Deciding between pleasure and investment strategies

Wine is one of the oldest investment categories in Europe. British traders have been importing clarets from Bordeaux, Port wines and Sherry for centuries. The old family adage was that you would buy 3 cases of each wine you would like to collect, 2 cases to invest and 1 to drink, the appreciation over time of the first tow paying for the free consumption of the last one.

British merchants were pioneers in selling wines from Bordeaux to their clients with investment cellar plans. The wine market has been very resilient over long period of times, showing a good level of de- correlation to any of the financial crisis.

The wine industry has always been quite keen to encourage this investing approach, as it takes a lot of time to get a fine wine produced and eventually sold to a client. The work in the vineyard is nearly a year, as soon as a harvest has taken place, you need to prepare the next vintage, work in the vines and on the soil. Planting, grafting, pruning and harvesting are all different stages of what will happen in a global wine estate for many of its parcels year after year. After that long and costly process in the vines, comes the winemaking, followed by a resting period in more and more sophisticated cellars which are major assets, and for the best chateaux another 2 years of cellaring will follow prior to the final bottling.

With a 3 years cycle from the vine to the bottle it is no wonder that some wineries have been willing to accelerate their cash cycle and have pushed to find clients in the first year following the harvest. This started with Bordeaux which champions the en-primeurs (future sales) as an investment opportunity.

Fine wine investments v. key market indexes

Futures in wine are based on a vintage, which has already been harvested and the wine made but not bottled yet. The process in Bordeaux, which leads the category and has created it, is to invite every year in April, six months after the harvest, all the key critics to rate the vintage and their wines and to invite shortly thereafter all the key merchants around the world to come sample and evaluate the quality of the last vintage This is no small feat, as each year thousands of people flock to Bordeaux to taste from the barrel hundreds of wines which are so young that little of their merits have been revealed yet. Based on the level of enthusiasm of that week of tastings and the on the critics scores, chateaux will determine how much they can hope to charge for their wines to maximize their cash-flow and earnings.

Things are changing though in the industry. Historically, chateaux were selling almost all their production and few were keeping stock for the future, however since the departure of the en-primeurs model from Chateau Latour (now owned by Francois Pinault), many chateaux have realised

the importance of keeping some of their production in stock to be released under optimal conditions in the future.

One of the drawbacks of the historical investment model is that private investors when buying wines to invest would be selling their stock on an ongoing basis; so some were kept till optimal maturity, but many investors, seeking a quick return for their cash, would sell their wines only a few years after they were acquired.

This means that the investor willing to cash in early (2 to 4 years) needs to find an interested buyer who is willing himself to carry the inventory for a few more years till the wine is ready for consumption (5 to 10 years is a typical cellaring time for a good Bordeaux).

 

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