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October 28, 2011

Market Overview – The ascent of substitute brands

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During the last three months the global investment landscape has been dominated by a succession of poor financial data from the US and the slowing down of the Chinese economy. Taken in conjunction with the sovereign debt and banking crises in Europe it has rightly led to fears of stagnated future growth, or a double dip recession.

Since August which signalled the unofficial end to the 2010 En Primeur campaign, that some joke never really started, there have been two broad market trends. The first has been a large pullback from Lafite Rothschild and the other prized first growths, resulting in a 10% drop of the Liv-ex 100 Index. The second trend has been growth within the Super Seconds, Burgundy, and Super Tuscans.

First growth pull back
A combination of profit taking, an expensive and unsuccessful En Primeur campaign and what appears to be a backlog of wine in Hong Kong has led to a well overdue pullback. The largest downward pressure has come from Lafite and the 2008 vintage overall.

After 24 months of accelerated growth, Lafite has recently experienced a 13% average vintage drop from 2000 to 2009. The biggest loser was Lafite 2008 (with the famed Chinese symbol for 8 on the bottle) which saw a 37% drop. After two years in the barrel it is common for newly released physical stock to see large selling in the market, with investors looking to capitalise on the profits (700% at 2011 year high price) which had been locked-up over the same period.

It was the awakening of the sleeping Dragon (China) in 2008 that accelerated the growth within the fine wine market. It is natural, therefore, to consider the recent pullback a decrease in the Chinese’s appetite for Lafite. However, a number of large merchants and broader market reports suggest that buying from Asia has moderated recent price drops. It is noteworthy also that China bought an approximated 35% of En Primeur in 2010. This represents their first serious involvement in non-physical stock and a large outlay of capital. Lastly, it would seem that the huge weight of wine imported to Hong Kong has created a back-log of stock in the distribution chain, with red-tape delaying imports into mainland China.

The ascent of substitute brands
Another trend seen at the apex of the fine wine market has been that of substitute brands. In October 2010 the market saw the average case of Lafite off-vintages just short of £8,000, which was largely driven by consumption demand from Hong-Kong. The knock on effect was that the other first growths looked undervalued by comparison.

Mouton Rothschild had been the first to respond earlier in 2010, sharing the Rothschild name with Lafite and therefore a close brand association. After Mouton the markets moved to the most obvious substitute brands of a similar quality, consequently looking extremely cheap by comparison. The result was that the rest of the pack moved sharply with the off-vintages of the other first growths rising to between £3,500 and £4,000 by May this year.

As discussed already, the last few months have seen first growth’s price either static or in decline. However, it is value trends moving the market again. Where first growths have faltered buyers have moved to the highest tier of the left-bank outside the first growth bracket. Since the beginning of the year the price of the Super Second wines have increased 18 percent. The last ten vintages of Durcru Beaucaillou and Pichon Baron have returned 21% and, 19% respectively, with Montrose up 25%.
Traditionally not considered Super Seconds Leoville Poyferre, Pontet Canet and Pape Clement have also moved against the market tide, returning an average, 16%, 21% and 16% YTD respectively, an incredible return considering the torrid last three months for all asset classes.

Buying outside of Bordeaux
It is noteworthy that the great Burgundy stable of Domaine Romanée-Conti has seen pronounced interest, with its flagship Romanee Conti experiencing an average price rise of 50% over the last 12 months. Burgundian domains are notoriously fragmented, however, Domaine Romanée Conti owns the monopole Le Tache and has major holdings in Richebourg, Echezeaux, Grand Echezeaux and Romanée St. Vivant, providing a clear indicator of brand. As one might expect DRC’s other holdings have responded in kind and continue to gather momentum. (A full report on DRC will follow later this month, when these wines enter our trading universe).

What to expect next
First growths represent the most iconic purchases a wine lover can make and many experienced traders see this pullback as a good buying opportunity. First growths signify prestige and are at the pinnacle of luxury, as a result these wines will always be the first port of call for emerging markets and the beloved wines of the more established markets of Europe and the USA. Their economics have not changed, finite supply and an ever increasing global demand continue to stretch global reserves. However, in times of financial uncertainty it is obvious why the stock of the undervalued super second wines is on the ascension. Indeed, while the super rich can afford to continue to buy and consume the stellar first growths, many wine lovers who were accustomed to the £1500 – 2,000 a case price range are now finding value in the Super Seconds which offer similar quality at a much reduced cost.