The Wine Collector

WinePrices.com's wine price indexes continued to rise strongly in October based on 14 auctions worldwide, three of which were in Hong Kong. Of US$25.8 million in proceeds from these auctions, US$13.2 million or 51% was spent in Hong Kong.

The top three most actively traded fine wine indexes were up 8%-14% in October after increasing 9%-12% in September.  These indexes are up a stunning 44%-64% year to date.  Wine investors with the stomach to have invested when the economic outlook was bleak are now being amply rewarded.

See below for a table of key stats on all of the indexes and the full summary results page for trading metrics information (and archives from prior months).  Note: each index equaled 100 as of January 2005.

Observations

• Investment grade Bordeaux, which continues to experience high demand from Asia, is leading the pack in terms of returns.
• Positive year-on-year growth - The majority of indexes are now in positive territory when measured on a year-on-year basis.
• The California 100 index has shown little appreciation over the past five years (in last place based on its index value) and it's been the worst performing index year to date.  I suspect major contributing factors are the weak U.S. economy and relatively tepid international demand for the wines which comprise the California 100 index. Historically, virtually all of these wines were sold to oversubscribed mailing lists comprised largely of U.S. wine collectors and enthusiasts.  Now that wine auction demand is shifting towards Asia, the relative lack of exposure and access to California's top brands among Asian wine collectors is hurting these brands' secondary market price performance.  U.S. wines, in general, are relatively hard to find in Asia and most brands seem to be ignoring the opportunity (if the U.S.'s very minor presence at the recent Hong Kong International Wine Fair is an indication of interest).
• Vinfolio's Asian experience confirms these trends.  The first of five offers drawn from a US$3+ million cellar that we began offering yesterday through our U.S. and Hong Kong offices is already 75% sold out in 24 hours with the majority of the spending derived from Asia.

A "flash sale" is a generic term applied to limited time (typically 24 to 48 hour) sales featuring a single item, or modest number of items from a single brand or small group of brands, typically at 50%-70% off suggested retail prices.  One of the most well known players in this category is Gilt Groupe, which focuses mainly on "premier fashion and luxury brands."  They have been so successful that numerous competitors have emerged and the selling methodology has spread to other product categories, including wine.  Recent entrants in the wine space include Cinderella Wine (from Gary Vee!), Wines 'Til Sold Out, and general merchandiser, Rue La La.

A new generic selling method

After assessing this new selling method, Vinfolio concluded that it's here to stay (with or without a recession). The combination of a limited time offer and a deep discount motivates consumers to buy before they miss the opportunity.  Flash sales also help fill a need for brand owners/representatives because not only are they a useful means of managing excess inventory levels, they can be an effective way to obtain new customers who buy again at full price after trying the wine (if executed properly).

Introducing Vinfolio's fine wine-focused flash sales

As Vinfolio's focus is on fine wine, we've decided to introduce a program (see today's press release) for high-end and boutique wineries, importers, and distributors which requires that the wine offered have a list price of $60 or more with a minimum professional score of 90.  We've also designed our flash sales to deliver long-term customer acquisition benefits and to leverage our full online marketing skillset (one of our key strengths).  So regardless of whether a wine's list price is $60 or $260, our program delivers value for the high-end or boutique winery, importer, or distributor.  If you are a member of the trade and would like to learn more, email flashsale@vinfolio.com.

Wine collectors should pay attention

For wine collectors willing to try new wines, the lower price points offered in flash sales reduce your risk of trial and stretch your wine budget farther.  However, don't expect to be able to buy large quantities at discount prices or see the same wine offered repeatedly.  For example, we permit flash sale partners to impose bottle limits of as little as one bottle for higher priced wine.  You should also expect the producer to be given your name and email address as a form of quid pro quo for being offered a great deal (this is the norm for all wine flash sale providers).  While you may opt out later, part of the reason these programs exist is to help wineries build their own direct-to-consumer channel.

Bottom line: Wine flash sales are here to stay.  If you interested in fine wines which appeal to more serious collectors and enthusiasts, then sign up on on our home page for Vinfolio's wine offers (which include flash sales).

The counterfeiting of any item is more likely when two conditions exist:

1. The item is substantially more valuable than the cost to fake it.
2. The identification of fakes is difficult or inherently subjective.

Unfortunately, fine wine easily satisfies both conditions. E.g. counterfeiters can refill empty authentic bottles or digitally print almost any label at low cost.  Identification of fake wine is more of an art form using various clues instead of based on an objective assessment.

Authenticating fine wine - What matters

What ultimately matters is the wine itself - not the label, bottle, or capsule. Anti-fraud technologies which successfully authenticate the contents of the bottle such as Prooftag (see my prior post from 2007) are all that's needed.  If the security seal isn't broken, then the bottle has to be authentic. Other methods like adding DNA markers or invisible ink to labels, or engraving bottles, only help authenticate the bottles not the contents.

Step 1: Producers must enable objective authentication

Deploying a security seal like Prooftag's solution is a fundamental requirement to eliminating fake wine as it introduces an objective test which may be relied upon with 100% certainty.  I'm not sure what the current cost of using a Prooftag solution is but I have seen a range of 30 cents to $1.50 per bottle in other articles (no doubt driven by the volume of tags).  As a consumer, I would rather see a security tag on the bottle than buy fancy packaging like overweight, over-sized bottles if producers need to find a means of paying for it.

Step 2: Permit anyone to validate authenticity of bottles

Just as with identifying counterfeit currency, the only way to spot wine fakes is to cast a wide net by educating and empowering members of the trade and consumers on how to validate bottles.  If the anti-counterfeiting technology is "non-forgeable" (as Prooftag claims), then disseminating information publicly is safe and does not "train" criminals in how to counterfeit the wine.

Without an objective test (as with older vintages pre-dating use of anti-counterfeiting measures), however, sharing information on how to identify authentic wines may be tantamount to publishing how to make a fake successfully.  This is exactly why Step 1 should be adopted ASAP by any producer interested in preserving their brand's integrity and resale value in secondary markets.

Overt vs. covert systems

A September 2009 feature story in Wines & Vines titled New Ways to Fight Counterfeiters opens with the question of "Overt or covert?"  Covert systems seem pointless - almost akin to creating laws without enforcing them.  The only reason a system is covert is because of the fear (or reality) that a dedicated criminal could copy it.

Open systems like Prooftag's can be even more effective by providing members of the wine trade with access to automated "readers" to verify authentic bottles in an efficient manner.  These readers should be provided at no charge to qualified fine wine retailers and auction houses willing to use them to help choke off any trading in fake wine.

Wine anti-counterfeiting standard needed

Various winery and producer trade organizations should endorse a common standard of anti-counterfeiting technology.  If the industry adopts a multiplicity of approaches, enforcement will become near impossible as trade members would not only need to support all technologies but know which one was used by which producer and starting with what vintage. It's unworkable.

Bottom line: Stamping out wine counterfeiting starts with producers taking preventive measures.  Assessing fakes without an objective capability to determine them is just educated guesswork at best.  Consumers are exposed to financial loss, fine wine retailers and auction houses may get unfairly blamed or accused of complicity, and producers' reputations are at risk when consumers drink poor quality fakes and think it's the real thing.

Other recommended reading:

1. Vinography post: Do we have Ebay to thank for all that counterfeit wine?
2. Dr. Vino post: High stakes and alleged fakes - Koch sues Kurniawan.  In particular, read Koch's legal complaint which goes into some interesting details (especially first 5-6 pages).
3. Jancis Robinson's robust series of articles in her fake wine category on her information-rich site
4. Billionaire's Vinegar.  Quite entertaining and superbly researched.

At the opening ceremony of the Hong Kong International Wine Fair today, John Tsang, Financial Secretary (on right in photo), announced an important step towards streamlining access to the Mainland Chinese wine market:

"I am pleased to tell you that we have just reached agreement with the Mainland Customs to provide customs facilitation measures for wine exported from Hong Kong to the Mainland. We are also discussing with their food safety department, the Administration of Supervision, Inspection and Quarantine, to see if we can introduce even further measures."

At a later session, another government official said they expected to announce more details in "the next 1-2 weeks."

What it means

Currently, mainland China has roughly a 50% duty on imported wine plus inspection/sampling laws which permit bottles to be "tested" (and destroyed in the process).  If this announcement signals a potential removal of those barriers for wine flowing through Hong Kong (but not from elsewhere), it will help Hong Kong further its ambition (already well on its way to being realized) to become the wine trading hub for Asia.  For wine collectors, even higher demand for fine wine from China (if essentially duties are removed via passing through Hong Kong) translates into continued upward price pressure on fine wine prices globally.

P.S. For the full text of John Tsang's speech, click here.