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.

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.

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.

UPDATE: As of 2/23/09, I have modified this post to remove mentioning the name of a particular firm after their attorneys contacted me.  However, my warning to readers stands and if in doubt about an investment opportunity, don't proceed.

A few months ago, I attended a Vinfolio wine dinner in San Francisco and spoke to one of our Bay area clients, a doctor, who told a story about being solicited to invest in wine by someone calling from Canada representing a UK firm. The pitch she repeated to me sounded more than a bit questionable but she went ahead and invested some money.

I told her that I would research the firm to see what I could find (which wasn't much other than the sites above).  About that time, I was contacted by a journalist in France, Kathleen Buckley, who was researching a story about wine fraud and investing for Wine Enthusiast magazine.  I put Kathleen in touch with my client and just learned a few days ago that Kathleen's story titled "Wine Fraud" had been published in the 12/22/08 issue the Wine Enthusiast.  This is a must read article (4-5 pages if you print it) as Kathleen does an excellent job pulling together various aspects of the topic into a coherent whole.  I think you'll find the examples provided of the various sales pitches used by con artists particularly interesting (some are just ridiculous statements that should scream "scam" for any potential investment).

My client told me last week that she reported the UK firm to the SEC and FTC.  She also asked them to sell her wine but has not heard back from them.  She doesn't expect to get much back, if anything, but part of the initial charge was made to her American Express card.  Amex has agreed to investigate and reverse those charges

In doing a new Google search on the UK firm today, I found a thread on a site called WorldLawDirect.com with over 40 posts (started on 9/4/08 and with a post as recent as yesterday).  Suffice it to say, they are consistently negative.

As I note in Kathleen's article (and in past blog posts), if you're investing in wine, know your retailer and insist on completely transparent transactions and disclosures. If they balk, go elsewhere.  Research the firm on the Internet (and with wine friends) before parting with any money as you may find threads like the one above or positive ones which help confirm the legitimacy of the operation.  If you're still not sure, contact me at Vinfolio and I'll be glad to look into it.

When to buy

If you're a wine collector trying to decide when prices are at the right level to resume buying actively, I would make an analogy to stock investing.  Some investors will look at the Dow Jones Average today and fear it is going down another 50% from yesterday's weak close below 8000; others will view the market as oversold and shift cash back into the market.  Where you place yourself on this continuum is a decision only you can make (is the wine glass half empty or half full?).

As most professional stock investors will tell you, calling the bottom is near impossible and is often not clear until months after it's happened.  The long term outlook for fine wine, however, remains positive.  The global demand for fine wine is only going to grow with the global economy.  In particular, as emerging economies (mostly in Asia) recover, they will drive fine wine demand and higher global prices sooner than the average stock price recovers.

Bottom line:  As with stock buy/sell decisions, it's your money so make your own decision after evaluating multiple opinions and considering the facts.

The December 2008 stats for the Liv-ex 100 fine wine index are now in.  The index fell 2.2% in December 2008 vs. only 0.6% for the Dow Jones Industrial Average (DJIA) but the the basic picture remains unchanged.  Namely, you would have been far better off with you money in wine than stocks whether on a one-year or longer term basis.  The four-year stats are dramatic with the DJIA declining 18.6% compared to a 110% increase in the the Liv-ex 100 index.

Madoff-like risks with wine investment funds?

One method you might consider for investing in fine wine is through a wine investment fund (although most are outside the U.S.).  Over the holidays, James Suckling's Uncorked blog at the Wine Spectator had a post titled "Scary thoughts on wine investment." I suspect James is correct that these funds are not regulated in their respective jurisdictions.  So to help avoid the risk of a Madoff-style debacle, I'd recommend that prospective investors consider what third party checks and balances are in place to prevent the "closed loop" system Madoff created.  E.g., are wine assets verified by a credible independent accounting firm on an annual or more frequent basis?  Are buy and sell transactions reported to investors in a transparent way?  Are third-party storage facilities used or an in-house facility? 

As an alternative to using investment funds which will charge annual management fees and a percentage of gains, interested wine investors can simply invest directly through one or more reputable merchants and take possession of their purchases for greater security.

Next post: I'll discuss various influences on fine wine prices and how to think about where prices may be headed.

The latest Liv-ex 100 fine wine index data for November has been published for November 2008 and it shows virtually identical performance for the month to the Dow Jones Average and continued outperformance on a longer term basis.  Here are the stats:

For a graphical comparison over the last year as well as the past four year period, please see the charts below:

Bottom line:  Fine wine is an attractive investment class.  As with stocks, one can try to pick the bottom but most professionals will tell you it's hard to do and not to bother.  If prices are attractive, then act on them now before prices recover.

P.S. Here's another good story from the International Herald Tribune for more commentary on the price resiliency of fine wine: "Wine Investing 2009: End of the Madness."

With investors looking for alternatives to stocks and bonds given the daily roller coaster being experienced in public markets, Vinfolio now offers a new investment option via its Wine Investment Service (see yesterday's press release). 

Many wine collectors have often been "accidental" wine investors by purchasing more than they plan to drink to finance their consumption.  Vinfolio's new service is aimed at investors, whether wine knowledgeable or not, whose first priority is making money.  Even better, all of the necessary components (expert advice, fine wine selection, professional storage, and multiple selling options) are all provided under one roof.

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.

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?

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.   

Financial markets are in turmoil.  Your financial investments are in the tank.  Where else can you invest and still make a nice profit?  The answer: fine wine.

Almost exactly a year ago, I wrote Why fine wine prices will keep rising.  All of the reasons I cited then are still true.  As with any category of investing, there can be windows of buying opportunities which present themselves and we may be in one right now.

The chart below shows the results of last week's Zachys auction in New York.  We took the 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 2008 YTD auction average according to WinePrices.com.  For the 831 lots where we performed the comparison, only 228 or 27% were at or above 2008 YTD auction averages (100% in the chart means the price per bottle equaled the 2008 YTD average)

The median (or typical) per bottle price achieved for a particular lot was only 87% of the 2008 YTD average price.  There were some other attractive wine auctions going on about the same time so perhaps buyers were focused elsewhere or just temporarily distracted by financial market problems. But if this auction's results are an indication of a dip in market prices for fine wine, then maybe it's time to reallocate some money to take advantage of what is likely a temporary buying window.  The global fine wine market is here to stay and market drivers still fundamentally support a trend towards higher prices.

P.S. Here's another prior post with Wine investing tips.

The news of Cos d'Estournel's purchase of Chateau Montelena is hard to miss, even from my current vacation in Italy.  While some will attribute this purchase to the cheap dollar, as a former M&A banker, no purchase of this nature is made without solid strategic reasons.  In this case, I think the quotes referenced in Tom Wark's Fermentation blog are correct, that this purchase is ultimately about a recognition of the quality of Calfifornia wine.

Will the Asian wine collector now pay more attention to California wine?

Now that a top Bordeaux chateau has provided a very public endorsement of California wine, my thoughts shift to another place in the world, i.e., Asia, where top California wine has not received sufficient recognition.  It's common knowledge that the Chinese have a strong preference for Bordeaux, and are highly brand conscious.  Will a top Bordeaux producer's endorsement of California wine cause Asian wine collectors to consider diversifying their collections away from Bordeaux? 

In addition, wine investment drives purchases by Asian collectors.  The combination of the current weak dollar and the likelihood of greater quality recognition in the future both auger well for further value appreciation.

The Financial Times' annual Wine Investment Report was published today.  Jancis' Robinson's lead article, Asia gives the market a new flavour (or see this link to read a longer version on her site), provides a superb overview of global market changes.

As noted in my quote in the article, I firmly believe that being in the fine wine business requires a presence in major economic markets -- that now means Asia.

Tangible evidence that markets are constantly changing

Consider this quote from Jancis' article: "Last year, more than $233 million worth of fine wine went under the hammer in the U.S., as opposed to not much more than $35 million in the UK."  There was a time when these relative percentages were reversed.

Why did UK fine wine traders (other than auction houses) never expand into the U.S.?

While the U.S. is a large fine wine market, the state-based regulatory environment and direct shipping laws likely seem daunting.  While many UK players serve the U.S. market remotely, only Bordeaux Wine Investment (through its sister company, Bordeaux Wine Locators) has U.S. operations.

Why aren't more U.S. companies expanding into Asia now?

Other than Vinfolio and Acker Merrall, I'm not aware of other U.S. fine wine companies launching operations in Asia.  A few reasons come to mind:

1. The U.S. is a huge market in its own right.  Most firms have not exploited the opportunities on their doorstep, partly due to antiquated direct shipping laws that limit interstate sales.
2. Many U.S. firms are family-run and under-capitalized.  Most started as bricks-and-mortar businesses serving a fairly local community of customers.  Their next big step is moving online to at least address a national marketplace before going international.
3. Running a global business is more complicated, and therefore, harder to do successfully.
   

How will fine wine retailing in Asia evolve?

The market (including in Hong Kong) is still in an early stage of evolution and is fundamentally "up for grabs."  The keys to success are:

1. Having access to the right supply of fine wine at competitive prices.
   
2. Ensuring that the quality of the wine is preserved through appropriate shipping, handling, and storage.
3. Providing a high level of service (hence our own guiding principle, "Fine wine. Finer service").

Why will many Asian consumers storing their fine wine in London (or the U.S.) prefer Hong Kong?

1. Having your wine closer to where you live is comforting to many wine collectors who often feel emotionally attached to wine which they may have painstakingly acquired.
2. Proximity also means quicker access when you want your wine.  Air freight is expensive and not as safe a means of transferring wine from the UK/U.S. as refrigerated containers (by boat).
3. For Hong Kong-based wine collectors, even the modest risk that wine duties could be reinstated in the future argues for bringing wine back to Hong Kong while the duty is zero.
4. Climate-controlled, secure storage environments are replicable almost anywhere.
5. Future sales of investment-grade wines will increasingly be made within Asia (just as they have already shifted to the U.S. from London).

Vinfolio's Hong Kong storage facility

As noted before, we are actively engaged in taking steps to open a Hong Kong-based wine storage facility, both for local storage of our own retail inventory as well as to provide full-service wine storage to others.  If you're interested in registering your interest in our Hong Kong storage, please email us at service@vinfolio.com (make sure to mention your estimated quantity of cases to store).  I also be in Hong Kong for the week of May 26th and would be glad to meet interested parties subject to my schedule.

Do the wealthy think we're in a recession?  Yes (see yesterday's Wall Street Journal story, Wealthy See Recession, Poll Says).

Is it affecting their spending on fine wine? No (based on Vinfolio's growing sales volumes as well as those of some other fine wine importers I know).

Why not? Demand for fine wine is determined on a global basis and other parts of the world are still going strong enough to absorb finite supplies.  Moreover, "spending" really only occurs when you consume your wine.  Until then, you are merely converting cash into another asset class, which in this case is likely to grow in value.

Tomorrow's Washington Post includes a story on wine investing called Buyers and Cellars (including a few quotes from me).  There's no question that investing in wine is a topic of growing interest.  The story mentions this blog and some wine investing tips which are part of a prior post (click here to read all of the tips).  The story also references wine's investment performance relative to other categories, the details of which may be found in this post from last week.

The annual Hospices de Beaune charity auction held each November is widely viewed as a leading indicator for pricing of the new vintage (2007 in this case).  If you thought Burgundy prices couldn't go much higher, brace yourselves!  Red Burgundies rose by 38% and overall prices were up 27%.  White Burgundies did not rise as much but that might be because they were up 65% in the prior year.

More details on the 147th annual auction

• 607 barrels were auctioned, down 11% from 680 barrels in 2006.
• Of the 607 barrels, 469 were red and 138 were white.
• The minimum purchase is a single barrel.
• 42 cuvees were offered: 30 red and 12 white.
• One cuvee was new in 2007: Corton Clos du Roi, Cuvee Baronne Du Bay
  
• 22 different growers cultivate 2.5 hectares each (1 hectare = about 2.5 acres) for the Hospices de Beaune domaine.  Each grower produces one or more cuvees.
• Each barrel yields 24 cases of either 750ml or magnum bottles.  The purchaser receives the bottled wine with the Hospices label.
• According to Christies (who has run the auction for the past 3 years), there were "many new clients from Asia, Australia, America, and Europe sending pre-sale orders and bidding by telephone and the Internet."
• The $6.81 million proceeds from the auction provides medical equipment for the local Beaune hospital and covers the cost of maintaining historical monuments.

Bottom line: Be prepared for price hikes on 2007 Burgundies.  From an investment point of view, high-end collectible Burgundies always seem to me to be a pretty safe bet given that consumers worldwide can't get enough and are growing in number.

Photo note: Upper right is the Hospices de Beaune and its famous roof. Below is a sample label image.

Fine wine prices rose 39% in 2007 according to the Liv-ex 100 index, second only to oil (see Decanter.com story).

Investment returns of this magnitude are high enough to get the attention of even "unintentional" wine investors.  There are a variety of reasons causing wine prices to rise (see my September post as well as Eric Asimov's December 5, 2007 story in the New York Times titled "Drink and Be Merry: Wine Prices to Rise").

Rising global demand vs. a weak U.S. dollar 

Rising global demand (especially from Asian countries) is the main factor driving wine prices higher. The weak dollar may be contributing partially to what Americans pay for wine from Europe, but the dollar has only depreciated against the Euro by 9.2% in 2007 and a total of 15.2% since January 2004.

 P.S.   If you'd like to read all my prior posts on wine investing, click here.

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.

In the past week, two reporters have approached me wanting to discuss the topic of investing in wine.  No doubt the dramatic price rises for Bordeaux wine, in particular, is fueling their interest (read "New money's taste for fine wine cleanses wallets as well as palates" from yesterday's Financial Times for some impressive data on pricing trends).

When forced to admit whether I'm aware of specific Vinfolio customers who are pursuing wine investment as the primary motivation for their purchases, I can't come up with one name (excluding members of the trade who buy from us to resell).  Nor am I aware of U.S. retailers promoting investment as a rationale for making sales to customers. (Please post a comment with a link to a marketing page from a U.S. retailer web site if you know of any).

The UK is a different story.  In my European Trip Observations post from May 2007, I noted that some UK tax incentives and long-standing retailer promotion of wine investment have made wine investing a more common activity there.  For example, the reputable UK retailer Berry Brothers & Rudd promotes wine investment via their Cellar Plan offering and I understand they have thousands of participants.  The Financial Times even publishes an annual wine investment report (for a summary, see this post from a relatively new site called WineInvestor.com). 

I think that it's far more common for the typical wine collector to engage in a form of wine investing, which is buying some extra wine to finance their drinking habit or buying excess wine to have an option of drinking it later if it matures nicely (see Pleasure before profit - thoughts on investing in wine).  If you nevertheless want to dive into the investing game in a bigger way, read my Wine investing tips.

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.

A news item on Decanter.com last week titled "Yquem goes into nebuchadnezzar" notes that Yquem is creating a limited series of 120 of these 15 liter bottles for the highly-touted 2005 vintage.  This marks the first time in the long history of Chateau d'Yquem (since 1593) that this bottle format, named after a King of Babylon Nebuchadnezzar II, has been used.  Until now, the largest bottle format available has been 6 liters which only began in 1982.

The facts

• 120 15L bottles to be produced: 20 to be retained in the library of the Chateau
• 100 of the bottles to be sold via Bordeaux Wine Investments (BWI, UK-based) and Bordeaux Wine Locators (BWL, US-Based), which are sister companies owned by the same sole shareholder.
• The BWI/BWL's price per bottle is €12,850 (about $17,100)
• The wine will be bottled during the first quarter of 2009
• The Wine Spectator has scored the wine its highest possible rating in barrel which is 95-100.  Robert Parker has yet to rate it but in writing about the 2005 vintage, he said the 2005 Yquem "should be utterly amazing when released" given that it is a "towering example of profound Sauternes."
  
• Each bottle is etched and engraved with a bottle number.  Bottles will be presented in a special wooden presentation case.
• The names of the 100 buyers will be drawn in April 2007 at the Chateau, providing each purchaser with the opportunity to own bottle #1.
• Special glass was needed so that it would not yellow over an extended aging period.
• Two people are needed to handle a bottle given its weight and size.
  
• Special Styrofoam shipping cases are to be used for delivery.
  

Why now?

I decided to email Robert Lench, Managing Director of BWI, to ask if he knew what the motivating factors were behind the decision to produce 15L bottles.  Here is his response:

"The idea was conceived and initiated by my brother, Andy Lench [the owner of BWI and BWL]. We believed this would be a unique format for the greatest Sauternes in the world in an historic vintage, the 2005. The 2005 has received a generally high profile and acclaimed as one of the greatest Bordeaux vintages. A very special bottle for both investors and connoisseurs. This is a high profile opportunity to have a piece of history."

Apparently, the market seems to agree as there are less than 10 bottles left for sale between the two companies.

Other questions you might ask

1. How do I buy one? The bottles are only available through retailers except in the UK where an individual may buy directly from BWI.  Or just email service@vinfolio.com and we'll try to snag one for you.
2. Does this portend a new supersizing trend for Bordeaux?  Robert Lench did not think so.  This concept was something they initiated as wine merchants.
3. How much of Yquem's typical production is being diverted to the 15L format? About 65,000 bottles (750ml size) are produced annually.  The 120 15L bottles (20 750mls in each) translates into the equivalent of 2,400 750ml bottles or about 3.7% of annual production.
4. What is the price premium compared to the 750ml bottle format? $675 is the median 750ml price based on 23 U.S. retail prices taken from Winesearcher.  Using $17,100 as the minimum price one could pay, this equates to $855 per 750ml equivalent or about a 27% premium.  Two different U.S. retailers have both offered the wine at $20,000 which would be a 48% premium.
5. Would this be a good investment? My guess would be "yes" given the quality of the vintage and the producer, the limited number of bottles produced, rising global demand for top wines, the unquestioned sourcing of the wine, and the ability to prove the authenticity of the wine over time (via etched bottles and other certification).  The fact that over 90 have already been sold tends to confirm my guess.

I don't believe people should use wine solely as an investment vehicle. I've said this before (see my December 2, 2006 post: Pleasure before profit - Thoughts on investing in wine). 

In the last few days there have been several articles relating to wine invsting by major publications.  For example, the Wall Street Journal ran a story on February 24, 2007 in its Money and Investing section called "Fine wines no longer just tempt collectors" (WSJ online subscription required) spotlighting some of the issues (including a quote from me on market inefficiencies).  The day before, www.decanter.com launched a wine investment guide with the respected UK retailer, Berry Brothers and Rudd.  Here's a quote from that guide:

"DON'T buy wine which you happen to like, hoping it will go up in value.  Stick to the tried and tested investment wines.  Personal taste is irrelevant [my italics added] and has no place in investment decisions." 

Wine is meant to be enjoyed, not treated as an anonymous commodity.  For many of the best wines in the world to be purchased and hoarded by speculators, locked away in storage facilities while ownership changes hands on paper, is not the reason wine was created.  Moreover, the practice drives prices beyond the reach of many true wine lovers.

The "temptation"

There's no denying that if you've spent $500,000 building your wine collection that you consider it an "asset" if asked to prepare a personal financial statement.  After all, most of us would miss $500,000 if it suddenly disappeared.  But like buying a primary residence, most people's first objective is to buy what they'll enjoy the experience of consuming (or living in).  It's nice that the "asset" may appreciate in value but that's a a secondary benefit for most wine collectors just as it is for most homeowners.

Planning to invest anyway? 

1. Choose “investment grade” wine - To be a candidate, the wine should have been rated well by recognized critics, preferably 95+ points by someone like Robert Parker, Stephen Tanzer, or Allen Meadows. It also helps if the producer’s wines have a proven track record for improving in the cellar.
2. Pay attention to a wine’s supply and demand factors -This includes looking at the absolute case production in a given vintage as well as where the wine is in its lifecycle. If a wine is close to its peak drinking window, it’s time to sell as it won’t get any better and demand is likely to fall.In short, a wine held too long will begin to fade and so will its value. See my prior post on “An explanation of fine wine prices.”
3. Buy competitively - The wine industry can be very inefficient, in part because of crazy state regulations left over from the repeal of Prohibition. The average retail price spread for a wine on Winesearcher.com is 2x from high to low. If you don’t buy competitively, you will be “in the hole” from day one.
4. Inspect your purchase– Verify that you receive what you purchased and ensure that the condition of bottles is satisfactory. I once received a case of the wrong vintage of a very expensive grand cru red Burgundy. Unintentional shipping errors happen.
5. Exploit arbitrage opportunities - For example, if you can secure a spot on the mailing lists of cult California wineries offering highly allocated wine, you can immediately sell any purchase for a profit. But there are probably less than two dozen of these wines and the wineries typically have multiyear, if not 5-10 year, waiting lists.
6. Sell efficiently - Selling wine typically incurs transaction costs which are very high in comparison to financial securities. A sale transaction with a major auction house may carry a fee overhead of 30%-35% (or more) of the market value. Vinfolio’s personal selling service offers a very efficient alternative with retail-based pricing and fees as low as 13%.
7. Target up-and-comer wines - One reason Vinfolio has a full-time reviewer, Doug Wilder, based in Napa Valley, is to discover and review promising new wines before they are reviewed by mainstream critics (that may generate price increases). Read Doug’s free weekly wineletter, the Wilder Side of California, and his blog, Free Run Juice.
8. Protect your investment – The “carrying costs” for a wine investment can be significant but are unavoidable for protecting your investment from a catastrophic loss. In particular, store wine in a temperature-controlled environment at all times which typically costs $1/bottle to $3/bottle per year at an offsite storage facility. In addition, insure your wine which costs about 0.4% - 0.5% of the market value per year.

One big wild card

Should a major wine critic later downgrade his rating of a wine you own, you’ll see the value of your wine fall. Conversely, upgrades raise the value. The only problem is that this volatility is completely out of your control.

Drink your losses

Buy wine you’d be glad to drink so you can convert your losses into gains!

To the extent one’s wine appreciates in value, I believe that this is purely a secondary benefit to the typical wine collector. It’s great to know you can sell your wine for a profit should you need the cash or want to replace it with other wine because your tastes have changed. The robust resale market may even encourage the general tendency to “overbuy.” After all, why not have the option to drink a little more when you know you can always sell any time to recover your money?

Wealth Manager magazine interviewed me for an article published yesterday titled “You don’t have to own a vineyard to invest in the fruit of the vine.” This is a well-written, comprehensive article targeted at investment advisors whose clients ask them about investing in wine. The principal focus is on the investment potential of buying wine futures. As background, you might with to review my prior post titled “Wine futures and pre-arrivals: what’s the difference?

In tomorrow’s post, I will provide some advice on how to maximize your chances for financial gain and point out risk factors to be aware of if you choose the wine investment route.