Current State Of The Bordeaux Market and The Future

I don’t think I need to tell anyone that when the 2005 vintage was released the world was in a state of euphoria…or irrational exuberance, to paraphrase Alan Greenspan.

For a while some people didn’t think twice about paying $15,000 for a case of a newly released Lafite or $5,000 for Angelus. While I was certainly happy to oblige and fill those orders, I was simply hunkering down for the inevitable crash that came not long afterwards.

As I have been living and breathing Bordeaux for the last 20+ years in business, I can tell you that the changes we are going through today, and will be going through over the next six to eighteen months, will be quite drastic. As those who follow “the other” wine board may be aware of, we have lost a MAJOR player in the US, as Diageo Chateau & Estate is no longer importing and distributing Bordeaux in the US, with the 2007 vintage being the last one, ever.

This is something that every retailer, restaurant, and ultimately consumer, should be very concerned about. Yes, there are other smaller importers and brokers you may say, but trust me, it is not the same by a long shot and I can assure you that with 100% certainty. There will be less choice, deliveries will be more irregular, and the flow will be surely impaired. Many retailers around the country will not have as much stock and with no wholesaler stocking hundreds of thousands of cases that can be distributed easily and fast, many will rely on smaller suppliers (which are notoriously less reliable) or direct purchasing from overseas entities and be faced with all the inherent problems. Long waits, erratic pricing, storage issues, etc.

What is going on at the moment is a like a big fun party that will eventually end. Prices for many wines from great and less heralded vintages have been coming down heavily and most of it is the result of Diageo’s fallout and other distributors following suit. Buyers are happy, as they should be, but the honeymoon will be over soon. The problem is that once all of this wine has worked its way through the system, what will remain is a huge vacuum with nothing following behind. Very few have bought 2008 heavily (or at all) and there is not one distributor in this country that has taken a major position on the vintage. The same will be for 2009 and who knows for how long it will continue. We could see some small entrepreneurs moving in to fill these voids but Bordeaux is expensive to stock and it is risky, especially when our friends in France grossly overprice it and everyone else has to bear the losses a few years later.

So, where is the problem? Well, unless one is willing to play with futures and rely on a merchant being able to deliver, the aftermarket for those not buying that way will be dry. Most merchants will be inclined to simply buy what they sell, with little extra to supply once the wines are delivered. America will certainly lose its place as the biggest market for Bordeaux and we will have less to offer. That may even put upward pressure on prices since supply may not be able to keep up with demand.

As a word of advice, and this is not a sales pitch, if you love many of the wines from great recent vintages like 2000, 2003, 2005 and even the many superb deals in 2002, 2004, 2006 and 2007 (soon), grab ‘em while you can because once they are gone, they are gone for good and there is nothing coming behind it at prices even remotely close to what you see now. Trust me on this.

Take it from someone in the biz that knows the Bordeaux market like very few out there. It’s a brand new Bordeaux world coming up. Of course, you can just ignore all of this and buy 98 points Spanish and Australians, as there never seems to be a shortage of those.

Max,

Assuming the economy does start to recover by the end of the year, wouldn’t somebody jump into to cover the void left by Diageo if there is money to be made? Or is the bordeaux system so broken and lopsided that the risk is too great for the distributor? The other issue too, I guess, is that Asia is becoming a bigger market for these products that losing market share in the US may not motivate a change in the system.

Clemente,

Truthfully, the system was (is) broken and that is the reason why Diageo has decided to let go. In the Seagram’s days much was overlooked and stupid business decisions were made along the way. Diageo, as a public company, is in the business of making money for shareholders and Bordeaux just doesn’t fit in the plans because of the high risk and low profit margins involved. I cannot think of one company, even after a full recovery, that would be willing to commit about 40-50 million dollars every single year to keep Bordeaux happy and risk free. Unless changes are made at the source, there are no reasons or economic advantages to engage in such business.

Can Asia pick up the slack? Some but not all. If they do, great for them but that’s not going to help anyone here.

Hey Max, that is hard to believe. Someone will either come in and fill the void or the entire business model of how bordeaux is distributed and sold will be changed. I wouldn’t rush out to buy wines based on the expectation that I wouldn’t be able to buy future vintages.

Yeah, I agree with Paul. You had me for most of it, but I don’t see why the part about back vintages fits with your thesis (and it is less supportable). Thanks for the thoughts though. Very interesting read.

I would bet the system would have to change before someone steps in and makes a considerable investment. With the status quo, it will be a fragmented situation with smaller players in local markets. Like I said, no company will invest 50 million dollars to make a profit one year and lose 50% the next to support Bordeaux (see 2006 and 2007). My point as far as older vintages may have been misunderstood. What I am saying is that many wines from those vintages are being deeply discounted now and supply is finite. Inventory is not being replaced and prices at the source (Bordeaux) are a lot of higher, (if any of the wines are even available). I have recently sold 20 cases of 2000 Margaux for $7000 per case. Can anyone find a deal like that again going forward? I can give many more examples. As far as future vintages, right now it is a very murky picture but we’ll have a slightly clearer outlook within the next 12 months.

Max - thanks for the insight. Considering BDX will continue to make wine in similar quantities, can you speculate what’s going to happen to all that wine if it doesn’t make it here? Where will it be backing up and kept? How will it eventually make it to the marketplace? Will 2008 be the first vintage we see the effects?

Chris

Max, Interesting read thank you. Paul, finally welcome. I am drinking an 03 Clos St Jean Combe des Fous in your honor.
I am glad I went light the 08 vintage in Bordeaux. Max, does Diago also have a heavy hand in The Rhone and CDP? I am mixed about your restocking thesis as well. There is also quite a bit of locally held Bordeaux that will need to be sold at the next equity slaughter that I believe will begin this summer . Maybe some of it will even be Jeff Leve’s.
Best Jack

Chris,

Some of the 150,000 cases that Diageo is not buying will find their way to other markets. Obviously wines like Petrus, or Ausone won’t have any problems. It is chateaux like Lagrange, D’Issan, Gloria, de Sales, Gruaud Larose and many others that may have a harder time. A lot of it will back up at chateaux and negociants and some in the distribution chains around the world. Maybe supermarket chains in Europe will be bigger players. Yes, 2008 will be the vintage that will give us a preview of what it may be, once it hits the market next year.

Jack,

Diageo imported silly amounts of few Rhone properties that are now being dumped on the market (Bonserine, Duclaux, the Cave de Tain line). No big names but they were stuck with over 2000 cases of assorted Cote Roties. Some nice deals out there now on those. To anwser your question, yes there is a good amount of wine in the pipeline that is getting and will be discounted but like I said, by January next year, if the economic outlook is a little rosier, those deals will look like the good old days. I could well be wrong but I think not. And again, once all the deals clear the market…now what?

max.

before the rise, where do you see the fall of prices

in particular, a wine like 2003 Pavie.

so much of it in investors hands

also a bunch of stores will need to liquidate all their stuff before people really start buying wine again

party line propaganda aside, the second tier expensive wine market seems pretty cool now.

I am waiting, and expecting 2003 Pavie to be a 120$ bottle. maybe 100$.

then sure, prices go up and up

maybe

Rob,

There is still a good amount of wine in the pipeline but not as much as you may think of certain ones. Pavie 2003 @ $100-120? I strongly doubt it. From my experience, I have zero trouble selling it for about $165 and I am actually expecting the market to rebound a bit in the fall. I already see some good activity and even at auction prices seem to be firming up a bit. I am not an advocate of ever increasing prices and I quite like it now, with consumers back in the saddle and speculators at bay. It seems like a more stable market, at the moment at least.

As far as “investors” anyone that doesn’t need the money is not puking up anything now. They know that the best time to sell is when everyone is buying and it is not the case now.

so you envision a smooth road to rebound?

no wave of liquidations?

the weak are all gone?

how much 2003 pavie, just for example, is owned by investor funds?
do you think any of the large stocks out there will be sold on the cheap? or will all be able to wait it out

Oh no…didn’t say that. There will still be casualties (2006 and 2007 for sure) but I am not being too unrealistic. I would love to see a 98 points Pavie for $100 but I’d be dreaming I think.

please. as a contributor on this board knows, i’m holding out for 1998 haut brion at 200$

i just need America to think we have solved the core problems of the economy and we can return to 2007 income expectations. I need a drink. I sound like Victor

but to put it on wine? why not Pavie. is it as timeless as Haut Brion? Is Pavie more immune to sales than say Ducru. Where is the stop line for wines that will not depreciate on a small scale. Small scale as in I can find a store looking to unload 2003 Pavie for 120$. right now it is at 149$ at a store in NY. why won’t I find a store selling it for 100$ to raise revenue. You talk about industry wide pricing which may go up. I am talking about winehunter sales for the swift

of course this is all rhetorical. I don’t drink bordeaux

Except for 82 Mouton Rob. We have not seen the lows in the economy or in fine wine prices.

please, that was metaphor

and I agree.

This will be an interesting test of the Coase Theorem.