(More wine news on www.vitabella.fr) Luxury wine and Lafite prices...If there is one article to read over the week-end, that may be the well documented post that Andy Xie - an economist who left Morgan Stanley after writing an email that described Singapore as a money-laundering hub - wrote in his blog. His conclusion is unambiguous: Sell your bottles of Chateau Lafite, Now. After reading this interesting analysis, I give here some comments on a few points he makes before giving his personal conclusion.
1) "Like other assets, the force for the bubble is the low interest rate environment. Bernanke is a bigger reason for the fine wine price than 1.3 billion Chinese." Andy Xie is certainly right on a short term but on a longer term, we can imagine the Chinese market becoming a huge population of wine consumers (and not only of fine wines).
2) "In the 2000 internet bubble, a lot of companies were worthless but were trading at billions of dollars of market capitalization. Some were really good companies but were priced several times higher than their intrinsic worth. Lafite is like the later." At the time of the internet bubble, share prices for all companies (all and not only a selection of them) were skyrocketing. This is in fact what explained the burst of this bubble in 2000. Today, if there is a bubble on wine prices, it is strictly limited to a very few wines which are in fact of very high quality. For wine - which makes the comparision with internet companies a bit biased - quality is still a major focus when it comes to investment.
3) "The crash happens when the US treasury market crashes, which forces the Fed to tighten monetary policy. That is probably in 2012. Still, now is the right time to sell your Lafite." Right but in this disastrous scenario, we can easily understand that not only Lafite or luxury wines will be concerned. In fact, all assets in general will be more or less impacted by this situation.
4) "By weight Lafite is more expensive than silver even for a bad vintage, and almost ten times as expensive for a great vintage like 1982." This is a very good point and shows how Chateau Lafite created its own bubble in the luxury wine market.
5) "Wine drinkers become hoarders.(...)The top Bordeaux chateaus behave like internet companies in 2000. They sell a small proportion for each release. The shortage triggers market frenzy." At such a high price, you think twice (or even more) before opening a bottle and prefer to keep it for a very special occasion if you do not sell it. So at the end, less bottles may be drunk than in the past, even if it said that these wines are made for entertaining business relationships.
So Bubble? Yes. Burst? we do not know. In fact, due to its rapid and impressive growth, China is facing inflation problem. A fivefold increase in China's M2 supply in the past decade is part of the problem. Raising interest rate will immediately impact investment strategies. And fine wines are more or more acquired to make an investment. In that sense, Lafite prices and prices of some other top wine estates will be affected. But China is a growing market of wine consumers. When you get back to history, you always find good reasons for a specific market to have developped a large population of wine consumers. In China, a broad communication around wine has been made particularly thanks to exclusive and very expensive wines. Chinese read and learn about wine through the stories of the most famous estates and the prices of their wines. So will this bubble burst or not? Only future can tell. But what history will tell is that thanks to this huge hype around top wines, China has discovered a taste for wine and this market will develop nicely in the future to become an important business destination for any wine estate. Without this big hype around Lafite, the aspiration of a large chinese population to discover the great world of wines would have certainly developped much more slowly.(More wine news on www.vitabella.fr)
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About Me
- Guillaume Jourdan
- Guillaume Jourdan founded VitaBella – a Wine Marketing & Communication Company - in 2004 and has helped more than 50 international wine estates to develop brand awareness and improve brand image by building customized strategies. He lives in Paris (France) and can be followed at VitaBellaWine on Twitter or Vitabella Wine on Facebook. As consultant, his experience is as deep as it is diverse encompassing the disciplines of advertising, branding, sales promotion and public relations. Most notably he has worked with companies in a strong international environment and had to deal with complicated issues in American, Asian and European countries. As Wine expert, he has a deep knowledge of old vintages (especially Bordeaux from 1900, Burgundy and Rhone Valley) and a very good understanding of most of the fine wines produced both in Old and New World. He is the coauthor of The impact of Label Design on Consumer Buying Behaviour, two VitaBella – Phebos reports that helped the wine industry to make changes on labels in order to increase sales and profitability. Guillaume studied Business School in Paris and Master of Business Administration at Trinity College in Dublin (Ireland).
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