Liv-ex Fine Wine Market Blog

Burgundy sets the pace

Trade on the exchange has encompassed a broad array of wines this month. As well as the usual bevy of Bordeaux, top labels from Burgundy have made buyers' wish lists and the region has accounted for seven per cent of monthly turnover.  Of course, the Burgundy 2010 campaign has been partly behind the region's performance. To a larger extent, however, Burgundy continues to benefit from the general broadening of the market.

With demand now spanning a more varied group of wines, Bordeaux has accounted for just 87 per cent of turnover in January. The table below shows the month's most traded non-Bordeaux brands. As you can see, Comte Vogue has outpaced DRC this month - a signal, perhaps, that more of the region's leading labels are gaining traction in new markets.   

The road ahead

Fine wine was not immune to the global economic gloom in 2011. Prices fell rapidly in the second half of the year and the Liv-ex 100 Fine Wine Index declined 21.5 per cent. We noted in late 2010 that a price correction and a return to a more sustainable level of growth would be beneficial in the medium to long term. The severity and swiftness of the correction, however, took many by surprise. 

Lessons learned

Many of these falls were concentrated in the First Growths, which did not relinquish their dominance over the market. This is demonstrated in the chart below, which shows the performance and production value (i.e. average price x production) of the top ten labels by value traded on the exchange in 2011. It wasn’t universally bad news as many of the second-line wines and Petrus managed to end the year slightly up.  

With a weighting of 68 per cent in the Liv-ex Fine Wine 100 Index, the First Growths’ recent falls have clearly cast a long shadow on the market. And although the Super Seconds increased in value in the 12 months to December, their weighting is dwarfed by their higher-ranking cousins. 

A stabilisation in the price of the Premiers Crus is a prerequisite to recovery in 2012. For this to happen, of course, they must reach a level where they regain buyer confidence and are once again seen to represent value. Encouragingly, we are seeing nascent signs that some wines are re-entering the ‘buy zone’. The Liv-ex Fine Wine 50 has edged upwards since the start of the year, while the Liv-ex Claret Chip inched higher in the first and second weeks of January for the first time since late July. More importantly, the value of bids on the exchange has started to rise again after falling for six consecutive months. 

Positive triggers

Though the prevailing economic concerns continue to cast a heavy shadow, several scenarios could see the market find a floor in 2012.

An affordable 2011 campaign: The eurozone crisis and economic weakness could persuade the Bordelais to lower prices. If so, a well-priced en primeur campaign might reignite interest in Bordeaux, as it did in 2009 when the 2008 vintage was priced very fairly. 

A return to value: The sharp price falls that were recorded in the second half of 2011 equate to those seen in 2008 after the collapse of Lehman Brothers. For this reason, one has to assume that a heavy dose of bad news is already in the price. Even a modest turnaround in sentiment towards the First Growths could have a profound impact on confidence.   

High 2009 in-bottle scores: Robert Parker is expected to publish his in-bottle scores for the 2009 vintage in the next issue of the Wine Advocate. If his effusive Magic 20 tasting is anything to go by, the vintage’s scores may eclipse those of its forerunners, making it a ‘must have’ for collectors and strengthening interest in Bordeaux.

Easing of Chinese monetary policy: Over the last few years, China has been the driving force behind the market’s growth. As such, any moves to stimulate growth in China will certainly be cause for optimism.  

As we sit here today, the fog of negativity that has shrouded the market since the summer is showing tentative signs of lifting. Indeed, as we discovered in 2009 and 2011, sentiment can turn remarkably quickly.

Market breadth boosts trading activity on Liv-ex

Although the market has yet to commit to a direction, there are several reasons to be cheerful this year. Demand has broadened in recent months and is no longer heavily concentrated in the First Growths. Perhaps as a result of this, a more diverse range of wines is now in play, including top labels from outside Bordeaux. The total value of stock bid and offered on the Liv-ex exchange is up 20 per cent year on year. The number of wines that have both bids and offers placed against them has risen 68 per cent in the last 12 months and the bid-offer spreads have tightened. Unsurprisingly, then, the volume of weekly transactions is up 20 per cent year on year. With First Growth trade reduced, however, trade by value is down 15 per cent. 

The rise in the number of active spreads on Liv-ex is shown in the chart below.

Is the improved breadth and depth of the market encouraging more merchants to trade? Despite Chinese New Year celebrations, merchant engagement is at its highest level since September.  

Gong Xi Fa Cai: A return to prosperity?

Yesterday ushered in the Year of the Dragon - the most auspicious year in the Chinese lunar calendar. The dragon is one of 12 Chinese zodiac animals and symbolises power and prosperity. As The Economist pointed out on in a recent blog post, this could bode well for the stock market, which has started 2012 on a positive note. The Dow Jones Index has historically seen strong returns during dragon years. Can the same be said of fine wine?

To find out, we analysed the movement of the Liv-ex Fine Wine Investables Index between 1987 and 2010 and measured each animal year's average returns. As you can see, the pig - a symbol of peace and honour - was in fact been the best performer over this period. Nonetheless, the Year of the Dragon has coincided with robust growth in the past - a good omen, it seems, for 2012. 

Liv-ex Claret Chip crosses paths with Fine Wine 50

Those with a keen eye on market movements may have noticed that the Liv-ex Fine Wine 50 and the Liv-ex Claret Chip converged last week. The latter, which tracks high-scoring vintages of the First Growths, has historically outperformed its sister index. In recent years, though, demand from Asia has altered the relationship between the two benchmarks.

Five years ago, critical opinion was a key factor in determining how well a wine would perform on the secondary market. From 2008 onwards, however, demand from brand-conscious Chinese buyers boosted the value of more affordable First Growths, and Parker scores became increasingly irrelevant to price performance. As a result, the gap between the indices narrowed from 16 per cent in August 2006 to less than one per cent at the height of the market last year. The Liv-ex Fine Wine 50 traded places with the Claret Chip in July and maintained its lead in the third and fourth quarters of 2011. 

This year, the Claret Chip has caught up. Could perceived returns be connected to quality in 2012?

Acker wine auction serves up mixed results

The Acker auction in Hong Kong last weekend sold just over 90 per cent of its lots, bringing in a total of £5.6 million. Although several super lots set new records, the overall results were unremarkable. 

The First Growths fetched slightly higher prices at Acker than they did at the Sotheby's sale in Hong Kong on the 14th. Buyers shelled out an average of six per cent more than the Liv-ex Mid Price (our trade-to-trade transaction price) for post-millennial vintages of the Firsts - if we include a buyer's premium of 22 per cent. From a seller's point of view, however, the results were disappointing. On average, hammer prices were 13 per cent below market, with some wines selling for significantly less than their current trading prices. 

All prices have been converted to GBP and are for 12x75cl cases. BP=Buyer's Premium

But what of Bordeaux's second-line wines, which outpaced their higher-ranking peers in the latter half of 2011? In general, demand for the Super Seconds and Flying Fifths was subdued. As you can see from the table below, Montrose 2003 was the best performer, while Leoville Las Cases failed to inspire Asian bidders. The brand's 2006 vintage fell under the hammer at a 42 per cent discount to its market value.  

All prices are for 12x75cl cases.

DRC's performance is somewhat open to interpretation. On the plus side, buyer's were willing to part with up to 28 per cent more than the Liv-ex Mid Price for younger vintages. Conversely, if we remove the buyer's premium, vintages from 1995 onwards sold for an average of 11 per cent less than their current market price - bad news, of course, for the sellers. 

Burgundy 2010 campaign off to a promising start

Last week, fine wine merchants and traders attended a series of Burgundy 2010 tastings in London. Initial reactions to the vintage have been exceptionally positive, with Allen Meadows (aka Burghound) noting that the wines could in fact be superior to their 2009 counterparts. This is particularly surprising given the challenging weather conditions that growers faced in 2010. 

Meadows suggests that the wines are notable for their refinement, balance and great sense of energy:

"It’s one thing to have racy acidity and punch but it’s another to ally these attributes with real substance. And this is what the 2010s do with such brilliance." 

The table below shows his top picks of the vintage. 

Whilst many growers overcame the elements and produced "genuinely excellent" wines, yields were down between 30 and 40 per cent on 2009. As a result, stock is in limited supply and buyers may need deeper pockets this year. 

Many of our trading members have reported modest price rises of five to ten per cent across all quality levels. Of course, where vineyards (and hence production) were severely affected by the adverse weather, increases can be as high as 40 per cent. Despite this, merchants maintain that the market has absorbed the price hikes "with little if any resistance". All of the fine wine traders that we spoke to said that demand for the Premier Cru and Grand Cru reds was outstripping supply. According to one merchant, "Price is definitely not the problem. Because yields were so low, not enough stock is available." Buyers who have not been able to secure allocations will have to hunt for stock on the secondary market, where prices are likely to rise quickly. 

Interestingly, anecdotal evidence suggests that there has been a strong rise in demand from Asia this year. "In Hong Kong five years ago there was no recognition [of Burgundy]," said one leading trader. "Now it's something that people are incredibly excited about. Buyers are bored with Bordeaux."  

Interest from Asian clients (who are reportedly a mix of speculators and collectors) appears to be concentrated in the high-end wines, including those of Roumier. As noted last week on the blog, Asian buyers are increasingly favouring Burgundy's top labels. This was clear at the Sotheby's auction in Hong Kong on Saturday, where Bordeaux suffered but Romanee Conti sold at a premium.

Super Seconds underperform in Hong Kong

Auction rooms in Hong Kong opened their doors over the weekend for two major sales. The Acker auction on the 13th and 14th of January achieved a total of £5.6 million, having shifted around 90 per cent of the lots. Bidding was slower at the Sotheby's sale on Saturday, where just 85 per cent of the lots found buyers. The auction failed to match its pre-sale estimate and raised a total of £3.7 million. 

Over the last few months we have noted that demand for top Bordeaux has receded. This was clear at the Sotheby's sale on Saturday, where numerous Bordeaux wines went unsold. On average, First Growth vintages from 2000 onwards were sold at a 17 per cent discount to Liv-ex transaction prices (if we exclude a buyer's premium of 22.5 per cent).

Although the Super Seconds have outperformed the fine wine market since June, they also met a cool response at auction. At the Sotheby's sale, Leoville Las Cases, Leoville Barton and Montrose all fetched prices well below their current market value. Winning bids for recent vintages of Leoville Las Cases were up to 53 per cent below trading prices, while those for Montrose were up to 38 per cent below market.

But where Bordeaux's biggest names came up short, DRC continued to shine. Romanee Conti 1988 held on to its value, selling at just under £79,000. At £126,150, a 12-pack of Romanee Conti 1990 was the most expensive lot of the day and sold at a seven per cent premium to its market price.

The table below shows the Sotheby's hammer prices and Liv-ex trade prices of selected wines, including post-millennial vintages of the First Growths. All values are for 12x75cl cases.

Plese note that Liv-ex trade prices do not include merchant margins and represent the prices merchants could expect to achieve when selling wine on the secondary market. Because we are approaching the auction results from a seller's perspective, and the buyer's premium does not go to the vendor, we have used hammer prices for our analysis.

First Growth trade increases

In November we reported that flagging demand for the First Growths had reduced their share of turnover on the Liv-ex exchange. The negative mood persisted last month and their share of trade fell to 32 per cent. Since the start of the year, however, the Firsts have bounced back. All five brands have seen an uptick in demand, pushing their combined share of weekly turnover back up to 53 per cent. The Liv-ex Fine Wine 50 has also regained lost ground and is up 1.6 per cent for the month so far.

The table below shows the First Growths' share of trade on Liv-ex as a three-week moving average. 

In the January Cellar Watch Market Report we suggested that First Growth prices must stabilise if the market is to recover in 2012. Does increased demand for the Firsts indicate that confidence is beginning to return?

12x75.com interviews Liv-ex Director James Miles

James Miles discusses Liv-ex and the future of the fine wine market with 12x75.com. Read the full interview below.

12×75.com: James, many thanks for taking the time to talk with us here at 12×75.com. Liv-ex has revolutionised the Fine Wine Industry, and it all started in a rented office above a pizzeria in South London. So I suppose my first question would be, how good were the pizzas downstairs and how much influence did they play in Liv-ex’s start?

They always smelt delicious but strangely we never sampled them. It was a takeaway pizza place and Justin and I always preferred the local Italian for lunch. (The chef did a delicious tagliatelle with spicy sausage.) As you are suggesting our first office wasn’t very salubrious. It was freezing in winter and boiling in summer and the noise of buses rumbling past our window often drowned out our telephone conversations. Crucially though it was very cheap and this was pretty important in keeping our heads above water in the tough early years.

12×75.com: You started the company with your friend Justin Gibbs.Tell us a little bit about how you met and how you coined the idea of a Fine Wine Exchange?

We both worked for a boutique Asian stock broker called Asia Equity. I was an equity analyst, following small cap stocks in Hong Kong, and he was a salesman in the London office, selling our research to large institutions in the City. We are a similar age and had friends in common outside work. We first met in 1993 or 1994 on his first trip to Asia and have been friends ever since.

12×75.com: Is it easy to work with friends? How would he respond to this question?

I think working with friends can be very awkward, but we have always worked well together. We have different strengths, which has meant that we couldn’t have built Liv-ex without each other. He focuses on running the sales and I run the business side of things. We were also friends at work, so we knew that we could work together. I think people are often different at work as to how they are socially. This tends to be where people get into hot water. They assume that they can go into business with their best friend, only to find out that they are totally incompatible in a business environment. Fortunately we had already worked pretty closely for seven years, before setting up Liv-ex, so we knew we could do it. We spend more time with each other than with our families – so hopefully he feels the same way. I have never asked him this question, but we have a pretty transparent relationship and he wouldn’t hesitate to tell me if he wasn’t finding it easy!

12×75.com: Before you guys started, how was the exact ‘market price’ for a specific wine and vintage determined, and how was that information distributed?

I am not sure that there was an exact market price, but the answer is that the process was very slow and inefficient. Most merchants ten years ago would have a pile of paper price lists or catalogues on their desk and they would flick through them to find the best price. Alternatively, they would call around their contacts in the market or send out wants lists by fax or email. They would then wait for their contacts to reply with availabilities and prices.

12×75.com: So let’s rewind a little bit. You grew up in Hong Kong, came back to the UK to study at Oxford, and then went back to Hong Kong to join the world of finance. How available and prestigious was Bordeaux Wine then?

I didn’t know much about it. At Oxford we drank gallons of Bulgarian Cab Sav (which subsequently I have discovered was actually South African wine, bottled in Bulgaria to avoid the apartheid trade embargo) because it was cheap. The early '90s was a tough time in the UK, but Asia was booming and in my early 20s I was earning more money than I deserved. I first came across top Bordeaux wine at lunch one day, where one of my mates said he had secured a parcel of ten cases of Lafite 1995 (from Richard Kihl) and persuaded each of us at lunch to buy two cases each (because it was going up!). They were about £700 per case. As it happened, one of the others changed his mind and I ended up with four cases. A couple of years later, just as the Asian crisis was unfolding in 1997/1998, I managed to sell these at £1,800 per case and I bought 20 cases of more affordable names (in those days) like Lynch Bages, Haut Bailly etc. So really I learnt about the fine wine market by accident, but this got Justin and I thinking about building an exchange for fine wine. 

12×75.com: What was Liv-ex initially created to do, and how different or similar is the finished product?

I was reading our initial business plan the other day and we have really not deviated far from the initial idea, which was to build a stock exchange for wine.

12×75.com: When you started Liv-ex, you’ve spoken of having competition. Your competitors at the time had plush offices in Mayfair with a larger staff. They ended up losing millions of pounds. Why do you think that you prospered and they didn’t?

I think more from luck than judgement. We launched our business at the peak of the dotcom boom. I think Lastminute.com floated the same week we opened our office. The buzz at the time was very much about cutting out the middleman, so many of the competitive ideas to ours were about connecting the producer to the consumer or the consumer to the consumer directly. Our model was built around the middleman. Our thinking was that electronic trading was already a reality in the City, yet Goldman Sachs and others didn’t seem to be going out of business. But this didn’t capture the imagination of the venture capitalists at the time, so we never had millions to spend – hence the office above the pizza joint. This just meant we were forced to play a longer game, which as it happened was the right strategy, because until broadband reached critical mass in about 2004/5, the internet wasn’t fit for purpose and equally our target customers weren’t in a hurry to change. In the first five years, we definitely didn’t prosper, but we did survive, and that was just because we kept costs very low.

12×75.com: When you guys first pitched the idea, what was the reaction in the industry to your quest for ‘transparency’? Was it met with open arms or slammed doors?

I am not sure that it was met with either open arms or slammed doors. Our message was that transparency was coming. This might lead to lower margins but also much higher volumes. It is true that the message was better received by the small and medium-sized players than the big boys. The smaller players saw some advantages and felt that they would benefit from greater scale and better information if they signed up to the exchange. The bigger players didn’t slam the door in our face, but they didn’t rush to join either. They weren’t going to help transparency to establish itself. In fact, the three biggest players in the UK didn’t join until 2007, and by that point the transparency horse had well and truly bolted.

12×75.com: What further improvements can be made to improve transparency?

I think that the market is already pretty transparent. Clearly it will continue to become more so. What excites us today is the potential to make the back office logistics and accounting functions more efficient. There is huge scope for improvement in this area. Most of the legacy accounts and stock systems were designed before the internet. As such we are not yet enjoying the benefits of connectivity that the internet brings in this area. What this means in practice is that the same transaction is being re-keyed dozens of times through the supply chain. We believe that electronic trading and straight through processing are now achievable and will hugely reduce the cost of trading in fine wine. We also strongly believe that it is time for fine wine to design its own supply chain and separate itself from the commercial wine logistics infrastructure. Basically the existing system requires too much movement, which is risky, expensive, bad for provenance and results in slow working capital cycle time. We believe we can learn from the equities market here and build a central depository for fine wine. This is quite a big topic, which we explain in a bit more detail in our blog here: http://www.blog.liv-ex.com/2011/11/fine-wines-online-revolution.html.

12×75.com: What are the main benefits to wine merchants of using the L-Win?

To facilitate this move to electronic trading, there is a requirement for the trade to develop a universal product code, so that our systems can all communicate and swap data with each other. L-Win – the Liv-ex Wine ID Number – is a seven-digit code that uniquely identifies the wine name. If the L-Win is widely adopted by the trade, then by establishing a common language, it will contribute to much lower costs by facilitating communication with customers and suppliers and also help people to better organise and populate their wine databases with value-added information.

12×75.com: In your ‘Fine wine’s online revolution’ presentation at the WineFutures Summit, you referred to a ‘central depository,’ a mechanism for storing and managing fine wine ownership records in multiple locations.  How important is this to the future of fine wine the fine wine supply chain?

I have briefly touched upon this above, but as you suggest one of the big inefficiencies currently is that ownership is very fragmented because it is stored at the warehouse level. If the trade can create a central database of ownership above the warehouse level, then transactions can be completed without excessive stock movements. This will dramatically reduce costs, risks and cycle time and also improve provenance. We will be introducing elements of this idea into our own supply chain. If it works it could be every bit as 'revolutionary' for fine wine trading as transparency has been in the last ten years.

12×75.com: Tell me honestly, it looks like Liv-ex is pretty much cornering a lot of aspects within the market. Are we running the risk of all roads lead to Liv-ex?

We are interested in making it easier for our members to trade. As such, our business has three key elements, i.e. the trading platform, data and storage/ transport. The reality, however, is that none of our members have to trade with us; they are all professionals and have their own network of customers and suppliers to deal with. We only trade with merchants or professional traders and not with restaurants, hotels, private collectors or producers. Our role is to facilitate trade in the secondary market and is complimentary to what our members do. They are in the wine business and we are in the exchange business. With less than three per cent market share, it is difficult to argue that all roads lead to Liv-ex. Our USP is really that we are the place merchants come to find out the market price. We don’t have a monopoly as to how they choose to use that information.

12×75.com: What is the future of Liv-ex?

Our future is more of the same. We want to continue to develop our three businesses: the trading platform, data and Vine - our storage/ transport arm.

12×75.com:  In your opinion, what is the reason for the not so great performance in the market this year? 

The main problem is that Hong Kong and China, which has been the most important market for the last few years, has enough stock for now (particularly of Lafite). It may take some time for them to work this off and start buying again.

12×75.com: As someone who has worked in both sectors, do you think we have underestimated the correlation between the fine wine market and the financial market?

Do you mean correlation as in price performance? It seems that at times of financial dislocation, as now and in 2008, all asset classes become very closely correlated and everyone panics into cash, but most of the time it is clear that wine is not closely correlated to other assets.

12×75.com: How soon do you think we can hope to see our first growths ‘flying’ again?

I am not sure that they are going to 'fly' again for a while. I think it will take time for the current economic difficulties to resolve themselves. I also wouldn’t be at all surprised if the next bull market was lead by different wines to the last. This always seems to be the way. In other words, might it be DRC or Parker’s Magic 20? I am pretty confident that it will not be Lafite anyway.

12×75.com: Other than 12×75.com and Liv-ex, who else can the Wine Industry not live without? 

I think Winesearcher and Cellar Tracker have become pretty powerful in their own spaces. But my suspicion is that the correct answer is Bordeaux!

12×75.com: What advice would you give to someone who is thinking of investing in fine wine for the first time?

Do your homework thoroughly.

12×75.com: What are your thoughts on DRC vs Lafite. Which do you think will be a better investment in the long run?

The long run is a very long time. DRC in the next year.

12×75.com: You must get to taste a lot of great wine.  What have been some of your tasting highlights in 2011?

You’d be surprised… we actually hardly ever taste. One of our members did bring a bottle of Latour '82 to lunch. He was fairly confident that the wine was going to be oxidised, because the level was low/ mid shoulder. To his horror it was absolutely perfect and a highlight of our wine career so far. We also had an amazing bottle of Lafleur '79 in Hong Kong with spicy Chinese (Szechuan) food… which again we assumed would be a disastrous combo, but the Lafleur blew the food away.

12×75.com: Are there any wines you would love to taste that still elude you?

Sadly most wines elude us... so yes, too many to name here.

12×75.com: The fine wine market doesn’t seem to be as stuffy and closed as it was once perceived.  Is this all down to the improved transparency of the marketplace?

Yes transparency has been crucial. Not least the ever-increasing number of critics and peer-to-peer sites like Cellar Tracker and other sources of info. It has never been easier to learn about wine generally or individual wines, or to find out where to buy them or check the latest price. This has brought a huge number of new people and new money into the market.

12×75.com: Tell us something that the wine community doesn’t know about you, eg likes, dislikes, fetishes, etc…

Nothing that is terribly interesting. I enjoy the simple things…work, family, sport, food, wine… my guilty pleasure is a long soak in a hot bath… couldn’t survive without that.

12×75.com: Parker always plays down his role in the fortunes of the estates whose wines he tastes.  How do you think the industry will change when he finally calls it a day?

The market is already changing and Parker gets less influential every day. He is still the most influential critic and will probably always be, but my suspicion is that critics and scores are becoming more commoditised. I think in future, as in financial markets, the consensus will become more and more important.

12×75.com: Congratulations to both you and Justin for making the Fast Track 100 (again). Liv-ex has appeared on this list three times in the last five years, what’s your secret?

I think luck, hard work and belief in our idea – but mostly luck.

View the interview on 12x75.com. Other recent interviewees include Peter Lunzer, Adon Kumar and Stephen Browett.