Saturday, January 24, 2009

Market Correction

Where Are We Now and Where Do We Go From Here?

Rob Landnsess

Its clear now that fine wine is not immune from market forces of this magnitude, though holders of the best will do just fine in the long term. Here are some thoughts on the current economic crisis in relation to the rare/fine wine market.

Robert Parker's recent bulletin board post goes as follows:

'The wine market is already going through a serious correction...the first major one since the early 70s...keep in mind top end wine has generally been recession proof over the last three decades..but that is changing sales are beginning to show less interest and lower prices...retailers are buying very little...wholesalers are feeling the squeeze as their inventories go unsold...importers are reluctant to purchase new stocks...and of course this is just beginning to snowball....the wine trade is hoping the big holiday season buying by consumers will mitigate the carnage...but it will not....this crisis will only get worse over the near term...especially in the USA as we are in limbo politically until the end of will be great to see lower wine prices..but there will be plenty of casualties...small, high quality wineries, retailers, importers with little liquidity, will likely crash and burn....and the result could be less and less competition as we see more and more consolidation(and that will be horrible)...I am just finishing my year end huge report on most of the top north coast California wonderful as many of their wines are...who is going to being paying $60 and up for chardonnay....$75 and up for pinot noir...$150 and up for cabernet?....that market segment is shrinking dramatically...of course no one predicted the global crisis..and no one can predict when things turn around...but IMHO the next 8-12 months look dreadful for the wine business...and also one of my favorite distractions.....high end restaurants...just so you realize...this is my personal opinion...and of course..I am the quintessentially glass half full personality....'

While there is pain in the short run I think this is actually great for the consumer. It's a (CNTRL ALT DLT) reboot of a bubble that has been witnessed in many sectors. Right now there is more great wine on the market than ever before and there will be further discounts and deals across the board. Like real estate, those who don't have a gun to their head will not sell and I believe the prices of new world cult labels who have never dropped prices will face a grim reality. It was only a year ago that those lists were impossible to join and now the flood gates have opened--you used to be lucky to receive 3 bottles but those limits are gone. I love Harlan Estate but when I saw the prices on the 2005 mailer I thought, wow, this is unsustainable. $500 for a bottle of Harlan, I think I may buy Bordeaux or Burgundy instead. Or a newcomer with less flash in marketing but a good bang for the buck. Unlike Bordeaux with its price fluctuations and tiered system, California prices have only inched up in the last two decades. One could argue that limited vintage variation is at play as well as a grey market that pumped up incentive to raise prices for mailers...but could 2009-2010 be the period when those assessments will be scrapped? Bottom line is that it is a different world and if you have gotten to big for your britches, this market may just whip you into shape. The massive waiting lists may save the big cult wines as people drop off. I wonder, however, what happens when those waiting lists thin out as people toss their mailers.

Francois Mauss of the French GJE (Grand Jury European) has a good point, also from the erobertparker buelletin board:

' we are the ones who did accept for so many years to pay wines like if it was a kind of gold, no ? We were the ladder : the producers just had to climb.'

It is indeed true that consumers were more than happy to climb the ladder and those in the business struggled to keep up with the demand of new releases--seemingly limitless demand especially from emerging markets. Some of that demand is still in play even if the prices have dropped. Inquiries on Lafite and Opus One, cliche as they may be, are still coming in from Hong Kong, though the competition on pricing is fierce.

There will be great deals for consumers with cash in the next year. One of the bright spots for investment may be some of the older vintages of Bordeaux and Burgundy that will come to market. This may be aided by pension funds in London when they will start to sell-- an injection of supply. Imports will drop as retailers and importers try to sell through their stocks. The extreme high end of European wine will always find buyers, maybe not at the same price jump but a drop is clearly expected. What will definitely suffer is mid tier wines, I see them collecting dust on shelves. The high end will drop in price but eventually be snapped up once the market senses a bargain--and there will be one for those with cash on hand. The value wines on the low end will do well if they have brand recognition and good QPR for the average wine drinker--think Mondavi.

Rob Rosania, a noted collector, posts the following:

'For drinkers, its all about what we are willing to pay for the experience of drinking the wine. Clearly, as everyone FEELS like they have more money, they are willing to pay more for experiences, and vice-versa. For drinkers that have the ability to buy, as well as the stomach to buy (people are afraid of their own shadow right now), this PERIOD (not predicting any bottom here) will prove to be the greatest opportunity to get impeccable provenance wines (clearly the business focuses on the provenance much more now than it ever did before) at incredible DRINKING prices.'

I agree with this sentiment, regardless of price point this will be a boon to drinker/collectors. The hyper inflated wines will deflate and then its time to jump in if you can. There are already screaming deals on private collections with much more to come. Provenance is getting better now with a wider availability and that supply will jump. Those not buying but instead are dipping into their own collections to ride out the turmoil will want to restock when things start to turn around. The bounce back will take a while but it will be strong. There are quite a few people out there who still will retain wealth though they feel poor every time they tune into the news now. When perception of wealth recovers watch demand soar.


'10 years from now, the prices of 2005 will be dramatically higher than ever before..'

I think most people would agree with this sentiment. It will be a buyers market for a while but recovery will shift prices upward again and what seems expensive now will seem like a bargain.

From Wine Market Journal's assesment report:

Despite good results in three Hong Kong auctions, the wine auction market still reacted downwardly in concert with the global financial crisis. All indices dropped significantly with, quite interestingly, our DRC index showing the largest decline of all. Also of interest is the performance of our California Cult Cabernet index, which fell the least of all seven. Our broad-market index of Top 500 wines by trade activity and dollar volume depicts that balanced portfolios took less of a hit than any of the major individual sectors other than blue-chip California Cult Cabernets.

All indices were down between 10.7% and 22.7%, leaving wine lovers with liquidity a terrific opportunity to buy the finest wines at prices not seen for two years or more. It will be interesting to watch how the market responds in Q1 2009, as the first quarter in many years produces especially strong results.

The broad market details, Q4 Final versus Q3 Final, are as follows:
  • Our general market index of blue-chip wines, the WMJ Top 150, declined 403 points or 19.8% to a level comparable to Q4 2006;
  • Our other general market index of Top 500 Market Value wines showed a more middling drop of 221 points, or 15.6%;
  • Our First-Growth Bordeaux index fell an astonishing 21.7%, down 543 points to a level approaching that of Q1 2007;
  • Our Bordeaux Super-Seconds index also shows a steep drop of 19.5% by descending 303 points to a level between that of Q3 and Q4 2006;
  • Our DRC index showed a most substantial dip of all, down 503 points, or 22.7% - the greatest vintages of DRC haven’t been this affordable since Q1 2007;
  • Vintage Port, the index that historically moves the least, declined an impressive 219 points, or 19.2% to a level not seen since Q3 2002;
  • Our final index, monitoring California’s most collectable Cult Cabernets, dropped a modest 127 points, or 10.7%, to a level not seen since Q2 2006.'
So where is this all leading? I think its a safe bet that those with tons of stock and not enough cash to survive will be burned out in 2009/2010, flooding the market with prices not seen in a very long time. I pity wine funds that bought a year or two ago who now face remptions. The next two years will be a time to buy if you can, and not sell unless you have no choice. Some clever people no doubt will take advantage of this correction and invest heavily on the best names and vintages when the market floods. They will be in a great position to sell at 'alpha' margins later on. No one predicted the unprescedented recession we are in, no one knows for sure when the bottom will be reached, but there is an argument to be made that a contrarian view will reward those who can bare the risk. This same contrarian view made short sellers a fortune in the last year, I think it will reward the patient buyers in 2009/2010. 5 to 10 years from now log into a wine chat room or bulletin board and you will hear collectors wishing they could take a time machine...

What to buy in the next 2 years? Take a page from Decanter which just posted the most widely traded wines from LivEx:

Chateau Lafite-Rothschild
Chateau Latour
Chateau Margaux
Chateau Mouton Rothschild
Chateau Haut-Brion
Carruades de Lafite
Chateau Petrus
Chateau Cheval Blanc
Chateau La Mission Haut-Brion
Domaine de la Romanee-Conti

Unless they are complete bargains, look to older vintages. There is less availability and they didn't jump as high as the recent vintages, 2005 being a prime example.

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