In
part 1, I explained certain difficulties with valuing fine wine and the importance of distinguishing between transaction prices (from auctions) and asking prices (from retailers). When Vinfolio released its enhanced valuation component of our free
VinCellar online cellar management software in early January, we concluded there were two fundamental types of wine values which collectors sought to determine:
- Replacement value – This is what you’d use to establish the insurance value of your collection. Retail prices are the basis of valuation because they represent the most likely price you'd have to pay to replace a bottle.
- Sales value – If you plan to sell part or all of your collection, this estimated value (excludes any third-party fees) uses auction prices as the basis of valuation because they represent actual transaction values (inclusive of buyer's premiums paid).
Valuation “certainty”
Our algorithms to estimate value use as much data as is available. However, there’s often a wide range in the component data between high and low prices (whether at auction or in the retail channel). For example, Winesearcher’s site describes the average spread between the high and low prices for a wine as 2x the low price. Any valuation estimate, therefore, is just that – an estimate.
Vinfolio’s data sources and methodology used in VinCellar
Retail dataVinfolio uses retail price data licensed from Winesearcher, the leading wine price search engine with worldwide data drawn from over 8,000 wine stores and retail outlets. After performing various steps to map retail listings to specific wines and cleanse the data to ensure validity, Vinfolio calculates the average U.S. retail price for the prior 12 months as its retail price estimate. Auction dataVinfolio uses auction price data from our own Wine Price File, the leading source of wine price auction results. As auction prices fluctuate from auction to auction and since there may be limited auctions for any given wine, Vinfolio developed a proprietary algorithm to determine an estimated auction value. The algorithm is based on the following principles:- Recent results are more representative of current values than older results and are therefore weighted more heavily.
- To ensure a representative value, we use a minimum number of auction results when available -- this may sometimes require using older results.
- In the event that our minimum number of results is unavailable, we may base our estimated value on as few as one auction or auction results up to eight years old.
“Plus” scenarios
The image above is a snapshot of a VinCellar valuation screen for a private cellar. You’ll note that there are two additional scenarios, Retail Prices Plus and Auction Values Plus. Not all wine has a current retail price or is sold at auction, so we provide a way to increase the number of wines with estimated values in either the retail-only or auction-only scenarios. These two additional scenarios are determined as follows: - Retail prices plus – When there’s no retail price but there’s an auction value for a wine, we’ll estimate a retail price by using 125% of the auction value. This is consistent with an average higher price level achieved at retail for the more convenient method of buying.
- Auction values plus - When there’s no auction value but there’s a retail price average for a wine, we will estimate an auction value by using 80% of the average retail price. This is the reciprocal of the rationale in the “Retail prices plus” scenario.
A word on the impact of wine condition and provenance
Bottle condition and a wine’s provenance have a direct impact on value. The approach used above inherently assumes that the wine being valued is in a condition worthy of being sold at auction or a retailer. When editing data for the Wine Price File, we'll actually exclude prices from the database if we feel the condition of an auction lot's wine was below the normal standard. If you know that wine you’re valuing has superior provenance versus the norm for that wine, then you could justify assigning higher values.
Bottom line: Valuing fine wine is more involved than simply looking up a market price for a financial security. But it’s possible to tackle the task systematically as outlined in this two-part post. If you’re interested in maintaining up-to-date values of your wine, use our free VinCellar online cellar management software by registering for a free Vinfolio account.
