A recent article titled "Traditional markets shun Bordeaux futures" from France 24 caught my eye. The Bordeaux futures market only works if there is a sharing of benefits between the producers, distribution channels, and consumers. In recent years, this seems to have broken down on many fronts: aggressive pricing by producers, difficulty for retailers in buying specific brands without being forced to take large quantities of plonk with it, and resulting high consumer prices which drive consumers to alternative wine regions.
What consumers want
Consumers want wine to enjoy drinking Bordeaux at prices which make sense. They don't care if producers had higher costs or lower production in a given vintage. The only question they're asking themselves is whether the quality of the wine is worth the price being charged. If it isn't, they won't buy it -- whether for consumption or investment reasons. Of course, the better the wine, the higher the prices consumers should be willing to pay.
What retailers want
Retailers make money selling wine. Unfortunately, for Bordeaux, the risk/reward ratio is about as bad as it gets. Here's why:
- Simultaneous release of the supply into the retail channel creates excessive competition, driving margins well below normal.
- The risk of buying is high because if the retailer doesn't sell through its commitment, it will often be stuck owning the wine for 18 months until it is bottled (as consumer interest fades rapidly) or selling at cost (or worse) to recover his capital.
- It's difficult to for retailers to avoid "tie-in" offers from suppliers which compound risk. E.g., the retailer may be offered one case of a first growth only if it also buys 10 or 20 cases of a $20/bottle Bordeaux.
Note: These are the principal reasons we don't sell Bordeaux futures.
How producers could fix the problems
- Bordeaux chateaux should finance their inventory with a bank or hedge fund and sell it only when bottled. After all, the top labels are increasingly being held as financial assets by international wine investment funds which are essentially doing this indirectly.
- If these wines are as good as producers claim, they should appreciate in value, giving producers no reason to flood the market all at once as financing costs should be more than covered by appreciation.
- Retailer risk would be reduced (no 18-month holding risk) and the margin opportunity increased which encourages more effort to promote Bordeaux wine.
- Retailer risk could be further reduced if Chateaux (and their distribution partners) were willing to allow retailers to broker their wines without tie-ins to other brands (i.e. sell up to a guaranteed quantity before being forced to commit to the actual quantity to be invoiced). This would also justify retailers being satisfied with a lower margin and allow producers to keep a higher share of the final retail price.
- Producer price volatility could perhaps be managed by hedging against key price-affecting variables as is done in commodity markets every day. The perverse correlation between poor vintage conditions, extra production costs with lower volume, lower wine quality and higher prices (at least relative to the quality level), might then be broken.
Bottom line: The Bordeaux futures market is broken. Maybe it's time for some leading chateaux to break with the system and pioneer a new approach to sales and distirbution.
