Andrew della Casa, Founding Director of The Wine Investment Fund, blows his cork about the latest release
Each year, April and May sees the release and the pre-selling of the latest Bordeaux vintage, a system known as ‘en primeur’. The precious liquids made by the great châteaux of the region will not be bottled, nor will they be physically available in the marketplace, for another year or more, yet they are bought and sold without the benefit of knowing how good the vintage will turn out to be. This creates a marketing opportunity for the châteaux, but one which they continue to squander.
Despite it being the traditional approach to fine wine investment, The Wine Investment Fund (TWIF) has questioned since its inception in 2003 the investment logic of buying wines en primeur, since returns achievable are not justified by the higher volatility in the price of these wines during this period. It is only very recently that others in the trade have begun to come round to TWIF’s point of view.
Any customer buying en primeur is purchasing the right to a future benefit (delivery or ownership of a wine) by sacrificing some benefits today (the cash which has been paid, plus any interest or other return which could be earned on this cash). The benefit in the future, however, is uncertain: the quality of the wine is very difficult to judge at this stage and there is at least a chance that it may not be delivered at all. This last point is because the consumer is not buying wine directly from the château: the arcane distribution system which has built up around en primeur means that the wine passes through several pairs of hands before reaching the consumer who has parted with his/her cash.
It’s All Been Downhill since 2000
Basic economics suggests that anyone sacrificing certain benefits today for uncertain returns in the future will require some compensation. With en primeur this can come in several forms, but the main one has been the expectation (hope) that the price of the wine when physically released (and further down the road, when ready for drinking) will be higher than that on release – sufficiently higher, indeed, to make the up-front commitment worthwhile. TWIF’s analysis shows that, up to and including the 2000 vintage, en primeur was the most efficient way to invest in the wine market. This has not, however, been the case in the 21st Century.
“Ironically, it was the very success of the high profile 2000 vintage from the point of view of the collector or investor which began to undermine the en primeur system and may eventually lead to its demise.” says Chris Smith, Analyst at TWIF.
Châteaux owners, seeing the large profits made from their cherished produce by ‘mere’ speculators, vowed not to make the same mistake again after 2000. They had an easy mechanism at their disposal: they simply released their wines at a higher price. Now, while some vintages may still have produced good returns, they were outpaced in investment terms by wines which were/are physically available in the marketplace. . Buying wines en primeur has therefore become an inefficient investment strategy. This result holds true from the 2001 vintage up to and including the 2010s (with the exception of 2008, released during the global markets turmoil) regardless of the underlying health of the fine wine market. This looks very likely to also be the case for the 2011s, 2012s and 2013s.
If en primeur is now not working as it used to, why has the system it survived?
There are two fundamental reasons. First is inertia. The fine wine trade is highly traditional in its operations and slow to identify and react to change. Many customers buy the same wines en primeur every year because they have always done so – it is an emotional purchase, not one made for strictly ‘rational’, economic reasons. Merchants, who have a strong vested interest in marketing en primeur, are also skilful at bolstering the system, persuading customers that they need to continue to buy in order to maintain their annual ‘allocations’ of favoured wines, irrespective of the less favourable terms on which such purchases are made.
Second is ‘branding’. Since 2000 the top châteaux of Bordeaux have increasingly become luxury global brands on a par with Louis Vuitton (which owns Château Cheval Blanc) and other leading names. If your wine is seen in this way it suddenly becomes very difficult to reduce prices if there is a poorer quality year or if the wider marketplace has seen substantial price falls: to do so would be to devalue the brand. In particular, you cannot reduce the price below that of your neighbour, as that would be to admit inferiority. In addition, a number of châteaux have been acquired by corporations whose goal is to maintain status and maximise profit; again hardly conducive to generating price reductions.
The Worst Since 1987?
The 2013 vintage has now been released and the wines are described as the worst since 1997 or possibly 1987. It is the third weak vintage in a row, and large stockpiles of these poorer wines remain in the distribution network. Everything points to the need for a sharp drop in prices, but an understanding of the main forces at work (inertia, decreasingly, and brand position, increasingly) suggests that this may not be forthcoming.
One of the world’s leading commentators on Bordeaux recently wrote that reigniting interest in en primeur “can only be achieved when Bordeaux accepts the fact that the price of their wine is what the end consumer is willing to pay to drink and enjoy it. Initial release prices strongly suggest that the château have not got that message”.
“We have always excluded en primeur from our portfolios at TWIF, considering it a sub-optimal way to invest in wine. It now looks as if our view is finally becoming mainstream”, says Andrew della Casa, Founding Director, TWIF.
“We continue to advise investors to avoid en primeur. Unlike many commentators, who may have a vested interest in promoting wines en primeur, at TWIF our role is to analyse the wine market objectively and take whatever approach is most beneficial for our investors. Buying wines en primeur has never been part of that approach.”