While fine wine has long been seen as an appreciating asset, the high costs associated with storing the product and other friction costs (shipping, handling, taxes, etc.) have made it a highly illiquid asset. However with the rise of electronic exchange platforms, such as Liv-ex, the estimated transaction value of wines traded on the secondary market has risen from $1bn in the early 2000s to $4bn today (of which only ~15% of purchases are done so with the intention of drinking).
Interestingly, Bordeaux, which used to account for ~95% of secondary transactions in 2011, now only accounts for ~60%, due in part to softening demand in the Chinese market (suspected reason is crackdown on guanxi) as well as high price levels. In its place, the value of Burgundy has risen by 50% over that same time, aided by it being a well recognized wine region with iconic names / brands (required to preserve resale value). Its trade share on the Liv-ex exchange has risen from <2% in 2010 to >14% in 2018.
Like other physical assets, the price of fine wine is largely determined by the degree of supply constraint. Burgundy, as a region, produces far less wine than other well-known region; Burgundy's top estates produce up to ~25-30x less their equivalents in Bordeaux. A rapid rise in demand can often result in a speculative bubble in such a market.
In traditional macroeconomic thinking, a yield curve inversion is a strong leading indicator of a market correction and / or recession. In the case of Burgundy wines, there has been anecdotal evidence of younger vintages have started to become more pricey than older ones, suggesting an equivalent to a yield curve inversion (unfortunately I haven't been able to find a good chart showing like-for-like secondary prices by vintage). However, Liv-ex points to the fact that there is decreasing trade count in Burgundy wines, with a simultaneous rise in trade value, which has largely accrued to the Grand and Premier Crus (two highest classifications). In their words: "Fewer trades at ever higher prices points to a narrowing of liquidity. Possibly a speculation bubble."
In case you find this topic interesting, you may consider signing up for (free) periodic News & Insights updates from Liv-ex, which has put together a rich library of market analysis. I'm linking here their deep-dive into the Burgundy wine market from earlier this month.
Sources:
(1) https://www.economist.com/finance-and-economics/2019/01/05/amateur-buyers-of-fine-burgundy-fear-a-speculative-bubble
(2) The Economist's The Intelligence podcast, February 25, 2019
(3) https://www.liv-ex.com/news-insights/
Great post, Sri. Thank you for sharing. My question to you is: how would you personally view investing in Burgundian wine as a pure "stock" play vs. investing in a basket of wine assets via purchasing shares of a conglomerate like Constellation?
ReplyDeleteIf I understand the question correctly, it sounds like an evaluation of expected price appreciation of already produced Burgundian wine versus the broader wine market (Constellation being the proxy for that). We've heard in class about pricing pressures in the domestic market due, in part, to decreased millennial consumption of premium wine (for example, Cameron Hughes was seeing ~2%-3% degradation in pricing, implied by volume growth of ~9% versus revenue growth of ~6%-7%; Constellation's disclosure on price vs. volume trends in wine isn't great, unfortunately). That's concerning if we were to purchase a diversified basket of wines. Furthermore, my expectation is that non-premium wines likely don't appreciate in value over time (and most likely decline due to storage costs). Of course, the question becomes more complicated if we're also evaluating investing in a Burgundian winery / vineyard versus Constellation (as a full company), as we would also have to consider factors that could impact the value of future production (available acreage, required growth capital, etc).
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