Andrew Caillard
The global financial crisis will clearly impact on the international fine wine market during 2009. The Australian secondary wine market, however, has a built-in resilience that differentiates itself from the traditional wine auction markets in London and New York. While the economic outlook may look grim, Langton’s expects its internet-based wine auction market to further expand and develop. The overall international secondary wine market, however, is going through one of its most turbulent but defining periods in its long history. The golden age of wine has come to a close; all the trinkets and baubles of wealth are now up for re-evaluation. Have we reached a market tipping point where the great recognised wines of today are doomed for oblivion like the highly-prized Roman wine Falernian?
The status quo may have altered but it would take a massive tectonic shift to topple off the top seeds of the wine world. The mystique, power and prestige surrounding Chateau Petrus and Domaine de la Romanee Conti, for instance, are the stuff of legend. Certainly, however, the spring cleaning effect of a financial crisis will see a change of guard. Chateau Latour is up for sale and no doubt a few prominent chateaux and producers will change hands over the forthcoming year. The international secondary market itself will also go through a period of adjustment.
In the established secondary market centres of the northern hemisphere including London and New York, significant downward price pressure is expected as broker and wine merchant inventories increase and speculative, mostly new buyers, evaporate. The forthcoming Bordeaux en-primeur campaign (in April) promises to be a poisoned cocktail. With mainly middling 2008 vintage reports and an uncertain economic outlook, it is destined for trouble. At the very best it will be a small campaign. With fewer cellars to fill and more to empty, volume of sales and values will drop. 2005 First Growth Bordeaux including Cheval Blanc, Petrus and Ausone, have already fallen. In some cases auction price expectations will return to initial en-primeur levels of 2006. 2005 Grand Cru Burgundy will experience some price adjustment but because of extremely limited production, prices will soften rather than free-fall. The Champagne houses, renowned for their strict pricing and luxury brand positioning, will also suffer, especially at the top end.
The overall international wine auction market will change in response to the new fine wine dynamic. Christie’s and Sotheby’s, having lost plenty of ground to wine brokers over the last ten years, will increasingly aim to service the crème-de-la-crème of wine collectors. This 'go-for-gold' policy will move the prestige secondary market into a more rarified atmosphere, making it difficult for top Australian wines to make headway in this utterly perplexing and ultra-snobbish market. General price-stagnation and price-decline of post-2000 vintages will provide buyers – especially cashed-up wine funds – with lower entry points. The first half of 2009 will see sluggish clearance rates and erratic demand.
The immediate issue facing all auction houses is establishing a fall-back position of realistic reserves. This is easy to say, but difficult to make happen. Vendors notoriously stonewall any attempts to reduce perceived asset values. The fall in real estate prices and almost every other sundry asset may help winkle these hard and fastened wine collectors off their rocks. However the initial reaction to a poor clearance rate environment is either to hold and hope or find other avenues of disposal. The last ten years has been a bumper time for wine brokers, the world over. They have outmanoeuvred auction houses by providing a more flexible and instant type of service. Generally the inventories are on consignment, but without auction campaigns, the encumbrance of catalogue production and slow payment of proceeds, finalisation of sales is generally more rapid and less costly. However the auction market continues to play a vital role. It is both a barometer of overall market sentiment and a price-maker. The sheer volume of broker inventories accompanied by unrealistic values illustrates that the fine wine market will remain in the doldrums for some time.
As the secondary market recalibrates clearance rates will stay low. In the US, a typical live fine wine auction will see over 90% of lots sold. This figure has dropped to as low as 37% although this is unlikely to become the norm. Necessity will inevitably force down vendor reserves and expectations. Although auction houses are claiming 2008 as one of the best years ever (Sotheby’s turned over $44.62 million, Christie’s $50.66 million), the market profoundly stumbled in November. While the Global Financial Crisis was the catalyst, the international secondary wine auction market was losing oxygen anyway.
Escalating prices and record sales may have kept the media in awe and vendors smug, but this type of environment can eventually lead to buyer flight and lower participation. There is an astonishing lack of depth at the very top end of the market. Already prices for rare vintages have dropped significantly. In June 2008 Acker Merrall & Condit sold a case of 1990 Domaine de la Romanee Conti Romanée-Conti for $242,308 in Hong Kong. In November the same wine fetched $137,359. The 'go for gold policy' may well bring in the big ticket items, but inevitably the market at this level becomes a service for the very rich. I wonder whether it is a sustainable approach. Without diversity and interest even the wealthy can get bored.
At Langton’s in Australia, the market has not tracked the desultory international pattern of sales. Our clearance rates have not taken such a great hit, but certainly volume of bidding has dropped. Record sales on the exchange over the Christmas period compensated for the negative drift. The market traditionally slackens off in January and February. Langton’s January auction in Sydney was quite upbeat. I believe this resilience has something to do with the way that Langton’s has built its business over the last ten years and the democratic reality of the Australian market place.
Langton’s has worked to broaden its buyer base rather than tighten it up to a smattering of the wealthy. Each sale has something of interest to our wide demographic base. A vast majority of the wines are difficult to source from normal retail outlets particularly the very top Australian, Bordeaux and Burgundy wines. Furthermore prices are inevitably better than retail. The efficacy of the internet, access to price and market data give customers confidence to support the electronic secondary wine market. Langton’s client participation rate is substantial and reflects that we probably have the largest active client base of any auction house in the world. Our counterparts have traditionally serviced a much narrower demographic market which will explain the cliff-edge drop in prices and clearance rates.
The Australian secondary wine market, however, is not immune to international sentiment. A pragmatic need by vendors to roll-over stock will ease up reserves, but sales of top Bordeaux, Burgundy and Champagne should perform reasonably well, perhaps with lower clearance rates per auction, but still moving through all the same. The expectations of both vendors and buyers are reasonably well-balanced. We have just not seen the hyper-speculative prices in other international markets, particularly Asia.
Ultra-fine Australian wine will perform comparatively well, largely because it is underpinned by an enthusiastic and longstanding domestic market. In the whole scheme of things it represents very good value and there isn’t much of it. Chateau Latour, with its Grand Vin, produces twenty times the average production of Henschke Hill of Grace. Realisations have not tracked up at the same rate as European equivalents; the wines are not over-valued nor have they been exposed to speculative buying. Penfolds Grange prices increased by roughly 15% during 2007. Despite a cracking record of $53,936 for the 1951 vintage in August, values have remained relatively static during 2008. While there have been intermittent record prices achieved for rare and legendary vintages, the market has been steady all year. Clearance rates have dropped to some extent, but a modest recalibration of price expectations is expected over the first half of 2009. This should apply to most recognised vintages of Langton’s Classified Australian Wines. Lesser vintages will suffer, but that represents a good opportunity for buyers to drink the wines and get them out of the system. 2009 should be a year where clients will increasingly take notice of vintage reputation, producer’s standing and regional definition.
The overall sales international results of the top auction houses is surprising, given the potential access to wine and the population base of Europe, the US and Asia. The secondary wine market, if consignment stock from wine brokers were included, would represent less than 1% of entire wine sales worldwide. In many respects it illustrates a blinkered and fettered evolution of the international secondary wine market over the last twenty years.
Auction houses are astonishingly Eurocentric with an almost obsessive reliance on Bordeaux, Champagne and Burgundy. These wines are the staples of the secondary wine market and account for the vast majority of turnover world-wide. The French have done a wonderful job in building a fine wine culture around its top wines. The longstanding resilience of individual Chateau or Domaine sales underscore the extent of relationships, reputations and the enduring popularity and importance of these wine regions.
Notwithstanding the luminary presence of some producers, the Rhone, Barolo and Tuscany play a side show role. Spain, Austria, Germany, California, Australia and New Zealand are barely represented in the major auction centres of London and New York. Ultimately the narrow field of play reflects a reactive rather than a pro-active wine auction business. The last fifty years has been built on a fairy tale world centred around the terroirs, architecture, tasting/cellaring heritage and histories of the Bordelais, Champenois and Burgundians. Their wines represent essential bottled real estate. The First Growths and Grand Crus are prime locations that cannot be replicated. While the oriental drift of buyer demand, a new economic reality and the growing access to fine wine on the internet may allow greater regional diversity at auction, the baubles of wealth will remain centred around Bordeaux, Burgundy, Champagne and the Rhone for the foreseeable future. Although prices may stagnate or decline during 2009, brand equity will ultimately strengthen on the back of continued Far-East support. Indeed the Asian market understands brands better than points.
Hong Kong has trumped Singapore’s ambitions as Asia’s hub of fine wine. Through its proximity to China and other emerging economies, Hong Kong is set to become the fine wine capital of the East. The wine-tax free environment and level of government support is unprecedented. There are even plans to build a wine auction centre. Although the market is in a state of flux, Hong Kong presents itself as an exciting and viable alternative to London and New York. Already major auction houses have conducted successful sales including Bonhams, Acker Merrall Condit, Christie’s and Zachy’s. Most of these initial sales were fly-in-fly-out projects but many of these participants have indicated a stronger and more permanent presence in 2009. Langton’s, recently acquired by Australia’s largest retailer Woolworths, may also work towards auction sales in Hong Kong.
The overall softening of the market has provided some breathing space and time for reflection. Spiralling prices during the first three quarters of 2008 illustrated a rapacious and limited appetite for the 'best of the best'. The bargain hunters moved in during November. Notwithstanding the global financial crisis, the market will ultimately settle down into a more predictable pattern as buyers more fully understand the vagaries of the market. Many observers, including myself, believe that Hong Kong is the fine wine auction gateway to China.
The top wine auction houses have largely avoided investing in internet technology beyond the less costly setup of a website and downloadable catalogues. In recent times "real-time internet" bidding has been offered to buyers. The live wine auction environment is likely to remain the preferred international method of auction sale for the foreseeable future; not because it is better, but because traditional auction houses have not been challenged. Internet auction pioneers have invested millions into efficient electronic systems. Hong Kong may well become a battleground for change. In Australia live auctions have become rare events as they simply cannot compete. Multi-lingual internet wine auction sites – with a wealth of wine information and data – will become the norm within the next five years.
2008 was a year of extremes for foreign exchange. The Australian Dollar surged and then collapsed against the US Dollar. The Japanese Yen strengthened creating havoc with exporters. The international secondary fine wine market is inextricably tied into the relative values of the Euro, US Dollar and British Pound Sterling. Fluctuations between the currencies have provided opportunities as much as they have compounded losses. The Pound Sterling dropped a bundle against the US Dollar during the third and fourth quarters just as the market entered a period of great uncertainty. Although Liv-ex – a UK based wine exchange – reported a general malaise in market conditions with an 11.8% fall of its index (based on 95 pointer First Growths etc) in 2008, the overall secondary market is governed by reserves and expectations. Some vendors may have experienced low clearance rates but better price realisations than the index suggests.
It is predicted that the international auction market will become sluggish in 2009. However it is unlikely that there will be a free-fall in fine wine prices across the board. Many of the top vintages of the 1980s and 1990s have become quite rare or difficult to find and remain great value compared to the release prices of recent vintages. The very top Bordeaux and Burgundies have traditionally performed well as an alternative investment. If you read some pundits, these wines can represent an average annualised return of 12%. Much of these remarks are based on indexes and smoothed out data. It is true that wine can appreciate in value but timing is everything. Furthermore the costs of buying and selling, storage and insurance can eat away at the return. Despite the uncertainty, fine wine is ultimately a finite/limited production stock. Some buyers may find the current circumstances a great time to enter the market.
Auction prices during 2009 will be relatively volatile reflecting a recalibration of vendor expectations and oscillating buyer participation. The key indicator will be the percentage of lots sold. High clearance rates means that wine is selling through and not stockpiling.
The rarity market has always captured the imagination of fine wine collectors. There is something very special about an old bottle. It is living history. The possibility of tasting wine made by our forefathers during momentous historical times is compelling and utterly seductive, especially to those with extraordinary material wealth. In truth many of these bottles are curios. The power of the imagination is able to transcend 'over the hill' bottles into soaring examples of elegance and sophistication. The speculation and accusations surrounding Hardy Rodenstock – a celebrated European collector and purveyor of ancient and historical wines – has raised a huge question mark over the authenticity of many bottles previously sold at auction and through wine brokers.
A hand-blown dark green bottle etched “1787 Chateau Lafitte (sic) with initials Th.J”, unearthed from a cache of 18th century bottles said to belong to Thomas Jefferson, was apparently found in a bricked up wall in Paris. It subsequently sold for £105,000 in 1985, the highest price ever paid for a single bottle of wine. New evidence, however, suggests that this and many other bottles of antique wines were or are fakes. In the US, billionaire wine collector Bill Koch continues his crusade against the trade of counterfeit rarities through various lawsuits including longstanding legal action against supposed perpetrator Hardy Rodenstock. A court order has stopped one auction house from selling pre-1962 wine in New York. A proliferation of fake wines is predicted. The inexperienced Asian market is particularly vulnerable to such skulduggery. Australian wine, because it does not have the same price cachet as Bordeaux rarities, is unlikely to enjoy the 'reflected glory' of attracting the counterfeit trade. All the same Langton’s maintains constant vigilance at all times with all classic imported and Australian wines!
2009 will be a year of progress rather than a year of record prices. Cashed-up collectors should be able to take advantage of the overall market conditions. Auction houses and brokers will have to innovate and work hard to maintain competitiveness and generate sufficient sales. While such uncertainty is unnerving, the ultra-fine wine market has enjoyed a period of extraordinary boom. Many great wine labels have become inaccessible to wine collectors and morphed into celebrity status symbols and trophies of success. The bust cycle is a normal part of the capitalist system. It will force the market to readjust and its players to reflect on what is important and meaningful. The golden age of wine may be over, but the world of fine wine will not stop, even if the market weather remains inclement.
Andrew Caillard, MW
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Caillard Archive
2012 En Primeur: Left Bank Tasting Notes
Exaggerated Classicism: 2012 Bordeaux Primeurs
Henschke Hill of Grace 50th Anniversary Tasting
Hill of Grace - 50th Anniversary
Henschke Hill of Grace 50th Anniversary
Classification V - Introduction
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The Story of Penfolds Grange
Jasper Hill a Retrospective Tasting
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Bordeaux 2011 Left Bank- Tasting Notes
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In the Tiger's Den - Bordeaux 2011
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2011 A review of Coonawarra
Penfolds Red Winemaking Overview 2011
Penfolds 2006 Grange Release
A history and description of famous 20th Century Australian wines -1973 Wolf Blass Bilyara Black
Classification V - Questions & Answers
A history and description of famous 20th Century Australian wines - 1973 Moss Wood Cabernet Sauvigno
Region Focus - Margaret River
A history and description of famous 20th Century Australian wines- Penfolds Grange 1971
Bordeaux 2009 Top Picks from the Great Solar Vintage
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Languid Lunches and Goose-Fat
Bordeaux 2009 The Great Solar Vintage
Entering the Realm of First Growths
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Forecasting the wine auction market 2009 (through a cumulonimbus).
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Penfolds and the Australian Secondary Wine Market
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