The Bordeaux En Primeur Conundrum

Posted by WineInvestment.org on March 27, 2013
Cult Wines Ltd News, Wine Market News
The Bordeaux En Primeur Conundrum


As the dust settles following the Bordeaux 2010 in-bottle scores and attention moves to the 2012 Bordeaux vintage due to be tasted by the wine trade over the coming weeks, the question and logic of buying Bordeaux en primeur (wine futures) comes into greater focus. A focus which was heightened last week amidst the first ‘non-primeur’ Chateau release by Latour who controversially left the en primeur system last year.

Traditionally buying en primeur, a century-old tradition in Bordeaux, helped winemakers generate an income to help finance their production costs. At the beginning of the last century, most of the power was held by the negociants who bottled and distributed the wines, but over the past 100 years the power has dramatically changed hands and now with most of the top Grand Crus under the ownership of large conglomerates or extremely wealthy individuals – the need for finance to help with production is not so great. So why does this system still exist and who exactly does it benefit?

In April 2012 Chateau Latour, the first growth estate owned by Francois Pinault (the 3rd richest man in France & 53rd richest in the world) announced that it was leaving the en primeur system, a decision that was part of a ‘long term strategy to quit’ said Jean Garandeau, commercial director at the property. Indeed it hadn’t gone unnoticed amongst the trade that over the past decade allocations of Latour each year at en primeur had become smaller – clearly part of this long term plan to eventually leave. The cellars at Latour can accommodate up to 1 million bottles and with the vast financial wealth of its owner behind them, there is little need for them to sell their wines before they feel they are ready. They are of the belief that it’s better for the consumer and over the long-term it’s better for Latour’s bottom line as they avoid collectors, investors and merchants benefitting from their wine’s appreciation. Monsieur Garandeau feels that their decision was ‘a revolutionary moment’ but others are not convinced. Stepehen Browett of Farr Vintners didn’t believe others would follow suit because ‘the negociant system works for them because they have other properties whose wines they want to sell’. For example unlike Mouton and Lafite, that both own other properties in Bordeaux and around the world, the Latour team are very much focused on the three wines produced at the Chateau. So there is less need to leverage off the demand for the grand vin to sell other estate owned wines.

tg2Whatever the future for the en primeur system, it will be without Latour and earlier last week, we did get a glimpse into what the future held as Latour made their first non-primeur vintage release onto the market. Offering three different vintages to the market for their three wines; Latour 1995, Forts de Latour 2005 and Pauillac de Latour 2009. As with the wines sold in the 2011 ex-cellar auction sale, these non-primeur releases  will come with ‘anti-counterfeit Prooftag capsules and a special back label stating that the wines have been released by the Chateau in 2013’ as reported by Decanter.

The price for the grand vin ex-London of just under £5,000 represents around a 15% premium against current available physical stocks on the market. So what are the buyers of this stock getting? A guarantee of provenance – something that ex-cellar auctions particularly in Hong Kong have shown collectors are happy to pay a premium for. It’s clear that Latour, who held a successful ex-cellar sale in 2011 with Christies in Hong Kong, feel this is where the future value lies for their product. But is this worth an extra 15%? As Liv-ex, the world’s leading fine exchange, claimed last week – is a case of 1995 Latour stored in the Chateau cellars really worth that much more than a perfect condition case of Latour 95 that has been stored professionally since delivery in Octavian? I think there will always be those willing to pay that little bit more for this type of provenance, especially from the new emerging markets where counterfeiting and questions of authenticity are greater, but i would question that if this is a glimpse into the future for Latour and is this really benefitting the consumers they have emphasised it’s all for?

If you look at the mechanics of the wine market, the ability for the world’s greatest wines to appreciate injects new funds into the market. If you took a straw poll of collectors who purchased Latour 1995 en primeur and have since stored and consumed it at their own choosing over the past 15 years whether they would preferred to have bought it from the chateau now, I’m pretty certain the answer would be a resounding no. Looking at the historical data, it shows that Latour 95 was initially released to market at en primeur around £450 per case. A collector who purchased two cases, en primeur, and had the negative carry of 15 years storage and insurance totalling around £300 would be looking at a total cost of c. £1,200. If said person decides now to drink one case and re-sell the other, the current market value of £4,250 would leave the collector with £3,050 profit in his back pocket and 12 bottles of perfectly stored Latour 1995 to drink. The fact, that in most cases that capital would then be used to fund new purchases, seems to be wholly overlooked by the majority of Bordeaux when the question of investment and speculation arises.

It’s the wine’s appreciation that inevitably funds collectors’ ability to buy more wine. Selling off part of your cellar to fund new purchases is part of wine collecting. If Latour’s new model sees them eliminate the speculation, will this inevitably hinder them in the future? In recent times the overwhelming clamour from wine critics and traditional buyers, has been for lower prices and more affordable top class Bordeaux – but I really fail to see how Latour’s decision and new strategy will help this. Will they be able to protect their wines for longer and ensure the majority are consumed at the optimum time? Yes.  But are they benefitting the end-consumer by eliminating speculation, in my opinion – No.

For the rest of the Bordeaux estates that will again go through this annual process, the question of pricing will be firmly at the top of the agenda as the world’s wine trade arrive on Bordeaux. The last four en primeur campaigns have been markedly different experiences for consumers and the trade alike.

 

Ahead of the 2008 en primeur campaign, following the Lehman Brothers crash, merchants and trade urged the Chateaux to release at low prices. With the economy and market in a precarious position and 2008 being considered by most as an average-good year, many feared there would be no market for the wines if released at too high a price. The Chateaux heeded this warning with many releasing almost immediately and at low prices. But crucially many did so before Robert Parker’s report was published. So when he reported of a better than expected vintage with high scores to match, prices for wines such as Lafite Rothschild scored 98-100 pts increased dramatically from £1,700 per case to over £3,000 in a matter of weeks. This coupled with the continuing emergence of Hong Kong & China as a major player in the fine wine market, saw prices rise meteorically in a short space of time leaving many of the Chateaux owners (who were encouraged to drop prices) with a bad taste in their mouths. They watched as the market recovered with their 2008 wines doubling or trebling in price. The winners in this scenario were well and truly the speculators, merchants and collectors, the Chateaux were clearly not going to let this happen again.

Lafite Rothschild 2008

When the 2009 ‘vintage of a lifetime’ rolled around 12 months later, there was to be no repeat of reduced prices and with the wine market in the grip of a 2 year Bull run fuelled by the emergence of Hong Kong as the world’s number one wine hub, Chateaux owners were keen to push boundaries. But despite record release prices, even beyond those most expected, 2009 en primeur sold remarkably well across the board. As Robert Parker Jr recently stated ‘there appear to be few 2009s left in inventory, either at the chateau level, the negociant level or at wine retailer shops throughout the world’. The 2009 vintage worked, the quality of the vintage justified the high prices and looking now at current levels for those wines below First Growth level, prices have risen across the board. A 100 pt wines such as Chateau Clinet have increased in value by over 100% (£1,050 on release vs. £2,200 at current levels). Perhaps, one could criticise first growth pricing as many languish around the release price or less, but compared to historic vintages the 2009′s still provide an incentive for buyers.

2010, the second vintage of a lifetime in succession, was released onto the market in June 2011 a time that is now regarded as the end of the bull run and the start of a market correction that carried us into late 2012. As Parker reflects, ‘This vintage came out at incredibly high prices, even higher than 2009s, and a number of major merchants throughout the world refused to buy them, or cancelled their orders once it was apparent that the recession of 2008 was going to keep many of the big spenders on the sidelines, but despite this, many merchants reported record-breaking en primeur sales (helped by increased prices) followed by a market downturn which saw prices soften subsequently. In a vintage that has been widely reported as being one of the first that the Chinese really bought into, this has done little to encourage or convince them to buy en primeur. Recent critic scores and reports, have however confirmed the greatness of the 2010 vintage and despite the top wines remaining highly priced, some of the lower priced grand crus represent great value and as Parker reported ‘given the greatness of the vintage, it is hard to believe they are going to soften any more than they have already. And if anything, given the less than stellar vintages of 2011 and 2012, I suspect prices could increase beyond current levels.’

So with record sales and profits recorded by Chateau on the back of the great 2009 and 2010 vintages, and deservedly so many would argue for producers of a product that’s quality can be so variable on annual basis, why was the 2011 vintage such a disaster? As US wine critic James Suckling wrote on his blog ‘many really blew it with their pricing for 2011 futures, or en primeur, and didn’t drop their prices enough…Most top wine merchants in the world sold less than 10 percent of what they did with 2010 or 2009. Some didn’t sell any 2011′. And this highlights the fundamental flaw of the system. There is little recourse for the Chateau because they sell all their allocations to the negociants, who are obliged to take them to ensure they will get an allocation the next year. The negociants are left with the responsibility of marketing and distributing the vintage, but in 2011 when prices were way above what they should have been it leaves little incentive for buyers and you will therefore find that many of the big negociants in Bordeaux will still be sitting on quantities of 2011 stock, unlike the Chateau owner who has simply sold their wine en primeur.

Chateau Duhart Milon 2011

From the buyers and the market’s perspective, the 2011 campaign lacked ‘incentive’. If you can buy a 2001 or 2008 vintage, both comparable in quality to 2011, for less than the en primeur asking price – then why would you? Unsurprisingly the wines that sold best for 2011 were those that were well priced (Pontet Canet, Eglise Clinet, Lynch Bages, Lafite) but these were few and far between. The issue of how the chateau decide on pricing levels has been argued long and hard, what is clear though and worryingly so is the lack of real market analysis. The 2011′s would have sold and sold well, if priced right. This is something that Suckling would like to see for the 2012 vintage, ‘I suggest 2008 opening prices for the first growths…They did it with the 2008 vintage. Why can’t they do it with 2012?’. Whilst I’m sceptical we will ever see a repeat of 2008, there does need to be a concerted effort from all parties to re-ignite the interest in the en primeur system. They will end up burning bridges with their new emerging markets and following two of the most expensive campaigns in history and one of the most overpriced and undersold, a lot of people may start to become disillusioned.

As simple as it sounds, my advice would be to assess the quality of the vintage in comparison to other physically available vintages and then price to incentivise. The wine market has been buoyant since November posting consecutive monthly market gains and a poorly executed en primeur campaign could a negative impact (as it did last year). On the other hand, a well thought out and priced campaign could completely reinvigorate everyone’s interest in en primeur and further boost the tentative but positive growth we have been witnessing over the past few months.

 

 

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