The Wine Collector

The San Francisco Business Times compiles an annual list of the Bay Area's 100 fastest growing companies and Vinfolio was ranked #4 based on 2005 to 2007 revenue growth of over 700%.  We were #5 in last year's ranking.  Read our press release and the associated article titled Vinfolio tracks wine for finicky oenophiles. 

I've been trying to research the size of the global fine wine market (in terms of annual sales) but have not found readily available research reports on the topic.  While there are reports estimating the U.S. wine market at $28-$30 billion annually, none that I've found provide any relevant segmentation that removes mass market wines.  Therefore, I thought I would pose this question to readers to see if a group collaboration could help answer it.

What is "fine wine"?

For the purposes of answering this question, let's define "fine wine" as any wine which retails upon release at $50 or more (per 750ml).  As some of your probably know, most market segmentations stop at $20 a bottle on the high end with that price point often described as the "super-premium, luxury" category (I'm not sure which dictionary they are using).

One "brute force" methodology

1. Identify all top producers of "fine wine" globally
2. Estimate average annual production levels per producer per wine
   
3. Multiply by an average retail price per wine
   

Your thoughts

How would you approach answering this question?  Or better yet, is there some existing research report which already does it?

Reuters just published a story titled Wine collectors eye cellars for liquidity in which Vinfolio is prominently featured. In fact, over 70% of the wine we sell (by value) is sourced from private collections because that's where most of it is -- not in the trade channels.  We are, in effect, systematically creating a new supply channel for fine wine by aggregating the "long tail" of supply.

In the past month (ending 10/10/08), the Dow Jones average is down 26.0% (and much of that was in the past week).  Does anyone believe the prices of investment grade wines have fallen by anything close to that level?  I don't.  In fact, the Liv-ex 100 Fine Wine Index was down only 3.7% in the month of September (-6.0% for the DJIA in same period). The YTD change for the Liv-ex 100 is still +5.5% through September (see 4-year chart on right) vs. -18.2% for the DJIA.

As the September Liv-ex data and some of my recent analyses of September auction results indicate, there's no question that fine wine prices are softening.  Consumers have slowed spending and personal financial circumstances have caused cherished wine to be reluctantly put up for sale which changes the supply/demand balance that drives market pricing (note: Vinfolio's own pipeline of private collector purchase opportunities has surged in the past few weeks to about $10 million).

Four key reasons why wine investing beats stock investing

• The supply of each fine wine is fixed upon production and only shrinks over time as wine is consumed.  If anything, people drink more in a recession as it's a lot cheaper pleasure than vacations, new cars, etc.
• Collectors tend to hold on to scarce wines when finally located and purchased given the difficulty in replacing them.  This reduces "liquidity" in a given wine and helps push up prices to buyers.
• Wine is a tangible collectible and benefits from the perceived security this provides relative to electronic entries in a brokerage firm account.  There's a reason why the sale of home safes have been soaring in the past month.  People can pick up and handle their wine assets whenever they want.  See the CNNMoney.com chart at right which compares the Dow Jones average performance in the past month (green) to another hard asset: gold and silver (blue).
  
• The aggregate supply of fine wine is relatively fixed as most of the greatest European producers have little room to plant additional vineyards.  The trends in global demand for fine wine, on the other hand, are fundamentally going up (broader wine consumption, wealth creation in emerging economies combined with treatment of fine wine as a luxury good, and the likelihood of continuing decreases in import duties in these countries).  

What are you waiting for?

On Friday, October 3rd, DHL notified its U.S. wine shipping customers that effective November 3, 2008, "DHL will no longer ship wine or alcohol within the U.S."  However, international wine shipments will continue.

DHL (which is owned by Deutsche Post World Net) is a huge global business with operations in 225 countries.  However, in the land of Fedex and UPS, it struggles with only a 6-7% market share and has lost $3 billion in the past four years.  To cut costs, it's even partnering with UPS  (see this June 11, 2008 Business Week story).

What motivated the decision?

My guess is that when the DHL cost accountants looked at the high cost of maintaining regulatory compliance with 50 different sets of ever-changing state wine/alcohol shipping laws, they concluded the effort outweighed the rewards.

An implicit indictment of U.S. wine shipping laws

Note that DHL isn't exiting wine shipping anywhere else in the world.  What does that tell you about how screwed up the U.S. wine shipping regulatory environment is?  Ironically, only this past week, there was a major legal decision in Michigan that is set to streamline wine shipping into the state for consumers.  Other pending cases (e.g., Texas) seem to be building momentum in the same direction.

As a follow up to my last post titled Time to invest in fine wine?, I performed a similar analysis on the results of the Hart Davis Hart Fox cellar auction in Chicago on September 19-20, 2008. A few points about this cellar need to be kept in mind when evaluating the results:

• The provenance was impeccable (even better than "typical" fine wine auctions)
• The auction included the largest offering of Lafite-Rothschild ever to appear at auction
• Over 700 cases of first growth Bordeaux and over 1,000 bottles of DRC were offered
• 100% of the lots were sold for $11.2 million (see post auction press release).

The surprise to me was that despite these advantages, which would one think would translate into above average market prices, the results obtained (in aggregate) were no better than 2008 auction averages (using 8/08 YTD data). See the chart below:

If one assumes the provenance alone should have generated a 5-10% premium, then these results can be interpreted as a weakening of fine wine prices since earlier in 2008.

Even more surprising was the price performance of the premium Bordeaux and DRC lots.  In total, the eight producers below accounted for 910 lots or 57% of the 1,597 unmixed lots offered.  Only Lafite-Rothschild generated more premiums than declines to 2008 market averages (no doubt due to high Asian demand).

In fact, even with Lafite-Rothschild included, these premium wines did relatively worse than the other 43% of lots.  The chart below is comprised of the subset of 910 lots of these wines and the median (or typical) per bottle price achieved for a particular lot was 95% of the 8/08 YTD auction average.

Conclusions

The analysis above, combined with the analysis of the Zachys auction results from the same weekend, are signaling a consistent message: namely that fine wine prices are under some modest pricing pressure at the moment.  However, given the fine wine market's long-term fundamentals, I believe this is a buying opportunity for those interested in wine investing. 

In turbulent markets, there seems to be a trend towards investing in hard assets (see yesterday's WSJ story titled When stocks tank, some investors stampede to alpacas and turn to drink).  I don't know about you, but I would far prefer to invest in wine that exotic livestock.

P.S. The methodology used in this price analysis was the same as in my prior post. We took the auction price results (inclusive of buyers' premiums) for all unmixed lots sold and compared the average per bottle price per lot to the given wine's 8/08 YTD auction average according to WinePrices.com.