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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.

A newly published Associated Press story (for which I was interviewed) is titled "Collectors do it for love, perhaps money".  The title sums up the general point that most collectors of anything, whether it be baseball cards or wine, pursue collecting because it is a personal passion.  However, being knowledgeable about your area of interest may help you identify values that can lead to good investments.  If you're a serious wine buff and make intelligent buying decisions, chances are you can buy a little extra to sell later at a profit.

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.

Bottom line: Those of us who enjoy drinking fine wine need to get creative on financing our "habit" (perhaps by buying additional quantities to sell later for a profit) or by seeking world class wines from newer regions or wineries that have yet to be recognized as such.

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.

Bottom line: The stage seems set for long term price rises for fine wine.  Wine collectors need to keep in mind that the world of fine wine is a very global business in which trends or market discontinuities elsewhere will impact their wallets and/or investment approaches.

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.

If you are interested in Yquem, you might also want to read an earlier post titled "1860-2003 vertical of Yquem sells for $1.5 million."

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? 

Here's a short list of wine investing tips to keep in mind. In addition, check my other posts on valuing wine.

 

If you insist on buying wine as an investment despite my post of yesterday (see ”Pleasure before profit – Thoughts on investing in wine”), then take the following factors into account to maximize your chances of a positive outcome:

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!

True wine collectors buy wine to drink -- not for potential financial gains. They may buy excess quantities of a given wine to sell later but this is usually only to help finance their wine consumption. In short, the “dividends” from wine collecting are paid in pleasure, not profit.

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.