The Wine Collector

I've been in Hong Kong all week and was pleased to see a front page story in yesterday's Wall Street Journal Asia titled "Can Hong Kong uncork trading of wine in China?"  My answer is an unequivocal "yes" which is why Vinfolio is launching our own operations here (see earlier post). 

Barriers to creating cost-effective wine storage facilities in Hong Kong

But, there is at least one significant obstacle to overcome in realizing Hong Kong's potential.  Proper warehousing facilities for fine wine don't really exist.  Moreover, the nature of the real estate market is structurally biased against creating them on a cost effective basis.  Here's why:

• Given the high cost of land, almost all warehouses are in high-rise buildings.
• The floor loading capacity of these buildings is low relative to the weight of wine which limits efficiencies on using the space (i.e., how high you can stack cases).
• Virtually no warehouses are readily available with appropriate temperature and humidity conditions.   This necessitates a capital investment to install equipment (and insulation).
• However, the market's standard lease term is only 2-3 years which reduces amortization periods on your investment (effectively making it more expensive for a given length of time).
• Moreover, the fast-moving real estate market results in industrial spaces being subject to redevelopment into office buildings and residential towers that are more lucrative for landlords.  This means any market-rate renewal option you might negotiate could result in dramatic rent increases or, even worse, the landlord can trigger a "sales and redevelopment" clause and force you out of the space in 6 months (i.e., before your already-short lease term is completed).
• Finally, there is little new supply of warehouse space being built which could help moderate rental rates.

One suggestion to support market development

Hong Kong landlords should consider developing specialized "turnkey" facilities for wine storage and just charge higher monthly rents to recover investment costs (although this potentially limits their prospective tenant universe).

The Financial Times' annual Wine Investment Report was published today.  Jancis' Robinson's lead article, Asia gives the market a new flavour (or see this link to read a longer version on her site), provides a superb overview of global market changes.

As noted in my quote in the article, I firmly believe that being in the fine wine business requires a presence in major economic markets -- that now means Asia.

Tangible evidence that markets are constantly changing

Consider this quote from Jancis' article: "Last year, more than $233 million worth of fine wine went under the hammer in the U.S., as opposed to not much more than $35 million in the UK."  There was a time when these relative percentages were reversed.

Why did UK fine wine traders (other than auction houses) never expand into the U.S.?

While the U.S. is a large fine wine market, the state-based regulatory environment and direct shipping laws likely seem daunting.  While many UK players serve the U.S. market remotely, only Bordeaux Wine Investment (through its sister company, Bordeaux Wine Locators) has U.S. operations.

Why aren't more U.S. companies expanding into Asia now?

Other than Vinfolio and Acker Merrall, I'm not aware of other U.S. fine wine companies launching operations in Asia.  A few reasons come to mind:

1. The U.S. is a huge market in its own right.  Most firms have not exploited the opportunities on their doorstep, partly due to antiquated direct shipping laws that limit interstate sales.
2. Many U.S. firms are family-run and under-capitalized.  Most started as bricks-and-mortar businesses serving a fairly local community of customers.  Their next big step is moving online to at least address a national marketplace before going international.
3. Running a global business is more complicated, and therefore, harder to do successfully.
   

How will fine wine retailing in Asia evolve?

The market (including in Hong Kong) is still in an early stage of evolution and is fundamentally "up for grabs."  The keys to success are:

1. Having access to the right supply of fine wine at competitive prices.
   
2. Ensuring that the quality of the wine is preserved through appropriate shipping, handling, and storage.
3. Providing a high level of service (hence our own guiding principle, "Fine wine. Finer service").

Why will many Asian consumers storing their fine wine in London (or the U.S.) prefer Hong Kong?

1. Having your wine closer to where you live is comforting to many wine collectors who often feel emotionally attached to wine which they may have painstakingly acquired.
2. Proximity also means quicker access when you want your wine.  Air freight is expensive and not as safe a means of transferring wine from the UK/U.S. as refrigerated containers (by boat).
3. For Hong Kong-based wine collectors, even the modest risk that wine duties could be reinstated in the future argues for bringing wine back to Hong Kong while the duty is zero.
4. Climate-controlled, secure storage environments are replicable almost anywhere.
5. Future sales of investment-grade wines will increasingly be made within Asia (just as they have already shifted to the U.S. from London).

Vinfolio's Hong Kong storage facility

As noted before, we are actively engaged in taking steps to open a Hong Kong-based wine storage facility, both for local storage of our own retail inventory as well as to provide full-service wine storage to others.  If you're interested in registering your interest in our Hong Kong storage, please email us at service@vinfolio.com (make sure to mention your estimated quantity of cases to store).  I also be in Hong Kong for the week of May 26th and would be glad to meet interested parties subject to my schedule.

As any wine collector knows, it's difficult to find all of the fine wine you want to buy from a single wine retailer.  As noted before in Buying smartly from wine retailers, you increase your odds of obtaining scarce fine wines by concentrating your purchases because most retailers make some attempt to reward loyal customers with priority access.

Our approach to cultivating loyalty 

In early 2007, Vinfolio created a customer priority program.  Benefits increase with reaching higher annual spending levels ($5,000, $25,000, and $75,000+).  The prime benefit is priority buying access to scarce, allocated, and/or highly rated wines.  These wines are generally highly sought after but given excess demand, I'd always prefer to offer them first to customers who have demonstrated their loyalty to Vinfolio.  So that's what we do -- in a very systematic fashion.

How it works 

For newly puchased wines that fit our criteria for scarcity and high ratings, we literally offer these wines in three successive 24-hour periods to an expanding group of priority customers before releasing any remaining unsold wine to the general public on our website.  Wines that sell out at a given level are simply not presented to the next level.  When signed in on our website, priority customers are recognized and wine available at their benefit level is made available to purchase.

Moreover, the email notification such customers receive that announces newly available wines is personalized to reflect whether the customer already owns a wine being offered and in what quantity (based on the contents of their VinCellar cellar management software account).

Bottom line: If your retailer is not reciprocating your loyalty in some proportionate manner to your spending level, then take your business elsewhere.

Note: This post was inspired by a book excerpt titled "Loyalty is a Two-Way Street" from a new book called Marketing Metaphoria that was written up in a recent article in the Harvard Business School's Working Knowledge email newsletter.

Do the wealthy think we're in a recession?  Yes (see yesterday's Wall Street Journal story, Wealthy See Recession, Poll Says).

Is it affecting their spending on fine wine? No (based on Vinfolio's growing sales volumes as well as those of some other fine wine importers I know).

Why not? Demand for fine wine is determined on a global basis and other parts of the world are still going strong enough to absorb finite supplies.  Moreover, "spending" really only occurs when you consume your wine.  Until then, you are merely converting cash into another asset class, which in this case is likely to grow in value.

Why is an out-of-state retailer treated any differently than an out-of-state winery that is selling wine into a particular state?  The nature of the purchase transaction is exactly the same.

Return of the Stone Age in Illinois

Yet that is exactly what is happening in Illinois.  After over a decade of out-of-state retailers being permitted to ship to Illinois consumers, a new law is set to take effect June 1, 2008 which bans such purchases while continuing to allow out-of-state wineries to ship into Illinois (read Illinois opens to direct shipping - i.e. for wineries only). 

When the world is moving to purchase more and more goods online, why is Illinois going back to the Stone Age?   Answer: political contributions/influence and in-state self-interests trump free market competition.

I found it particularly ironic that the above linked article ends with a quote from a representative of the Illinois Department of Revenue trying to justify the state's position when the state is losing tax revenues from such sales that it could capture if it permitted sales by out-of-state retailers to occur.

California at risk too

As Tom Wark over at Fermentation points out in his appropriately titled post, Fixing Stupid Laws, California is at risk of making the same mistake as Illinois.  Why would some major California winery trade associations and even groups claiming support of free trade principles like Free the Grapes support such a ban of out-of-state retailers selling to California consumers when even in-state retailers welcome it?

The best solution

It's time for a federal law setting standards for regulating wine shipping by any licensed party (wineries, retailers, and even wholesalers).  Anything short of that will continue the patchwork of 50 sets of state laws that change constantly based on acts of economic protectionism and local political self-interest.