Speculation vs. Consumption in a Landscape of Luxury

Alcohol is generally considered a recession-proof category because drinking is a common human response to the capricious nature of life. Some drink when times are tough, some drink when there is nothing better to do and almost everyone drinks in celebration. This baseline reality assures us that drinking will never go out of style even if the style in which we drink continues to change. When it comes to drinking wine, especially bottles at exclusive price points, changes are being brought about by the explosive growth of both population and wealth in the Asian market.

There is a vinous gold rush happening in China, Japan and Singapore that is rapidly changing the face of fine-wine and simultaneously, but more gradually, the face of wine itself. The most obvious impact of the Asian market is on “luxury” or “prestige” brands. Lafite is the most obvious example because it kicked off the luxury wine craze in China, which from about 2008-2011 was the only market for Lafite. Suddenly anyone who owned Lafite had to reconsidering whether it was still a consumption item or if, because of the prices Lafite was achieving, it had become a commodity to be cashed in on. Consider the mind-boggling purchasing power of a nation with 1.3 billion people against the annual production of Chateau Lafite Rothschild, no more than 20,000 cases, and you get an clear example of fundamental supply and demand economics. So Lafite that what was once being held for drinking was suddenly worth too much money to justify the indulgence. For westerners during the initial rush it was like finding buried treasure and you were a sucker if you didn’t cash in. “Why would anyone drink something for recreation that’s 10 times as valuable as silver, and may become as valuable as gold in a decade?”

The cult status Lafite achieved created a side-market for empty bottles and the most valuable empties were the 1982s, which could go for up to $1,500. Clearly any use for a $1,500 empty wine bottle is dubious at best but it does explain why there is more 1982 Lafite in China than was ever produced at the chateau. It also explains the problematic reality that can overtake such singularly valuable items. But the criminal side of this is a well documented topic and not the point here, what is germane to this discussion is the nearly endless money that is available overseas for the unwavering pursuit of luxury and prestige.

While Lafite is still popular, the inflated prices have come down slightly as a result of Asian consumers diversifying their drinking habits. That is good news for sellers of fine wine. But what are they buying and why? Here there is an important distinction to be made about the impetus propelling luxury wine purchases, whether of chateau/vineyard properties or of finished bottles. We must distinguish between purchases based on speculation, toward profit, and purchases based on the desire to collect and consume. In other words, wine as a speculative asset vs a consumption item.

Luxury purchases made based on speculation, in the name of $$, are a problem for the average wine enthusiast and the average local farmer because the end result is that they are being priced out of that portion of the market. Where once Grand Cru Burgundy was within the reach of many, now Premier Cru or even village wines are the only quality level affordable to the average consumer. Talk to any established wine collector and you will be told how significantly prices have risen since the 80s and 90s when the UK was the financial center of wine, before the US really got going with its buying. This was a time when the Grand Cru wines mentioned above were mere pennies compared to current prices. The US is now an established market and we are watching the rise of Asia along with prices. What is different this time around is that the price increases are on steroids, like so many current professional athletes. In this era of bigger and better much of the price inflation corresponds to a standard within the exclusive circles of the world’s financial elite, expensive for expensive’s sake.  But is the goal of the financially elite buyer to produce/consume, or is the goal speculation and investment in a commodity? If the buyer is motivated by the latter, the results of his/her action are more likely to exert a detrimental influence on the future health of the international wine marketplace.

Consider land prices in the French regions of Champagne and Cognac. A recent AFP article by Sandra Laffont draws attention to a study of the effects that international demand for iconic French luxury products Champagne and Cognac has had on the price of the land from which they are produced. The effect? Prices skyrocketed in 2012. The price for one hectare of land in Champagne country has increased 21.5% and is going for more than $1.3 million amid a rural property market that is otherwise in a depression. Cognac and coveted Bordeaux sites have seen similar increases, making these vineyards all but unobtainable for young farmers. Thomas Diemer, a spokesman for a union representing young french farmers points out that “sales at this level clearly show that some buyers are speculating on land prices rather than using the land as a production tool” and that an “increasing number of transactions are being made by companies and not by growers and farmers.” He continues that while they are not opposed to this “when it’s a matter of facilitating transfers within a family, [they] can be concerned about the consequences when these companies, which are not farmers, start acquiring properties.”

Recently acquisitions of French vineyards by foreign buyers have become relatively common. Hong Kong based Goldin Financial Holdings (owner of Sloan estate in Napa) is the new majority owner of Chateau Le Bon Pasteur (Pomerol), Chateau Rolland Maillet (St. Emilion) and Chateau Bertineau Saint-Vincent (Lalande de Pomerol) as a result of it’s recent deal with international wine consultant Michel Rolland. Also recent, outside the vineyards but very much in the wine world, was the sale of the Wine Advocate by Robert Parker Jr. to, as Reuters put it, “a shadowy group of investors in Singapore.” Japanese investment has also been going on somewhat more quietly in California, France and Germany for quite some time. Whiskey giant Suntory has owned iconic German estate Weingut Robert Weil (Rheingau) since 1988, is partner in a Bordeaux negociant business and owns 3rd growth Chateau Lagrange (St. Julien). Japanese importers Takashimaya have controlled legendary Domaine Leroy ever since Madame Lalou Bize-Leroy split from DRC and aquired the Charles Noellat domaine and iconic Cupertino producer Ridge Vineyards has been Japanese owned since 1987. Other California vineyards that are Japanese owned are Markham, Freeman, Dalle Valle, Clos Pegase and Kenzo. Historically “Japanese discretion and precision are two very positive qualities for wine” and their quiet ownership of iconic vineyards has been a model that should be followed and imitated.

These are just a few examples of the Asian influence that is steadily increasing in the world of wine. To be sure, among these examples there are parities that fall into each category, driven by speculation or driven by desire to produce/consume. These differences in “style” will continue play out in auction rooms, vineyards and across the international wine market. Hopefully champions of consumption will not be priced out of the market and into oblivion by deep pocketed speculators.

Andy Xie for Caixin Online:

http://english.caixin.com/2010-12-07/100205377.html?p1

Jancis Robinson for Financial Times:

http://www.ft.com/cms/s/2/704c1a7e-66dd-11e2-a805-00144feab49a.html#axzz2VouQFxUr

Winesearcher:

http://www.wine-searcher.com/m/2013/06/champagne-and-cognac-push-up-land-prices

http://www.wine-searcher.com/m/2013/06/chateau-bon-pasteur-sold-to-hong-kong-investor

r.a.h.

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