Causes and effects on the luxury wine market
The primeur tastings in Bordeaux are still ongoing, while the fastest journalists have already published their ratings. At the same time, the subscription of the 2023 vintage is picking up speed. The first prices for consumers have arrived on the market and show a significant development. Top houses such as Léoville Las Cases and Pontet Canet have set the monetary direction for this year’s price campaign with prices of 66 euros ex negocient and 89 euros for consumers. Price reductions of 30-40% compared to last year represent a massive statement and are an almost desperate attempt to counter the buyers’ strike of the last 12-18 months.
It is safe to say that this development is not a reflection of an inferior quality vintage, but is taking place despite the good qualities harvested in 2023. The consequences for the market are not yet foreseeable. It can be assumed that this is a fateful vintage, although it is unclear whether the measures introduced will be suitable for halting the erosion of sales volumes.
The consequences for the secondary market are also of interest, as vintages that have already been delivered are traded there. Over the past 12 to 18 months, a clear trend towards falling prices has already been observed in this segment. On average, prices have fallen by 15 %. In this context, the question arises as to whether the price reductions in this year’s primeur campaign will exert further pressure on the pot. Buyers who have stocked up “en primeur” in recent years in order to achieve an attractive return with tangible assets are likely to experience a similar disappointment as buyers of expensive properties who invested at peak prices in 2022. In the case of the expensive 2022 vintage, there is a risk of losses in the order of magnitude of this year’s price reductions, taking into account that the wines will only be delivered to buyers in the fall of this year.
photo by adrian van velsen
We believe that a number of factors have contributed to the fact that the price decline has taken place in a comparatively short period of time and to a considerable extent. In analogy to a bear market on the stock exchange, there is now a downward movement that no longer leads via the staircase, but directly into the cellar. What factors are responsible for this development?
In recent years, the market for wine was primarily characterized by capital investors, while wine lovers played only a subordinate role. As a result, the laws of the capital market apply. Over the past 12 to 18 months, tangible assets, especially wine, have become considerably less attractive. The reason for this can be found in the volatility of capital. If the general conditions change, the market is affected in the same way as a bottle of wine whose contents have a volatile acidity. They are no longer touched. Market participants react with restraint and withdraw. A similar effect was observed following the rapid rise in interest rates. Instead of negative interest rates, 3.0% interest can now be earned on fixed-term deposit accounts again. With a longer commitment, supposedly secure returns of 4% and more can be achieved with fixed-interest securities. The consequence of this is that a large number of players who were interested in wine as an asset class want to abandon the sinking ship. The sharp increase in supply at auction houses in Germany is evident. In Europe’s largest wine market, London, on the other hand, the effects are completely different. Storage capacities are almost exhausted. A considerable proportion of the available vintages, particularly the most recent, high-priced Bordeaux vintage, is in the cellars of merchants and is only being sold there with difficulty. This is restricting liquidity and increasing the potential for write-offs and losses. It has already been reported that some merchants find themselves in situations that threaten their existence. This can lead to a precarious situation for subscription buyers in particular. Insolvency usually leads to a total loss of the debt, which means that neither the wine purchased nor the money already paid is paid out to the creditors.
In recent years, the city of Bordeaux has lost much of its image. This is due to the fact that the protection of people and the environment is playing an increasingly important role for many buyers. However, this realization was often gained too late. The intensive use of pesticides in Bordeaux over decades has led to uncertainty among many consumers. Valérie Murat and her commitment against the careless, widespread use of various pesticides made it clear in 2019 at the latest how an entire industry is fighting for its business, its profits and the intensive use of its products. Valérie’s father most likely died as a result of a pesticide-related cancer.
Changes in consumer behavior are also of not inconsiderable relevance. On the one hand, there has been a considerable decline in alcohol consumption in many industrialized countries in recent years. On the other hand, a change in taste can be observed across generations. Until the 1990s, wines with a high alcohol and tannin content were all the rage. Since then, there has been a clear trend towards wines that are more drinkable and easier to digest. This development can also be observed in Bordeaux wines of recent years. Alcohol excesses are a thing of the past and the tannins have become rounder and finer in most wineries. Nevertheless, a Bordeaux remains a Bordeaux, and structure and a certain richness
structure and a certain richness are part of the DNA of these wines. Ultimately, this can also be seen as positive, although it is not in line with current trends.
In this context, it is of particular interest whether these are home-made problems in Bordeaux or whether this is a generally expected market reflex. So can a similar trend be predicted for Burgundy wines when looking at price trends in Bordeaux?
The wines from the 2022 vintage are currently available on the market. It is clear that after the significant and sometimes exorbitant price increases for Burgundy in recent years, there has not (yet) been a significant reversal, at least not yet. Although winegrowers were able to produce particularly good qualities in 2022, the price does not appear to be rising any further, at least at present. However, it is not yet possible to say whether there will be a market clearing at the current price level. The future price trend can only be estimated in six to twelve months at the earliest, when the first trading companies communicate their price expectations. A subscription system, as established in Bordeaux, does not exist in Burgundy.
The reasons listed under point 1 for the price trend in Bordeaux apply globally and are therefore also relevant for the specific Burgundy wine sub-market. Even if many Burgundy winegrowers were not characterized by a restrictive use of pesticides in the past, the renunciation of these products is better communicated by many wineries today. Furthermore, an increased focus on organic farming standards can be observed. In conclusion, it can be said that the characteristics of Chardonnay and Pinot Noir seem to meet today’s preferred enjoyment requirements better than Bordeaux wines.
An additional challenge is the collapse of the Chinese market, which is attributable to Xi Jinping’s amateurish economic policy. The Chinese real estate market, which in the past has helped many middle-class people to accumulate considerable wealth, is currently experiencing a significant destruction of value that has the potential to plunge the global economy into crisis. As lovers of wine, and Bordeaux in particular, who do not buy wine as an investment, we only subscribed to Bordeaux selectively and in greatly reduced quantities after 2019. It can be assumed that this assumption is not unfounded. While Bordeaux, with its huge quantities, is prêt-à-porter even at 1er GCC, Burgundy and Barolo can be described as haute couture. We predict that the price trend there will be more stable.
To summarize, the luxury wine market is subject to cyclical fluctuations caused by external factors that affect price trends and consumption. It remains to be seen whether the measures implemented in Bordeaux will lead to a positive development. However, we are optimistic that other regions, such as Burgundy and Barolo, will remain more stable.
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