The Wine Collector

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.

VinTank just released its 85-page report on the state of Wine Industry Social Media (download the PDF).  I'm pleased to report that VinTank rated Vinfolio's VinCellar offering the highest on its Innovation metric and second on its Value metric in their "Impression Chart" for wine social media networks below (also on page 23 of their report).  For VinTank's detailed comments on VinCellar, start reading on page 46 of the report.

There's more innovation to come and expect a major announcement in approximately two weeks.

Based on analyzing the component wines in the WinePrices.com Fine Wine 250 index, which is comprised of the 250 most frequently traded auction wines, here is the list of the top 10 performers from January 2005 through March 2009.  All prices are for single 750ml bottles and "CAGR" means Compound Annual Growth Rate over the period:

While these annualized returns are impressive, keep in mind that current values are substantially below the peak prices achieved during this  same period.  Here is the same table restated to include the highest monthly auction average value per wine, the corresponding index value, and the percent decline from the peak price which the current value represents:

Bottom line: There's money to be made in wine investing.