Seems somewhat similar to what DeBeers does with diamonds.
Good post, Maureen. But the numbers don’t nearly jive with what I’ve seen. I’m no student of the Bdx market, but futures prices to consumers have been more like ex-chateau plus 40%, not 300%.
Reference above in a post this morning to Latour wanting to go direct to consumer “like California” is a separate but related thing that is very interesting, and long overdue IMO.
Post Number:#42 Unread pos tby Lewis Dawson » Sat Apr 14, 2012 10:55 am
Good post, Maureen. But the numbers don’t nearly jive with what I’ve seen. I’m no student of the Bdx market, but futures prices to consumers have been more like ex-chateau plus 40%, not 300%.
I agree, my numbers are a quick pre-adequate-coffee, no research exaggeration - but some of the examples we used in class were MUCH higher than 40%. That’s why its stuck in my head & why is was such a fun debate. There is no way that even at 40% that is an efficient market for producers…
The course was actually called the “International Bordeaux Educators Program” and I think the accredidation is the Bordeaux Tutor. I am such a geek - I should still have my notes from the course. I’ll look them up and tell you why I have this huge number in my head if I can find them. (I was so annoyed with the course - I may have ditched the materials - hopefully I didn’t!)
If someone can provide the cost pinault paid for latour I can do a basic cf analysis with a few variables built on assumptions.
Same article places current value of the estate at EUR200m…
agreed.
Lewis,
I think maybe you’re confusing the negoc. price with chateau. The US retail price is much higher than 40 percent above release price.
Maureen,
This can’t be correct. We have bloggers come here all the time to tell us that the chateaus have released all their wine and it has been snapped up eagerly by consumers worldwide. In fact they’re really doing us a favor by not raising the price even more.
yes, but the question isn’t whether the release price of the new vintage is higher than the current price of the aged one. It’s, will the 2009’s, for example, go for more in 10 years than the release price. If they don’t, they’re a lousy investment.
It cannot be that the cheapest source of capital is a negoce, regardless of timing, good/bad vintages, etc. - a cushion to absorb market fluctuations makes sense, but that’s why God made credit lines.
Never mind the other intermediary markups.
I don’t think so, Nick, although I no longer have access to those blow-by-blow threads on eRP about futures campaigns. My recollection is that prices ex-negoc are about 20% up on ex-chateau prices, and US retail futures offerings are about 15-20% above that, sometimes less. My numbers could be wrong. I do believe the Bordeaux futures market is brutally efficient, especially compared to every other wine sold at retail.
Except that it only appears the ready for drinking vintages are in some way cheaper. They are still significantly more expensive than they were on release. Maybe that is what Latour sees here. By keeping initial EP tranches small or non-esistent they can push the prices up and up for the young vintages. But then the older vintages look like a good deal in comparison. Latour, not wine traders and collectors, then makes the big profit. The only question is whether they can ride out the lack of cash flow. Maybe they have plenty of 2006-2008 sitting around that will be ‘ready’ soon . . . .
Alright ladies and gents. I did a basic 20 minute chop job, nothing crazy. Lots of variables unknown. If Chateau Haut Brion or Lafite would like to employ me for their services, I’d be happy to do a more thorough and exacting job for a few cases 
Few assumptions:
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I neglected the purchase price of the estate by the parent co. At a 90m euro tag as of 1993, even if the purchase was financed, that obligation is veritably wiped 20 years later. On top of that, its peanuts compared to the cash flow generation of the estate. Almost certainly a non-factor in this equation.
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I assumed 10m euro expenses annually for the estate. I think this should help cover the consultants, labor, fixed operating costs (optical sorting machines, gravity presses etc), the bottling, the marketing etc… I think Latour spent a fortune jazzing up the joint a few years ago but as I don’t really know anything about what went on, that is not impacted in the analysis.
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The pricing models are built upon the average annual production figures I was able to dig out which was 18k cases of Grand Vin and 12k cases of Forts. I believe as of the last half dozen vintages or so, yields have diminished in the Grand Vin leading to more Forts production. I could refine the analysis with some more accurate annual production figures but it doesn’t alter the conclusion.
-I assumed ex chat prices are 30% of negoc-prices. I believe I remember reading pros cite this figure. If it is closer to 50%, I can easily revise my figures. It also really doesn’t change the bottom line that much (see below)…
Basically Latour prints absurd amounts of free cash flow. Absolutely crazy stuff!! I built pricing model assumptions based upon 85%, 75% and 60% production going to the negoc (with the rest held back for later sale). I looked at vintages 2005-2010. As it stands, it actually costs Latour more money to hold for these particular vintages, because their aftermarket price escalation has been rather muted (read fin. crisis coupled with exorbitant ex-chat pricing). However, if the sample set is expanded to include 2000-2005, you see far more weight to the aftermarket price escalation phenomenon which greatly adjusts the Net Present Value of holding onto a greater share of the wines. When blending the two (note I do not have accurate release price data for vintages 2000-2005), there is a compelling case for holding and releasing direct if the storage costs aren’t prohibitive. I think this as well as the parent’s sensitivity to market saturation and the consumption pattern demands of its growing client base (i.e. Asia) are the driving reasons behind this decision. Anyone claiming nobility is naieve imo.
In short, Latour could hold back 80% of its stock and sit comfortably w/r/t operating expenses. The parent company may be upset about the lack of immediate cash flow if it was needed to fund other operations, but the viability of accruing more money in the future both through (a) the aftermarket price escalation phenomenon witnessed (e.g. 2000-2005) as well as cutting out the frictive costs of moving through a tiered distribution system makes a larger allocation to “holdbacks” the logical move, turnover ratios be damned. It also portends to the development of a more direct distribution system, as I’d imagine the Chateau don’t want to leave an additional 20% on the table if they funnel said library releases through auction houses. With auction house reputation tarnished post Rudy, the likely increased demand for reliable bottles and the proliferation of direct-to-consumer distribution capabilities through “modern” logistics, it seems to be a no-brainer. Example Gratis: the FGs launching offices in Asia…Building blocks…
If we were to project this analysis to chateau with less pricing power, I’d think that at least the top 50 (maybe top 100) could play this game by hiring a CFO who knows his ass from his face ![[snort.gif]](/uploads/db3686/original/2X/b/bdc3944606213c4dca6c1169cf0a166c8bc4f8c9.gif "snort.gif"){kind=small}
Cheers,
Faryan
Faryan, I’m not sure I understand what you are saying here. If your assumption is that the traditional distribution through the Bordeaux negociants nets Latour just 30% of the necogiant’s selling price, that is very, very wrong. It’s more like 83%. I believe a typical negoc markup is 20% of what they paid the chateau.
This could cause a bit of a problem for Latour. Now, with them holding all the wines until they feel they are “ready” to drink (or at least be close to drinking right), there will not be much room for "it needs 10, 12, 15, 20 years excuse. Also, what happens if the wines are cooked when you open them? It is either that they did not stored them correctly ( a massive problem for them), or the way it was shipped (a pretty bad problem for the importer). Of course, it could also be the delivery service, but try and get your money from THEM. ![[oops.gif]](/uploads/db3686/original/2X/1/1f129ddad071ffe5db6c99817c3cab666035a70a.gif "oops"){kind=small}
Seems like a real role of the dice. But surely, they have thought all these issues through and have made a decision that works best for them, in their estimation.
I meant to say 30% cut for the negoc so 70%.
I’d be curious to see how this plays out. There is still the need for a clearing broker here in the states and to ship product to individual consumers is extremely expensive.
Jeff,
Would it not be feasible for Latour to have a few offices setup in the US which accept shipment of said wines and are tasked with distribution to individuals, shops, restaurants and auctions? I think there’s enough fat in the usual chain to make it lucrative.
Further, they can continue to sell through their importers, just cutting out the negocs who are taking 20-30% for what?
Clearly you need more to do in your day job. I’d have to agree with your analysis, but I’d be curious to see how much value accrues from the aftermarket price escalation vs. cutting out the middleman. They don’t need to withhold current releases to go direct, though I can of course see why they lead with the quality argument, rather than “we’d like to keep more of the profits”.
Very interesting news! I wonder when we can get on Latour’s mailing list…?
TK - I work in inv. consulting. Clearly I am never busy 