The Center Does Not Hold

Two recent articles in the Financial Times give a strong sense of the structural (as opposed to cyclical) forces that are transforming the world wine market.

The Age of Uncertainty

Jancis Robinson’s column in the March 21 FT is titled “Wine’s Age of Uncertainty,” echoing John Kenneth Galbraith’s 1977 book and 13-part BBC television series.”The wine world,” she writes,  “is currently every bit as riddled with uncertainty as any other.” And that sure is true. None of the quotidian constants seem to hold. Robinson writes that …

Perhaps the greatest certainty might be said to be that vines will bring forth a crop each autumn and the Bordelais will do their best to sell it the following spring. But even the Bordeaux 2008 en primeur campaign, just about to kick off, seems desperately uncertain.

London is the center of the Bordeaux trade, of course, and the prominence of Bordeaux wines among collectors has been both cause and effect of London’ rise as the nexus of global wine markets.  Now, however, this “virtuous” cycle seems to have turned inconveniently “vicious.”  London and Bordeaux seem to be collapsing together, and uncertainty creates anxiety and even fear.  Robinson searches in vain for some stabilizing force in global wine.

One would normally look to nature to offer some degree of certainty in contrast to the quicksands of commercial activity, but even the effects of the seasons seem to be less and less predictable, resulting in the increasing incidence of drought, bushfires, floods, frost and dramatic storms. These in turn have led to wine gluts and shortages, in Australia particularly, with concomitant effects on prices.

Nothing is reliable. Even our money betrays us.

These [problems] have been exacerbated by the current giddy gavotte of the world’s currencies, with particularly gloomy and inflationary effects on the price of wine in the UK. Britons are bracing themselves for the full effects of the slide of the pound on shop shelves, and it is hardly surprising that the wine trade is lobbying hard against any increase in UK excise duty. Already, pathetically few pence actually go to pay for the wine in any bottle retailing at £4.99.

These combined effects — recession, falling pound, potentially rising wine taxes — threatened Britain’s hold on its position as the leading global wine market.  But wait, it gets worse when you take into account adaptive expectations.

And then there is the general uncertainty now for any UK supermarket customer as to whether and when individual wines will be discounted. The pervasive discounting culture has lulled them into being afraid to buy any full price wine for fear of seeing it on promotion the following week.

How deep are the strains?  Robinson tries to put a happy face on the situation to end her column (“Perhaps, in wine anyway, it is not that we are more uncertain, just much better informed than we used to be,” she writes), but the evidence for something bigger at work is just too persuasive. We are better informed, but there’s more to it than that.

Drying Up

UK Loses Thirst for Bordeaux Wines” is the title of the second FT article, which appeared on March 23.  It provides more evidence of the death spiral that has seemingly ensnared London and Bordeaux.

British merchants are selling fine wine back to counterparts in Bordeaux and exporting it to Asia as domestic demand for the most expensive wine slumps and sterling weakens against the euro.

Everything seems to be be conspiring against London and Bordeaux, pushing the wine back to France and then on to Hong Kong, where a new market center has emerged now that HK’s high wine tariffs have been lifted.

Meanwhile, the price of fine wines sold in the UK has fallen by some 20 per cent since June, according to Liv-Ex.The return of wine to Bordeaux occurs as total French wine production is falling, raising fears that France is losing global market share to other producers like Italy.

And not just Italy, of course.  U.S. wine exports to Britain have quietly been increasing in the last year, overtaking France as the number one import,  as demand for French and Australian goods have slumped. It’s not all Stag’s Leap or Screaming Eagle, of course, but that’s not the point.  Every national wine market is stratified and Britain’s is not exception.

None of this is proof, of course, that London has permanently lost its place as the center of the wine world.  Maybe it really is just a cycle, where London’s falling status today will be reversed in 2010 or 2011 or whenever the heck the economic crisis ends.  But what if that doesn’t happen?  What if real structural changes are at work?

Then perhaps the center of the auction world will relocate to Hong Kong and the center of the retail wine universe will be the United States, with Costco and Trader Joe’s taking center stage. Nothing is certain — Jancis Robinson is right — and the Age of Uncertainty (Galbraith) yields uneasily to the Age of Anxiety.

More to follow.

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2 responses

  1. Excellent analysis as always but I’d just quibble with one point. The US is the number two wine exporter to the UK off-trade in terms of value – Australia is the top dog and has been for a few years. France has been pushed into third place by the Americans in recent times.
    It all gets more complicated when you look at the smaller and more fragmented on-trade, or at volumes instead of sales value. Most commentators go by the value measure, and the more reliable and quantifiable off-trade stats.

  2. What is most shocking to me is that anyone would be surprised by the wine industry taking a hit in this very difficult global economic climate. Indeed England has been the French wine industry’s benefactor for centuries and in fact Bordeaux came to world renown because of that symbiotic relationship.

    Although so-called luxury goods have a considerably different set of rules, it makes sense that if Bentley and Aston Martin are experiencing a decline in business, so then would Châteaux Lafite, Latour, et al. I am fond of Ms Robinson and certainly respect her wine acumen but hardly think that her article, “Wine’s Age of Uncertainty” is of much concern when looking at the scope of what is happening. And even though I’m a guy whose glass is always half full, I have to hope that we don’t end up needing wine for the purpose of getting enough daily caloric intake to survive, as has happened in Europe after two world wars.

    The facts are clear to me: virtually every Château in Bordeaux has benefited from fantastic growth, escalating prices and consumer demand over the course of decades (some over centuries). No one in his or her right mind would believe that that kind of growth and price increase could be indefinitely sustainable. So hopefully there are some erudite business people behind the scenes that recognized this fact long ago and stashed away enough cash to ride out this tsunami. Those that did not will find themselves on the auction block and be bought up at fire-sale prices. This is all a perfect form of market correction, which we started seeing at auction last autumn.

    As for the UK loosing its thirst for Bordeaux, I think it is highly unlikely, and by this point in England’s evolution, it is in the DNA of British wine drinkers. I have no doubt that cuts will be made, whether in the form of less consumption or trading down, but I expect England will always have an intimate affair with Bordeaux, as it should be. The Châteaux will have to lower their cost of entry, to be sure, but that would have to happen anyhow; it will probably be years, maybe decades before we experience a vintage as excellent (and perhaps as over-hyped) as 2005 and wine consumers are just not willing to support those ‘05 price points. People that bought 2005 Bordeaux futures are taking a bath unless they are willing to hang on to their purchases for the next 15 to 20 years.

    Worldwide, wealth shifts around. As England was once formidable, then much later the US, I have seen Japan, the Middle East and now China (Russia is faltering quickly at this moment) gather incredible market share and momentum, only to give it up to someone else. Even if Hong Kong is the saving grace for the fine wine market today, it too cannot be sustainable, especially given the fact that they are completely relying on other nations economies.

    In the end, I think if push comes to shove, I’ll have a lot of incredible wines to open and enjoy. But I’m not too worried about the great estates going away – after all, there a lot more people in the world today that can afford a bottle of Lafite or Latour than a Bentley or Aston Martin.

    David Boyer classof1855.com

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