An interview with Andrew Caillard MW
In recent weeks wine investors have started to receive their residual wine stocks from the liquidators of failed broking houses Heritage Fine Wines and Wine Orb. The following interview by Mark Lane of the UK based publication Wine International with Andrew Caillard MW took place in late 2003 well before the unfolding debacle. Earlier in the same year – because of anecdotal evidence from disgruntled wine investors – Langton’s issued a warning to its clients about various wine investment schemes. These warning were of course too late for many people, but it is astonishing that these type of wine investment offers persist.
What is your overall opinion of wine investment brokers?
It’s important to distinguish between reputable wine brokers and the self-fulfilling prophets who call themselves wine investment brokers. In the UK there are many wine brokers who act as good wine merchants competing against wine auction companies for a cut in the secondary market and dealing in the very meaningful en-primeur markets. There are, however, many instances of improper wine and spirit investment schemes promoted by unscrupulous wine brokers in the UK. These operators seem to work on the fringe of the wine trade. Unfortunately it appears that a few of these people have also come to Australia using similar tactics to induce wine investors to part with their money.
Why is it so easy to mislead clients with unrealistic market valuations and expectations? Do you have any examples?
Unfortunately it is human nature to be greedy. Fear of missing out, fear of not being able to live comfortably in retirement and fear of failure can lead to bad decision making. The clients who are being duped are promised high returns by enthusiastic sales people using data and anecdotal evidence largely published by the media. Only recently the Australian newspaper in their Wealth section published an article on wine investment quoting wine as ‘the second- most appreciating asset’. It is true that wine is increasingly recognized as an asset class. More and more self-managed superannuation funds are buying into wine. The message, however, that these wine investment SMSFs are ‘just as good as those for listed property trusts’ is misleading. The brokers use this information as a way of selling the idea of wine investment to the public.
One unwise wine investor purchased 323 bottles comprising three collections/portfolios for $32,400.00 in June and July 2002. This price included 5% brokerage fee and storage. The investor received “Portfolio Evaluations” in April 2003 and September 2003 stating that market value of the portfolio was $33,083.00 and $34,493.00 respectively. Regardless of the accompanying disclaimer these evaluations are grossly exaggerated and self-fulfilling. This investor currently expects a return of approximately $18,000.00 gross (approximately $16,000.00 Net) on his portfolio. This is half the original purchase price.
Are instances of this isolated?
Unfortunately this is not an isolated case. Despite electronic and published retail and secondary wine market data, ill-informed buyers are being seduced by overstated media reports and over-optimistic – sometimes hard-sell – sales pitches. Many of these wine investment schemes are based on a wing and a prayer.
How do you recognise a dodgy broker? What are the warning signs that should set alarm bells ringing? What methods do they use? Do you have any examples?
I think anyone who cold calls you with a wine investment proposition and without a reference is approaching you with little respect. While cold calling has been a traditional way of selling wine investment, in more recent years email has emerged as a powerful selling tool. Many of these sales people are actually casual workers working for a wine broking organisation. They just work to a sales formula and sales targets. Why would they care whether the service is satisfactory? Good wine merchants are not usually that aggressive.
At Langton’s, in a recent notice to our members, we offered the following information:
1. Brokers are offering wines at a significant premium on release. Overpriced wine regardless of provenance, quality or supply is rarely a good investment.
2. Brokers are offering a storage component and brokerage fee on top of normal, sometimes aggressive margins. This may result in significant premiums factored into the sale price.
3. Some brokers are offering returns through establishing networks or using auction houses in the US. The complicated rules regarding the importation of wine, the possible crackdown on parallel importing, the enactment of the Anti-Terrorism Bill, transport, customs and taxes makes it difficult to bring wine in to the US the first place. Also volume of demand for most ultra-fine Australian wine in the US and UK is still relatively weak.
4. Brokers are providing unsubstantiated valuations to maintain positive relationships with their clients.
5. The emerging Australian wine investment market is a legitimate market, but there are few wines that are able to deliver solid returns.
6. Australian Cult Wine – a relatively new phenomena and propelled by the highly influential American wine critic Robert Parker Jr. can perform well – BUT results are based on ludicrously small offerings.
7. Brokers have been using ‘sensational’ data – largely formulated out of context to push unknown wines with little or no track record.
8. There is a substantial amount of second rate investment wine in storage around Australia with no hope of ever achieving promised returns.
Have there been any recent court cases where such companies have been closed down?
The serious fraud office in the UK has secured a number of convictions and/or confiscations. In Australia these scams have barely raised an eyebrow. Journalists – bound by Australian Libel Laws – appear to be unable to warn about these schemes. Furthermore there are instances where the Australian financial media have highlighted these offerings as alternative investments. Interestingly it took years before authorities began cracking down on dodgy real-estate investment schemes. Why would it be any different with wine?
How do you identify a good broker?
If we are talking about wine investment, I don’t think there is such a thing as a good broker in Australia. I have yet to have met a wine investor who has realised the returns promised by their broker. In more recent times, however, some brokers have changed tack. They have dumped the “wine investment opportunities” or “portfolio” offerings in favour of developing their own brands or promoting their own exclusive wines. I don’t see a problem with this if the buyer is not sold the wine with the idea that it will bring a return.
In the UK and Europe the wine broking business is well established with some very reliable and reputable operators. Some are both customers of and healthy competition to auction houses. If you are serious about getting involved in the en primeur or wine investment markets, its best to deal with those that can guarantee supply and have some form of track record. A few enquiries around the wine trade would help identify the best brokers. Keep well away from investment opportunities in Champagne, Vintage Port and pseudo-cult wines. And steer clear from anything to do with spirits – especially whisky!
Is it always worth shopping around? Can prices vary that much, even between legitimate brokers? If so why?
Of course it’s always worth keeping an eye on the market. Prices do vary. For instance the Bordeaux en primeur markets are quite complex. Wine is offered in tranches and allocations. Fulfilling orders can create pressure on supply conduits and cause prices to move around. In the end you want to deal with a broker you can trust. The hard nosed wine investor is probably inclined to show less loyalty and spend the time to find the choicest parcels and prices. Certainly the idea of buying earliest, cheapest, lowest applies to all good investment – but a good relationship with a reputable broker can be equally important – especially if something goes wrong or allocations are really tight.
Even with a good broker is there a risk to your money or your stock?
There is always a risk associated with wine investment as much as there is with stocks and shares. The 2003 Bordeaux vintage for instance is regarded by many as a great year. Others are more reserved in their judgement. After the initial flurry of fulfilling orders, it is quite possible that the market could flatten off. Alternatively an enhanced reputation of the vintage may see prices takeoff. The 1998 Penfolds Grange – a great vintage – saw prices double in the course of a few months. Some brokers then repatriated stock from Europe creating an imbalance in the market and driving down prices. This was not predicted.
Buying wine en primeur does have its drawbacks. Most of the wine is delivered to the client a few years after purchase. In the case of d’Yquem it’s four years. The wine stays in the producer’s/negociant’s cellars until release date. Complications can and have occurred where brokers have over extended themselves and are unable to finalise payment. You reduce your level of risk with a good reputable broker.
Is there a wine scam website that targets these dodgy wine investment firms?
www.investdrinks.com is a very informative site.
What are some specific pitfalls you should avoid from these people?
The Champagne, Vintage Port and pseudo-cult wine market have all been championed by dodgy brokers over recent years. Champagne and Vintage Port are well loved on the secondary market but they have never really performed as wine investments. In Australia there was a huge trade in collectable tawny ports – Race Horse Series, Australian Capital Cities, America’s Cup etc. They were sold as investments but no one ever got a return. Pseudo-cult wines are secondary wines which bathe in the reflected glory of a huge Parker score. These wines have been offered as wine investments but usually have no track record and are unlikely to perform regardless of the broker’s spin. There are huge inventories of this stock lying in storage around Australia.
Most wine investors will buy half or full dozen cases of wine for wine investment purposes. Domaine de La Romanee Conti is offered in mixed dozens – so single bottles are not necessarily a bad thing. Certainly the secondary wine market does not always penalise single bottle offerings. It depends on the producer, vintage and rarity value.
The secondary wine market and the reputation of producers is driven by the idea of light and shade – the fact that wine is not homogeneous – but reflects the vagaries of vintage, the times and place. Over the course of many years a profile builds up where each vintage is a foil against each other.
Reputation is a derivative of this collective experience. Even a wine like Grange has its great and its ordinary years. When it comes to wine investment, performance is usually related to the reputation of a vintage. If it is a good vintage buyers may be prepared to pay a premium. No one really cares about the 1995 or 1997 South Australian Vintage. The same applies to 1993 and 1997 Bordeaux etc. Why would you sell such wines as an investment? Regrettably some reputable brokers and wine merchants have done so in the past.
The idea of provenance has always been important. Since the Asian markets have become involved in buying fine wine, there is a heightened concern about previous cellaring conditions and repatriation of stock. Many Asian collectors will store their wine in Europe or Australia. In Australia – through the Penfolds Red Wine Clinics – we have seen the stark contrasts of cellaring conditions between Melbourne/Hobart and Adelaide/Brisbane/Perth. The advent of professional storage facilities and better private cellars is changing this profile. However once out of a producer’s cellar, it is very difficult to track the cellaring provenance of a wine, unless it belongs to a special collection. We get few of these in Australia. How does anyone know whether a bottle of 1961 Chateau Latour removed from a temperature controlled cellar has been lying there since original shipment?
While it is important to be very vigilant about provenance, I do think that this issue is used as a ‘weapon of doubt’ to put clients off buying wine from a competitor or unfortunately at auction. In truth anyone involved in fine wine is concerned about where the wine has been stored. The overall condition of the bottle will give clues: lead capsules corrode; aluminium capsules lose their sheen; labels fade through light, water damage or humidity; label damage can be caused by silverfish, or acidity in paper; ullage levels can vary according to cellaring conditions or quality of cork (the 1976 Grange – a very great year is renowned for its bad quality cork); the overall sheen and condition of a bottle including ingrained soil, marks etc and clarity/turbidity/deposit of wine as seen through the neck or bottle.
How prevalent is the fake/forged wine market? Can you put an estimate on the figures/volumes/percentages of fake wine around at any time?
I think there is a difference between fake wine and counterfeit/forged wine. The latter is passing off bottles that pretend to contain a wine of perceived reputation and value for monetary gain. Fake wine is something that is open to philosophical argument. There are plenty of wines which are being sold or passed off at a premium price and hyped by marketers but which do not deliver quality at the price-point whatsoever.
Counterfeit/forged wine accounts for a minute proportion of the fine and rare wine market. Occasionally celebrated incidents crop up. In Italy, there have been discoveries of counterfeit 1994 and 1995 Sassacaia – worth apparently over £1 million. The emerging Asian markets, where fine wine is increasingly a status symbol, are particularly vulnerable. In 2002 Chinese racketeers were found with a cache of counterfeit 1982 Mouton Rothschild. I believe the Bordelais, quite worried about this scenario, have in the past invested quite heavily in anti-fraud strategies in Asia.
Langton’s made a famous discovery of counterfeit 1990 Grange some years back. And then there are apocryphal stories that may have a grain of truth. Is it really true – for instance – that three-quarters of Italian wine in the US is fake? The rarity market is particularly vulnerable to forgery.
It’s almost impossible to put a figure on fake wine. It is an ill-defined term. I don’t believe counterfeiting of fine wine is quite as prevalent as some media reports suggest but certainly it is an irritation. Frankly the high incidence of cork taint in fine wine is more of a scandal.
Is fake wine increasing?
Probably. The ever increasing number of fine wine labels provides a compelling argument that fake wine is increasing. The emerging Asian markets are not particularly well regulated. Food safety – above brand protection – must be the primary concern here.
How do you tell a fake wine?
It is some time since we last saw a counterfeit bottle. Langton’s discovered fake bottles of Penfolds Grange a few years ago which created widespread media interest. The spelling errors on the label “poor” instead of “pour” etc shows that counterfeiters should learn how to spell!
Sometimes it is impossible to work out whether bottles are fakes. The rarity market which comprises old vintages is particularly problematic. Standardization and chateau-bottling etc is a relatively new phenomenon. Indeed chateau bottling is a means of guaranteeing authenticity. In Australia old bottles of Grange come in all sorts of different bottles, capsules, bin numbers and labels. The Penfold Red Wine Clinics have played a role in discouraging fakes.
Interestingly the practice of topping up an old vintage with a new vintage (of the same wine) is not universally accepted and may breach local laws. As someone who was involved with the original scoping of this project, I feel this is a genuine bone-fide way of looking after old bottles – especially if there is an authenticating back label affixed. The Penfold Red Wine Clinics have been particularly successful in Australia and now take place in the US, UK and New Zealand. Some people, however, believe that “reconditioned bottles are easy to counterfeit”. I think this depends completely on how and where re-corking takes place. The Grange market in Australia has been greatly aided by this project where buyers will only pay top prices for vintages with decent fill levels. In the end, however, identification of fake wine is a gut feel and requires experience. This is where provenance and trust comes into play.
What are the moves to counter fake wines?
The genuine concerns of brand protection, food safety and theft have lead to various moves. Laser etching on bottles was introduced by Penfolds after the discovery of fake Grange. Other companies are now using DNA technology. Hardy’s have used DNA from 100 year-old vines to generate “DNA Matrix” bottle labels. The new Zork bottle enclosure is using a microchip to prevent theft and fraud.
Louis Roederer have looked at micro chipping their products too. Other companies are using embossed bottles. Rockford, Chateau Cos d’Estournel and Sassacaia are recent examples. Radio-carbon dating has been used successfully to challenge the authenticity of Champagne/Sparkling wine in the market place by a competitor.
There are new tests that are being invented all the time. New Scientist reported that the University of Seville in Spain had developed an atomic spectrometry test to authenticate champagne using an “analysis of trace metals that are passed into the grape from the soil”. Continuing vigilance is vital to counter the problem of fake wine. I think some companies have used the idea of brand protection as a means of adding value to their product rather than genuinely addressing the issue.
What wines in particular are subject to forgery?
All wine is potentially subject to fakery/forgery/counterfeiting. While high value fakes including 1945 Mouton Rothshild, 1947 Cheval Blanc, 1982 Petrus and 1990 Penfolds Grange attract the limelight, commercial wines are also subject to fraud. This starts becoming something of a minefield, because this can also include unscrupulous producers passing off their own wine as something better than it really is. In essence these wines are fakes – as much as the utterly unremarkable but expensive wines, which neither deliver on quality nor fulfil the marketers promise of nirvana?!
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