The Wine Collector

WinePrices.com's wine price indexes were up strongly in September after the normal summer slow period in global wine auction activity. The top three most actively traded fine wine indexes were up 9%-12% in September and 33%-44% year to date. Every index has double digit YTD gains and the most active indexes are within reach of turning in positive year-on-year returns.  See below for a table of some key stats and the full summary results page for all nine indexes (and archives from prior months).

WinePrices.com's most actively traded fine wine indexes were up from between 10%-17% in May 2009 based on global auction results (the Dow Jones Average was up 4.1%).  See full summary results page for all nine indexes.

What's going on?

As noted in my prior post, Asian wine buying influence continues unabated, I'm sure these prices reflect the impact of higher auction prices being paid in Hong Kong.  Of the 11 auctions held in May worldwide that we tracked, four were in Hong Kong and about 25% of the price data points derived from these auctions.  I'll be doing a separate analysis soon to try to quantify the "Hong Kong effect" although Asian buyers continue to be active in New York and London auctions.  Note that these results exclude the first mainland Chinese wine auction for reasons I will address in a separate post (the results would have been skewed upwards further).

The sharp upturn in The Conference Board's Consumer Confidence Survey during May (see press release) also seems to correlate with these May auction results.

California fine wine prices performing particularly poorly

The California 100 index has turned in the worst performance of the nine indexes since January 2005 (101.11 index versus 100.00 in January 2005).  The 2009 price recovery which has positively impacted all other indexes has largely skipped the California 100 with only a 1.2% increase YTD to May.  The lowest other index for the same YTD period is +9.1% for the Italy 25 and +31.3% is the highest for the Bordeaux First-Growth 100.

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.

The turmoil in fine wine markets since September 2008 created a need for better tools to track wine price trends than the limited options which exist today.  Therefore, Vinfolio decided to develop a series of nine wine price indexes utilizing auction data from our WinePrices.com site (read today's press release). 

Auction data is an ideal resource as a basis for price indexes for several reasons:

1. Fine wine auctions are recognized as the industry standard for fine wine pricing trends as historical press coverage from wine publications demonstrates.
2. Auction prices (inclusive of buyer's premium) represent completed transactions, not merely asking prices.
3. Pricing data is derived from global auction activity - i.e., not solely from the UK, US, or any other single geography.  As I have written before, fine wine prices are driven by global supply and demand.

March 2009 index results indicate fine wine prices are rebounding

If one reviews the summary results page for the WinePrices.com indexes, you'll note that seven of the nine indexes have positive YTD results with the median YTD performance being a 4.1% gain whereas the median year-on-year performance is a 25.9% decline. In particular, the three indexes with the most auction activity -- the Fine Wine 100, Fine Wine 250, and the Bordeaux First Growth 100 - were up from 2.1% to 5.0% in March and from 4.1% to 7.8% YTD.

Consumer confidence climbing

As further evidence which correlates with the positive price trends, The Conference Board's Confidence Index increased almost 50% in April to 39.2 (1985=100), up from 26.9 in March (see April 28th press release The Conference Board Consumer Confidence Index Increases in April for more details).

Wine investment opportunity?

With wine prices having declined 25% in the past year and now showing consecutive monthly increases in the most frequently traded investment-grade wines, maybe it's time for collectors to resume buying and/or investing. 

In addition to our wine investment service, Vinfolio happens to be offering a new pristine 31 OWC (original wood case) parcel from a single private collector with 10 cases of 100-point Parker-rated wine available for $185,000.  Call Vinfolio if you are interested in learning more (415-946-1300.

A story called Can Napa Wine Prices Stay Up? from Wines & Vines caught my eye today.  While there were arguments offered that perhaps prices can stay up, realistically, the answer is "no" in aggregate unless producers adopt creative sales and marketing approaches.  Here's why (plus a few suggestions on what wineries can do).

The fundamental law of supply and demand

There is no escaping the fundamental law of supply and demand.  When demand is high and growing (relative to a producer's supply and competitive substitutes), prices go up.  One of the best leading indicators of future prices is secondary market sales activity, i.e., when consumers sell a current or prior vintage of a wine after purchasing it elsewhere.  If secondary market prices are consistently higher than new release prices (as they have been for many Napa wines in recent years), mailing list prices can safely be raised. Certain high end wineries capitalized on this trend by raising prices 100% or more within only a few years.  On the other hand, if secondary market prices are falling, which they have been (25+% for fine wine in other categories), this creates downward pricing pressure on future releases.  Check out WinePrices.com for some well known, high priced Napa wines sold at auction and you can already see examples of price declines in the secondary market since September 2008.

How to maintain price levels

There are only two ways to do so:

1. Maintain sufficient demand at the historic price point.  This is perhaps possible if the winery had "excess" demand before, i.e. waiting lists can replace disappearing prior customers, or the winery will need to attract new customers, perhaps via new selling channels/methods (e.g., brokering wine through retailers), introducing new marketing methods, selling into new geographic markets, etc.
2. Reduce supply to match demand at the historic price point.  If the winery can afford to live without the cash flow from unsold supply, the unsold wine can be added to the winery's library to sell when better economic times return. Supply can also be shifted to overseas markets to reduce domestic availability (but that is really a demand building exercise).

As production from existing vineyards is hard to "turn off", and most wineries need the cash from current production to pay bills, the natural emphasis of wineries to respond to the current economic conditions will be efforts to stoke demand to avoid lowering prices.

Holding on to current price levels through market segmentation approaches

If a winery wishes to avoid a public price cut (long enough for an economic rebound to restore demand) and needs the money from selling annual production even if part of it needs to be sold at a discount to the public price, then they should segment the market to maximize revenues.

To address the market of consumers not willing to pay the "full price" for what is excess supply to the winery, the winery needs to avoid creating public price conflicts to avoid cannibalizing its "full price" customers.  One way of doing this is to offer wine through retailers capable of managing "private sales" of wines, perhaps only to their better customers and where it's not assumed the wine was sourced from the winery. Selling wine through an anonymous auction channel is a similar approach but adds more "below market" pricing data into the public secondary market data sources.

For example, Vinfolio has a priority customer program and markets wines to these high-spending customers via email without prices being publicly displayed on our site or fed into wine search engines.  Given that Vinfolio sources most of its wine in the secondary market (approximately 75% by value), even for a new release of many historically "allocated" Napa producers, the assumption by our customers is that the wine fitting this description is not from the winery.  The price, however, will nevertheless need to reflect secondary market price realities if the wine is to sell.  As the wine would only be offered after the new release was available, then such an offering is not competing with winery mailing list sales (where people still have a further incentive to buy to maintain a mailing list position).

Another method which comes to mind when a producer is to accept a lower price than desired on a portion of his supply is to consider any discount an "investment" in a relationship with longer term value.  E.g., perhaps a first-time direct customer gets a one-time welcome benefit of an extra 6 bottles at a better price per bottle for buying a full allocation at normal prices.  Or free shipping is thrown in which avoids the need to change the bottle price.  The producer might also make a longer term supply commitment to a retailer for supporting the brand in tough times that might permit the retailer to guarantee customers who buy now the right to the same wine next year (an extension of the mailing list concept to third parties).  You get the idea.

Innovation is the answer

The good news about bad times is it forces us to become more creative and to innovate.  That, in turn, is what leads the economy out of recession.  If you've got other ideas, please add a comment.

P.S. Also see a prior post from November 2006 titled "An explanation of fine wine prices."

Have fine wine prices fallen? 

Yes.  Prices of almost everything have fallen in recent weeks; fine wine is no exception.  See the latest Decanter.com story titled "Fine wine prices hit new low."

By how much? 

The article reports that the Liv-ex 100 Fine Wine Index fell 12.4% in October.  Interestingly, that is almost identical to the median 13% decline discussed in my September 27th post, "Time to invest in fine wine?" and close to the 15% median price decline in sold lots at the October 25th Zachys auction in Hong Kong. The broader Liv-ex 500 fell only 1.8% in the month.

Why is the unsold rate at recent auctions reaching as much as 30%?

Keep in mind that auction estimates and reserves are typically set 8 weeks before the auction date.  Given the sudden change in the financial market environment in mid-September, it's no surprise that the current values people will pay are below what the auction houses estimated prior to the financial market turmoil.

Is the fine wine market collapsing?

No.  The Zachys Hong Kong auction still sold HK$41.3 million of wine (approx. US$5.3 million) and about 25% of the sold lots were above their 2008 auction average through August (pre-decline).

Is fine wine still a good investment?

Yes. I stand by my recent post "Why wine investing beats stock investing."  Moreover, Stephen Browett of Farr Vintners, who claim to sell more Bordeaux than anyone else in the UK, makes a compelling argument in his comments after the Decanter article.  He notes that despite price declines in some wine that Decanter singles out, those wines are still selling for 30%-40% more than 18 months ago.

Vinfolio's new offer to wine investors: 5 years of free storage!

As an incentive to give wine investing a try, we'll give you a total of 5 years of free storage when you do the following:

• Buy at least $5,000 of wine in a single purchase where the average bottle price (750ml equivalent) is $100 or more.  Better yet, speak with one of our wine specialists for recommendations and then the next step is automatic.
  
• Call or email our Customer Service team (service@vinfolio.com, 415-946-1300) or your wine specialist within one week of your purchase to claim your storage credits (which you can use on any wine).
• This offer is effective only with new purchases starting today (November 7, 2008) and is exclusive of other promotions.

Vinfolio has quietly launched (in beta) a new web site, WinePrices.com, to provide comprehensive auction and retail wine price data for free.  Currently, over 10,000 wines are covered with over 400,000 auction prices from the last eight years.  Wine retail price data will be added within the next couple of weeks (via a licensing arrangement with Global Wine Stocks). Once added, WinePrices.com will become the most comprehensive resource for wine price information on the Internet. Best of all, it's completely free!  To learn more, click here.

Features you'll like

• Free - The first 10 searches are free (without signing in).  To continue free unlimited use, simply sign in on WinePrices.com with your Vinfolio account (if you already have one) or create a free Vinfolio account on WinePrices.com (which will then also work on Vinfolio.com and for accessing VinCellar).
  
• Summary results screen: Shows wines matching your search string with average U.S. retail price, average auction price (inclusive of buyer's premium), and the average community score from VinCellar.  The relative strength of the underlying data is also indicated. Coming soon: for those with paid subscriptions to our content partners (i.e., Allen Meadows' Burghound, Stephen Tanzer's International Wine Cellar, Roy Hersh's For the Love of Port, and The Richard Juhlin Champagne Club), we'll also display their professional ratings when you're signed in and have linked your content subscriptions to your account.
• Wine detail page:
• Overview of auction averages for 20 vintages around the one selected with a one-click (or slider) ability to switch to another vintage of the same wine
• Summary auction results data with low, high, and average by bottle size going back up to 8 years
• Price graphs for 1, 3, and 5 years
• Individual auction lot detail supporting all summary data
• Coming soon: A new section of the page focused on U.S. retail price data (with individual store listings provided)

Strategic positioning

WinePrices.com is not intended to be a site to compete with the likes of Winesearcher.com or other wine search engines aimed at helping you locate where to buy a wine.  While WinePrices.com will provide retail listings (mainly to provide transparency and credibility for the retail wine values displayed), the data is not likely to be as "real-time" as those search engines.  Instead, the emphasis of WinePrices.com will be on the current and historical value of different wines, or groups of wines (via composite indices).  In short, the goal is to empower those wine collectors potentially interested in selling wine or investing in wine with a robust tool to support their decisionmaking.

Additional Background

Many wine collectors are familiar with the Wine Price File, which served as a definitive source of wine auction price data for over 15 years.  Vinfolio acquired this business (and the www.wineprices.com URL) in late 2003 and converted this print publication into an online database.  The data was used in conjunction with Vinfolio's ecommerce site and provided part of the valuation mechanism within our free online cellar management application, VinCellar. For retail prices, we licensed Winesearcher.com data a few years ago to provide a retail valuation component. While Vinfolio already makes market price data available (both auction and U.S. retail average price) within the wine detail pages of its ecommerce site, WinePrices.com enables this information to be accessed directly (through a "Google-like" interface) that is more efficient for researching wine price information

We want your feedback and suggestions

We're still working on fixing bugs and rolling our features.  Please take a moment to report problems or to suggest features you would like to see added.  Just go to the WinePrices.com forum on the Vinfolio site or there's also a convenient link at the bottom of the WinePrices.com wine detail page.

While the basic economics of supply and demand affect pricing of any good, for items marketed globally such as fine wine, significant shifts in currency values in major markets will take their toll.

"Cannot take it any longer" 

Yesterday, Reuters ran a story titled Burgundy wine prices hiked in U.S. due to weak dollar (read it, it's short).  Prices are being raised 10%-20% in the U.S. (the second biggest Burgundy market after Britain) as "they cannot take it any longer."

Just how much as the dollar weakened?

The dollar has depreciated 19.6% against the Euro since the beginning of 2007 and 26.5% since January 2004.  Given that the dollar fell 10.7% against the Euro in 2007, its decline in Q1 2008 has accelerated. 

The broader impact of the weak dollar on wine prices

• Domestic wine will become better values relative to imported wine (although certain items used in making some domestic wines such as French oak barrels have increased dramatically in price).
• Domestic U.S. retailers will increase their efforts to sell wine abroad.  See my post from earlier this week, Vinfolio to open Hong Kong operations.
  
• Foreign buying in the U.S. will increase (including European wines being sold back into Europe).
• Foreign investment in the U.S. wine industry should rise.

Bottom line: Fine wine prices are set globally and are on an upward trend given that rising demand is outpacing new supply (see Why fine wine prices will keep rising).  Fundamental shifts in currency values will cause supply to shift to other markets as well as new opportunities for those paying attention and able to operate globally.

P.S.    Today is the last day to vote for this blog in the 2008 American Wine Blog Awards.  Read about it and vote. 

The chart above shows auction prices (per 750ml bottle, inclusive of buyer's premium) of 1990 Petrus in individual lots sold at major auctions houses worldwide over the past five years according to the Wine Price File (see more details on Vinfolio's site).  The relative performance displayed here could be repeated for many other fine wines.  What's going on?  It's simple -- demand has steadily exceeded supply.

What about the future?  The long term trend for fine wine prices is fundamentally upwards because growth in demand is likely to continue to outpace supply. 

Here's my supporting rationale: 

1. Wine has become a luxury good.  Wealthy consumers are increasingly buying it for other reasons than drinking it, including as a sophisticated way of displaying their wealth.
2. Wealthy consumers are less price sensitive when it comes to maintaining their lifestyles and often chase the same status symbols, as pointed out by Robert Frank of the WSJ's Wealth Report in his post, "Inflation soars for the rich."  Check out Forbes' cool interactive chart of its Cost of Living Extremely Well Index.
3. Fine wine is a global market.  Just examine the countries of origin of the top ten bidders at most major wine auctions.  Buyers seek out their chosen wines wherever in the world they may be found.
4. Supply of the best known brands is relatively fixed.  Lafite-Rothschild is simply unable to plant additional acreage to accommodate increased demand.  In Bordeaux and Burgundy at least, this is the norm.
5. Wine import duties are more likely to fall than rise.  What would be the impact on fine wine demand from China's burgeoning multimillionaire class if China were to cut its 50% wine import duty dramatically?  See my earlier post on wine import duties.
6. Wine consumption trends are up.  Per capita wine consumption rose 17% in the U.S. from 2005 to 2006.  The potential for growth in other economies is huge.  E.g., China's per capita consumption rate is only 6%-7% of the U.S.'s.  Also see my post on the Top 10 reasons driving wine's growing popularity.
7. The trend towards wine investment helps fuels prices.  Rising wine prices have attracted interest in wine as an asset class from both individuals and professional investors.  For example, in the UK, several wine investment funds such as The Wine Investment Fund and The Vintage Wine Fund have emerged (both founded in 2003).  These funds acquire and hold large quantities of fine wine which in turn creates greater scarcity and supports higher prices.

Wine collectors often wonder whether, and how much, factors such as label condition, fill levels, cork condition, capsule condition, and color, impact the value of a bottle of wine.

The first level of triage one needs to perform is whether the contents of the bottle are likely to have been negatively impacted by whatever the "condition" is.  If there's a distinct prospect of the wine being bad, then the bottle is worthless in my view as buying it boils down to a pure gamble. 

Even when conditions have no impact on the wine itself (e.g., torn labels), value can easily be negatively affected.  A good test to apply is to ask yourself whether an average group of consumers for the particular wine in question would be less likely to buy that bottle because of its condition.  The higher the percentage that would decline, the larger the discount will be.  Precise value adjustments for different conditions are difficult to determine as this would require a multi-variable regression analysis of what are often very subjective assessments. 

A practical approach to evaluating varying bottle conditions

Vinfolio operates on the premise that buyer satisfaction is paramount so we inspect every bottle we purchase according to a published set of Inspection Guidelines.  These guidelines effectively determine what we define as commercially acceptable criteria for selling wine at a uniform price point.  Any bottle which does not meet our condition criteria is rejected (i.e. not purchased).  In the event a customer is not satisfied with a bottle's condition, we'll simply take the wine back (which is very rare).

Reminder on preserving the value of your wine

By far the most important step you can take to preserve the value of your wine is proper, climate-controlled wine storage (which many of our criteria are intended to measure).  You should still do your best to avoid creating cosmetic damage to labels and capsules when handling your wine, even if you plan on drinking all of it, to keep your options open for selling it later at maximum value.

Note: This post was stimulated by an item on the eRobertparker.com Squires board titled "Effect on value for label damage?".

P.S.    The photo shown is an example of a bottle of Peter Michael chardonnay that we declined to purchase because of its torn label.

A couple of news stories in the past month focused my attention on the potential impact of unleashing pent-up global demand for fine wine that is now impeded by high import taxes.  Specifically, Hong Kong decided to cut its wine import duties in half and South Korea concluded free trade agreement negotiations with the U.S. which look likely to result in a complete elimination of its high wine import duties (see Korea Trade Agreement Moves Forward: Wine Industry to be a Major Beneficiary).  As pricing is about supply and demand, sudden reductions in taxes could cause demand to rise in a world of relatively fixed supply of fine wine.  

See the chart below for a quick overview of major Asian countries' wine import duties in comparison to the U.S.  The basis of import duties and taxes varies by country, ranging from the value of the wine to volume and alcohol levels.  The data below is based on a single case of wine valued at $1,200.  While Hong Kong's and South Korea's dramatic future tariff reductions are impressive, their economies are relatively modest.  The bubble size in the chart represents the relative GDP among the countries shown, and therefore the potential purchasing power which could be released to impact wine prices.  The two countries combined represent less than 5% of the U.S.'s GDP so the planned wine import cuts are not going to redefine price levels on their own. 

"What if" scenarios for China and Japan

1. China - What's more interesting perhaps is China's high duty combined with its purchasing power (about 60% of U.S. GDP and growing faster).  What if China were to cut its 49% duty to zero?  Given the growing number of millionaires in China (now in the 300,000-400,000 range), you can bet a such a change would impact fine wine prices (see my other recent post, China's long-term impact on fine wine prices, and Selling wine to the affluent Chinese).
2. Japan - Japan's fine wine market is already very strong and while a reduction of 15% is much less than 49%, one can imagine a more immediate impact given the far more established channels of selling fine wine into Japan.

Today's Wall Street Journal (WSJ) had a front page story on wine counterfeiting titled "U.S. investigates counterfeiting of rare wines" (WSJ online subscription required).  When I arrived at the office today, I had a voice mail from Robert Frank, the writer of The Wealth Report blog at the WSJ (which is billed as covering "the lives and culture of the wealthy").  He wanted to discuss how wine buyers could avoid fakes.  My comments are incorporated into his blog post today titled "Oenophiles see double."

In the discussion with Robert, I noted that buying wine sourced directly from the chateau (which is called "ex-chateau") or from individuals who bought it upon release is the ideal defense against fakes, as the "chain of provenance" is fully known (including storage conditions). 

Quantifying the value of buying ex-chateau 

I realized when making this point that I potentially had a method for quantifying the market pricing premium for authenticity. The other day when reviewing the price list of a very reputable British wine wholesaler (Farr Vintners) specializing in Bordeaux, I noticed that they listed certain Bordeaux wines with a notation that the wine was "ex-chateau."  If they happened to also offer the same wine, vintage, and bottle size without the ex-chateau designation (and in otherwise excellent condition), then an analysis of the price differences might reveal at least this firm's educated view of the price premium for authenticity (as storage conditions of non ex-chateau wine from Farr is typically impeccable).

The outcome 

In examining Farr's full Bordeaux price list, there were 18 examples that met the criteria which spanned the 1986-1998 vintage time frame including wines from Latour, Mouton-Rothschild, Haut Brion, and Pichon Lalande as well as less expensive Bordeaux such as Lafon Rochet.  The chart below displays the results with a trend line based on a linear regression approach.  A few observations:

1. The trend is for an increased premium for older wines which makes sense as the risk of fakes intuitively is greater the older the wine.
2. Only 1 of the 18 examples had no price premium (and this was for the cheapest wine).
3. Absolute price levels were less correlated with price premiums than vintage in this limited data set.  E.g., the five most expensive wines (priced at $2,000 to $5,000 a case), had 3 examples in the 9-10% premium range but also one at 5.6% and one at 2.8%.
4. The overall median premium in this sample was 5.7%.

One way of interpreting the authenticity premium is as a measure of the potential liability that an auction house or other seller of fine wine exposes itself when selling such wine.  If one extrapolated the trend line to 1947 (as an example of a great wine year), the premium (or potential liability of selling non ex-chateau wine) rises to 32.2%.  That's about the total gross margin percentage between buyer's premiums and seller's commissions that a major auction house would earn when selling a wine of that vintage.

Bottom line: Pay attention to provenance and be prepared to pay more for when it's solid -- it's worth it.

1. Replacement value – This is what you’d use to establish the insurance value of your collection. Retail prices are the basis of valuation because they represent the most likely price you'd have to pay to replace a bottle.
2. Sales value – If you plan to sell part or all of your collection, this estimated value (excludes any third-party fees) uses auction prices as the basis of valuation because they represent actual transaction values (inclusive of buyer's premiums paid).

1. Recent results are more representative of current values than older results and are therefore weighted more heavily.
2. To ensure a representative value, we use a minimum number of auction results when available -- this may sometimes require using older results.
3. In the event that our minimum number of results is unavailable, we may base our estimated value on as few as one auction or auction results up to eight years old.

1. Retail prices plus – When there’s no retail price but there’s an auction value for a wine, we’ll estimate a retail price by using 125% of the auction value. This is consistent with an average higher price level achieved at retail for the more convenient method of buying.
2. Auction values plus - When there’s no auction value but there’s a retail price average for a wine, we will estimate an auction value by using 80% of the average retail price. This is the reciprocal of the rationale in the “Retail prices plus” scenario.

Establishing the current value of your wine collection is more difficult than valuing a public securities portfolio. Even relatively illiquid securities have a quoted bid-ask price which can be used as an “arms-length” fair market value. Valuing wine is more complicated because:

1. Every combination of a wine name, vintage, and bottle size represents a unique item to be valued (even if one ignores condition issues) which generates an enormous number of items.
2. The produced quantity of any item is often quite small, which limits the potential transactions which can be measured to benchmark a value.
   
3. Transaction data is not centralized in one place. The best sources are wine search engines like Winesearcher.com for retail asking prices and Vinfolio’s Wine Price File for major auction house transaction data.

The difference between transaction prices and asking prices

Normally, the basis for establishing fair market value for any item uses transaction data as this means that the buyer and seller ultimately agreed on a price. Retail prices shown on Winesearcher.com are asking prices and are usually higher than completed transaction values from auctions.

A retail asking price is not a confirmation that a wine is selling. Moreover, some retailers routinely start with a high price and then gradually reduce the price over time if a wine does not sell. Therefore, at any given time, one has no idea whether the retail prices quoted on Winesearcher actually represent prices at which a wine is being successfully sold (which is the true test of fair market value).

How does one reconcile these differences given that all wine is not sold at auction and retail data is more abundant? In part 2 of this topic, I’ll address how Vinfolio has tackled this issue in our free VinCellar online cellar management software.

A recent article in the Economist titled “Fruity little numbers” and a post in the Dollars and Sense blog titled “The price of wine – not about the wine” inspired me to go back to Economics 101 and apply the law of supply and demand to explain fine wine pricing.

Supply

For any given vintage of a wine, the maximum supply is determined by total production in that year. Limited production relative to demand (e.g., Screaming Eagle, Harlan Estate, Le Pin, Petrus, DRC) leads to high initial prices. As production is fixed and supply can only decrease with consumption or with collectors storing wine for later consumption, the supply curve will only ever shift upward and to the left. Therefore, for any given quantity demanded, the price should increase with less available supply (unless demand falls faster – perhaps by negative changes in elements contributing to demand such as a reduced score from a major wine critic).

Demand

Demand is driven primarily by factors shaping consumers’ perception of quality:

1. Scores and reviews from professionals and the wine community. Parker 100 wines, Wine Spectator's Top 100 wine list, public community tasting notes, etc.
2. Appellation of origin. Terroir matters.
3. Reputation of the producer, of proven “celebrity” winemakers, and of the wine’s ability to age. Newer garagiste producers need to develop track records.
4. Marketing efforts by producers including label design, bottle selection, promotions, events, advertising, and extent of domestic and international brand development.

Other factors include:

1. The growing global population of wine drinkers, not only in the U.S. but in new markets like Russia, China, and other parts of Asia.
2. Investment appreciation potential, which is not necessarily a primary factor but may be a secondary consideration to many when deciding to buy fine wine.

For older wine, the provenance and bottle condition directly affect demand including:

• Past storage conditions and history
• Original wooden case or packaging intact
• Bottle fill levels
• Label, cork, and capsule condition
• Color

What about the costs of production?

Fine wine is generally not priced on a cost-plus basis once one a certain price threshold is exceeded (e.g., $50?). The producer’s objective is to price to perceived value, not costs. So get over the fact that Screaming Eagle now sells for $500 from the winery while their costs are a fraction of that. When demand is high relative to supply, production costs are irrelevant.

The impact of high prices on wine buyers

• If you are “priced out” of a wine you like, move on to discover alternatives in your price range. They exist.
• Get recommendations and advice from your retailer or others.
• Trust your palate to assess quality instead of relying on perceptions of quality that others are trying to shape for you.

Chart source: Wikipedia