Snooth Blog

Snooth User: Gregory Dal Piaz

The sky is falling! What are we to do?

Posted by Gregory Dal Piaz, Oct 15, 2008.

These are serious times for the world. Our economy is under severe pressure that few of us have ever seen before and they are taking their toll on the world of wine. Large collections of recently acquired wines are being hastily brought to auction to create some liquidity for those heavily invested in this "liquid asset" and the effect on the wine world will be interesting to watch.

Many factors will come into play here, the first being the aforementioned saturation of the auction market, which has already begun. The sheer volume of wine purchased over the past few of years of wealth accumulation is staggering. Far more wine than would ever be consumed was socked away in ever fancier and ever larger custom wine cellars. Just for illustrative purposes the wine cellaring business, which had been about a $15 million business a decade ago grew to an $800 million business last year! The explosive growth of MacMansions with the obligatory wine room helped to fuel this competitive buying binge as keeping up with the Joneses could now be measure on yet another scale, the opulent and extravagant wine collection.

The majority of what was purchased to fill these cellars were the fine wines of Bordeaux, in particular the first and so-called super-second growths, though with a pronounced effect throughout the sector. Wines that had languished on the shelves for $200 are now $1,000. The demand for these wines was overwhelming and came not only from domestic consumers but the emerging markets of both China, and to a lesser extent, Russia.

Bordeaux is a strange beast in many ways, it is unique in that it has long been a commoditized wine. The auction markets have always been dominated by Bordeaux and the large production of the Chateaux, typically over 20,000 cases per year, ensured that there was enough liquidity in those markets to truly allow the market to set the price of these wines. In fact the famous, or infamous depending on your point of view, Bordeaux classification of 1855, establishing the strata still in evidence today, was based apon the relative pricing of each Chateaux at the time.

Interestingly the phenomenon of global warming and technological advances in winemaking have played an integral part in the run-up of prices and can only exacerbate the pending collapse. In the past Bordeaux, like most fine wine regions, was blessed with a few great vintages a decade. The warming climate and the improved ability to deal with challenging vintages has introduced a new paradigm. In the 1990's both 91 and 92 were pretty dismal vintages but things picked up with good vintages in both 93 and 94, then excellent vintages in 95 and 96, with a slip in 97 that very nearly undid the Bordeaux trade as a crappy vintage met the ill-timed introduction of the new Bordelaise pricing policy, onward and upward! 1998 was a solid vintage, then came 1999, a pretty vintage that in the past may have been barely acceptable but modern know-how saved the day and the exceptionally powerful dollar brought the wines to market at very attractive pricing, a fine introduction to Bordeaux, but then everything went wrong.

2000, the millennial vintage, the first "Vintage of the Century!" of the new century, conveniently ignoring the reality that it was in fact the last "Vintage of the Century!" of the last century. Then 2001 very good, 2002 classic and well priced, 2003 an aberration of a vintage suffering from the sweltering heat of the season but greeted enthusiastically by the critics who thought that the exoticism of the wines was something to fawn over. Why one would want Bordeaux to resemble over-ripe California Cabernet is beyond me, but the hyperbole approached another 'Vintage of the Century!" call. 2004 was again a vintage that was fine and solid in a classic style if more expensive than the preceding vintage. And then came 2005, "Vintage of the Century!" yet again and at price increases never before seen. "Buy before they become even more expensive" was the rallying call and while interest was huge, purchasing follow through lagged a bit. That is until the Bordelaise pricing model kicked in with the less impressive 2006's that were priced above the "VotC" 2005s! In New York they call that Chutzpah.

Well if did not stop there and 2007 Bordeaux prices were released just in time to coincide with the meltdown of global markets. This adequate vintage is priced at or around the price of the better 2006s, converting them into yet another screaming buy! So there they are, a plethora of vintages worthy of one's cellar, some to drink in the short-term and some to cellar so that our grandchildren can enjoy the finest wines of our nascent century. Cellars are full to bursting, the retail pipeline is full to bursting, winemakers' cellars are full to bursting, and then the world's economy decided to implode. So where does that leave us and does this all have a point?

Yes and no. Some of this is just my venting, well only a little bit actually. The point is that for all you Bordeaux fans who have been priced out of the market recently salvation is coming. After last week's collapse on Wall Street a bit of panic selling spread to the fine wine market. Million of dollars worth of wine have been proposed to auction houses and retailers around the globe in just the past week, and that is only the beginning. The effect of this surge in supply has yet to be felt in the marketplace and the auction channels are keeping their fingers crossed that the Asian markets will sop it all up due to their pent-up demand, but our Asian brothers are not dumb. The super rare wines may hold their value or continue to rise due to their illiquid markets but the sheer volume of Bordeaux that is about to come to market almost guarantees significant price reductions, This may take some time to filter through as auction houses modify their policies to keep hammer prices afloat. By reducing their cut from both the buyer and the seller an auction house can keep hammer prices, the final bid proposed by a buyer, level while real pricing, the hammer price plus the cut or buyer's premium, usually 15-20% tacked on by the auction house, falls.

This is tricky business yet only postpones the inevitable, wine prices, and Bordeaux prices in particular, though there is little hope that the bloated and obnoxious pricing of much of California's Cabernet will retain their buoyancy, are set to re-adjust in synch with the grand asset devaluation that is sweeping the globe. France is already bracing for a precipitous drop in wine exports, led by the backed up flow of forsaken Bordeaux. Restaurants are dealing with a nation-wide drop in business and are already seeing consumers switch from the super-premium labels so popular over the past few years to more value driven selections.

So they bottom line, and thankfully we are almost at the bottom line here, is that wine prices will suffer a retreat that will once again allow everyone to share in the bounty. For too many years too much wine had fallen into the exclusive domain of the rich. That was not only wrong but it was a shame, something that is lacking in the wine business. This foodstuff, a simple beverage designed to make life a little more pleasant, was elevated to the level of status symbol comparable to Tiffany, Rolex, or Hermes. If you don't believe that wait for my blog about the problem with counterfeit wines! Well that time is coming to an end, it took a tortuously painful worldwide financial crisis to facilitate it but the long-term prognosis for wine lovers is improving! Keep tuned into the Snooth wine talk pages as I embark on a set of articles that will focus on value wine, wines to drink while we wait for the fine wine market to establish a new, reasonable, affordable pricing structure.Of course some of these value wines are so damn good you may very well feel that there is no reason to pay more for wine, but that is fodder for another discussion.

Gregory Dal Piaz is the Community Manager at  Snooth , an avid Wine Geek with a passion for things Italian, and a long suffering Mets fan. 

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