end".
2. Together, Vinfolio and CellarTracker have over 135,000 users managing 12+ million bottles of more than 400,000 unique items worth an estimated $2+ billion in retail value.
3. Buyers of fine wine will soon have access to the world's largest wine "store" (by an order of magnitude).
4. CellarTracker will be able to deliver even more value to its loyal user community.
5. To avoid any possible misunderstandings, we're not merging the companies and we'll continue to compete for new users to adopt our respective cellar management platforms.
   

The background story

CellarTracker's Eric LeVine and I first met in late 2006.  While our companies have been competitors for years, I've always believed in the principle of "co-opetition" in which one may compete in some areas but cooperate in others.  Vinfolio's development of the Marketplace enabled us to define an attractive win-win collaboration because any marketplace's success is defined by the ability to create a critical mass of buyers and sellers.  While Vinfolio had its own sizeable constituency, the opportunity to team with CellarTracker and its community of users offered what I considered to be a preemptive market move.  So I asked myself, "Why not go for it?" and broached the partnering idea with Eric in November 2008.

After working out an agreement in December, Eric and Vinfolio's team have been working closely together since January to ensure a seamless integration between CellarTracker and Vinfolio's Marketplace to support a simultaneous launch of bidding in early July.  CellarTracker users will soon be able to start marking wine for sale from their CellarTracker accounts to offer in the Vinfolio Marketplace.

Bottom line: While we will continue to drive the development of VinCellar's own user community, we're very pleased to be working with CellarTracker to create value for our respective users and the broader wine community.  We remain open to other such partnerships in the future but "execution, execution, execution" is our priority for now.

When I started Vinfolio in July 2003, my ultimate objective was to create an online destination where a virtually unlimited selection of fine wine aggregated from privately owned cellars could be bought and sold with the convenience and cost efficiency that only the Internet can enable.  That moment has finally arrived today with the launch of the first phase of the Vinfolio Marketplace (see Vinfolio announces launch of the Vinfolio Marketplace).

The fine wine supply problem

As a "committed" wine collector from the mid-1990s, I was constantly frustrated with the difficulty in obtaining the wine I wanted to buy.  At the time, I didn't realize the problem stemmed from inherent obstacles that retailers faced in accessing adequate supplies of fine wine in the new release (or primary) market.  Those obstacles, along with the capital required to stock inventory, forced wine collectors to buy from a diverse set of retailers (each with finite inventories) to find the wine they desired.  Even today, the wine retail market is still highly fragmented with over 850 U.S. wine retailers offering at least 50 items (over 400 with at least 500 items) but only a dozen or so with more than 5,000 items.

I realized that the path to building a scalable supply channel for fine wine depended on systematically aggregating the contents of privately owned cellars (i.e., the secondary market) -- in effect, applying the "long tail" theory (see chart below).  We sought to do so by creating VinCellar, our online cellar management application which was recently rated the most innovative wine social media network.  A by-product of users finding value in VinCellar was that merely using it brought visibility to who owns what and positioned it to be the platform from which sellers could easily opt to sell part or all of their collections.

Vinfolio's current business already built upon private cellar supply channel

Vinfolio's business has grown dramatically over the years by consistently sourcing over 70% of its supply (by value) from the secondary market (which ironically became our primary supply channel).  Along the way, we've developed numerous proven business processes and systems including a world-class ecommerce site, warehousing in multiple locations, storage, logistics, marketing, customer service and other skills.

The Marketplace represents the next step function in realizing the original Vinfolio vision by further automating business processes to deliver user convenience and business scalability while leveraging unparalleled access to fine wine managed within Vinfolio's VinCellar online cellar management application. The Marketplace selling platform will also be made available to the trade and other strategic partners (stay tuned for another announcement tomorrow!).

Why Marketplace is compelling

Vinfolio's Marketplace starts with the immediate critical mass of buyers and sellers derived from almost 55,000 users already registered with Vinfolio who are managing over $500 million and several million bottles of wine with VinCellar.

Marketplace redefines the online auction model -- it's not merely a replication of the offline bricks-and-mortar approach in an online context.  For example, there's no upfront consignment required, no listing fees, no time constraints, no minimum quantities, and no other preparation needed to start selling immediately other than marking wines for sale in one's VinCellar account.  With Vinfolio as the intermediary, the Marketplace is completely anonymous with all wine clearing through Vinfolio where it is inspected per published inspection guidelines for acceptance or rejection.

As of today, you can start marking wine for sale in preparation for the early July commencement of bidding and earn free Vinfolio storage credits in the process until May 31. 

Bottom line: Learn more about the Vinfolio Marketplace now.

A thread titled State of Wine Sales in the United States on the Mark Squires' Board on eRobertParker.com has renewed the debate over the arcane wine direct shipping laws consumers are forced to confront.  Robert Parker himself even weighed in with a scathing comment of the system (see post #13 in the thread above).

A consumer coalition led by Parker?

Tom Wark, in An Open Letter to Robert Parker, Jr., broaches the brilliant idea of Parker extending his independent, well-respected voice as the "Wine Advocate" from helping consumers determine quality wines to buy to actually enabling greater access to the wines he is recommending.

Tapping the power of organized consumers is the foundation of a solution

A few basic premises involved in changing the shipping laws:

1. Laws are made by legislators.
2. Legislators are elected by citizens (i.e. consumers) but heavily influenced by lobbying and political donations.
3. Unless one can match the political clout of the system's beneficiaries who redeploy monopoly profits to defend the status quo, the only way to trump their influence is through citizen/consumer activism. 

A Federal interstate shipping law should be the goal

As I have written before in Hypocrisy in wine shipping laws, the best solution is a new federal law that relies upon the government's authority under the Commerce Clause to mandate rules for interstate wine shipping while leaving the rest of the states' regulatory and enforcement systems intact.

How a Federal wine shipping law should work

1. Single annual shipping permit - A single Federal process for issuing annual permits to parties licensed in any state by their state regulatory authority (including retailers, wineries, wholesalers, and importers).
2. Tax collection - Mandatory state/municipal tax collection on new purchases based on destination zip code with monthly remittances to each state.
3. "Dry" area registry - National registry of dry counties and zip codes where inbound shipments would be prohibited.
4. Age verification - Age verification required (21 or older) to ship (either via an online service or in person) and to receive a shipment (with signature required).
   
5. Centralized reporting - Federal reporting and recordkeeping standard established requiring the permitholder to file monthly reports (available to all state authorities for tax verification and other purposes) and to maintain all shipment records for a minimum period of three years.
6. Regulatory jurisdiction matching activity - Shippers regulated solely by their home state authority for all activities other than shipping (where Federal regulation would apply) and shipment-related taxes (where each state's taxing authority would have jurisdiction).
7. Violations - Violations of Federal shipping rules (including the failure to pay associated state taxes) would constitute grounds for revoking all interstate shipping privileges.
   

Why a Federal law works for everyone

Implementing the above recommendation would solve every objection to change that I have heard articulated.  Specifically, it meets the following tests:

1. Minimizes administrative overheads due to centralization of permitting and reporting
   
2. Enables access to all 50 states for wine buyers and sellers
3. Fosters competition leading to more choice at lower prices
4. Ensures tax collection at a time when all states need more money.  Even "control states" shouldn't care where the sale is made.
5. Protects minors.
6. Leaves existing state regulatory infrastructure and oversight responsibilities intact.
7. Creates "teeth" for compliance with shipping rules via risk of complete loss of interstate shipping privilege upon violations.

Bottom line: The law I am proposing will encounter fierce opposition from entrenched interests.  The only way to make it happen is through a consumer coalition which can make itself heard by the political establishment.  Any such organization needs a recognized spokesperson to rise above the noise level and to reduce the magnitude of the lobbying dollars otherwise needed.  Robert Parker, Jr. would be an excellent candidate but the cause should be pursued, with or without him.