Ella Lister gives an overview of the bullish first six months of fine-wine trading in 2010, paying special attention to the second quarter, and offers a first-hand account of the frenzied trading at the height of the 2009 Bordeaux en primeur campaign

The first half of 2010 has witnessed a wholehearted recovery for wine prices on the back of unquenchable global demand. The Liv-ex 100 index has never been higher, crossing the 300 mark in June and up 27.3 percent so far this year. The index has risen 40.9 percent over the past year, and moreover, at the end of June it was 14.3 percent higher than its pre-crash high exactly two years previously, cementing the rebound of the fine-wine market.

In June, the Wine Investment Fund was up 3 percent, just ahead of Liv-ex's Fine Wine 100 index at 2.8 percent. Liv-ex also launched a new Fine Wine 50 index, tracking the past ten physical vintages of the five first growths and allowing a daily, rather than monthly, evaluation of the wine market's performance. Since its daily debut at the end of February, it has performed strongly against the stock exchanges of the world's wine capitals, up 25.7 percent over the period. Both merchants and auction houses have benefited from strong prices and demand, many achieving record turnovers for the first half of the year. As an added bonus, the trade has experienced the busiest and most lucrative en primeur campaign ever, which is likely to have a knock-on effect on auction prices- especially for back vintages of good performers and, in time, when 2009s begin to hit the salerooms.

Unsurprisingly, trade on Liv-ex in June was dominated by Bordeaux, which accounted for 98.5 percent of exchange turnover (compared to 96.7 percent in May and 88.6 percent in 2009), at the expense of Burgundy, at only 0.1 percent (down 93 percent on May). A hefty 39 percent of the Bordeaux traded was 2009, despite most wines being released only toward the end of the month, implying that merchants were immediately speculating and trading among themselves rather than simply sharing out their allocations between their clients, acting almost as a fund might. As a result, trading volume on the exchange is healthier than ever this year, with turnover in June hitting a new high for the third consecutive month, up 56 percent on May.

Gavel-anting

The Wine Spectator US Auction Index actually fell by 3 percent in the second quarter, though it remained up year to date following its six-point rise in the first. Nonetheless, continued demand has led to very impressive performances by the top US players so far this year. Hart Davis Hart, from its four Chicago auctions to June, made sales worth $16 million, up 28 percent on the first half of 2009. Despite having clients from around the world, Hart Davis Hart is the only sizable auction house to have resisted a physical move to the Far East, suggesting that its impressive average sell-through rate of 99.97 percent is largely down to local demand. Only four lots were passed of almost 5,000 offered to the end of June.

Liv-ex Fine Wine 50 Index vs Wine Capital Stock Indices, Mar–Jul 2010

Liv-ex Fine Wine 50 Index vs Wine Capital Stock Indices, Mar-Jul 2010

Zachys had the next highest percentage of lots sold, averaging 98.6 percent over the same period, achieving a turnover of more than $25 million, up 5 percent on 2009. Though undoubtedly aided by its strengthening footprint in Hong Kong, where it derived 25 percent of these revenues, Zachys held only one of its six first-half auctions in the territory and actually achieved its best sell-through rates in New York, where it held four sales. This encouraging local demand allowed Zachys to close the first half with 98 percent of lots sold at a two-day sale in New York in late June. The top ten lots consisted solely of Lafite, Pétrus, Mouton, and DRC, but encouragingly Zachys also noticed a healthy interest outside Bordeaux and Burgundy. Among rising Champagne prices, eight lots of Krug's 1995 Clos d'Ambonnay sold for $7,865 apiece ($2,622 for each of the three bottles per lot, 50 percent more than its best list price on Liv-ex). Also popular were white Bordeaux lots-many beating high estimates by more than a third-and Rhône, with several lots of Châteauneuf-du-Pape from Château Rayas well over 50 percent above the high end of the range.

Orient express

Combined US auction sales totaled $83.4 million in the first half of 2010-a very healthy figure, and 25 percent higher than Asia's total, perhaps partly thanks to the local focus of HDH and, so far this year, Zachys. However, other US auction houses are continuing last year's theme of focusing their efforts on the orient, and Hong Kong is again ahead of New York in the race of the auction capitals, with a huge $66 million to the Big Apple's not-quite-big-enough $62.2 million. A contributing factor to Hong Kong's tally, and the most extraordinary event on the auction circuit this year-perhaps ever-was Acker Merrall & Condit's "Imperial Cellar" sale, Asia's largest yet (and the second biggest globally). Acker offered 19,000 bottles from the cellar of US entrepreneur Eric Greenberg, averaging more than $1,000 each and realizing total sales of HK$152 million ($19.5 million). Wines from Greenberg's collection worth more than US$400,000 were served at 16 presale events laid on over a two-week period for loyal Asian clients, a form of courting that has been perfected by Acker since its early arrival on the Hong Kong scene.

Potential buyers were treated to a slew of lunches and dinners including, in Hong Kong, The Burghound Dinner (with Allen Meadows), two Bordeaux 2000 retrospectives, and a series of "Zodiac lunches" with such titles as Dragon and Monkey, and, on the mainland, two dinners at the Great Wall of China. The pinnacle was the Great Wall Dinner, hosted at Juyongguan, which once represented the northwestern gate of Beijing. Special guests were spared China's eponymous wine and instead served Margaux, courtesy of the château, whose owner Corinne Mentzelopoulos gave a speech at the dinner. The Guy Savoy menu boasted foie gras, lobster, black truffles, veal, beef and bone marrow and was topped off with a pudding of "poire Margaux" accompanied by 1953 Château Margaux from magnum. In the words of Gil Lempert-Schwarz, Acker's energetic Asia consultant and mastermind marketeer, "It was the dinner to end all dinners. Period!"

This sale alone accounted for 43 percent of Acker's turnover to June, helping the auction house to its half-year total of over $48 million, already eclipsing its full-year revenues in 2009 by 10 percent, with five more auctions to come in the second part of 2010. Acker's performance is testament to the power of the Hong Kong auction scene and the commercial wisdom of those who have courted Asian enophiles on their home turf. A huge 73 percent of Acker's revenues this year have been derived from only three sales held in Hong Kong, compared to four in the United States. Hong Kong's average sell-through rate remains marginally higher than that of the USA, at 95 percent to 92 percent. Interestingly, Singapore had the lowest average sell-through rate of any country, with 70 percent of lots selling at its only auction this year, held by Winefield's on May 16, suggesting that tapping into Asian demand should not be taken for granted, nor traditional Western markets neglected. After Acker, Sotheby's is the next most reliant on Hong Kong sales, deriving 60 percent of its first-half revenues from sales in the city, while Bonhams' and Christie's on-site auctions accounted for much less, at 15 and 13 percent of their respective turnovers. The mix has worked for Christie's, with the second-highest first-half turnover at $40.8 million, though there can be no skirting the success that Hong Kong has brought to Acker and Sotheby's, in first and third positions respectively.

Newcomer Spectrum Wine, launched last July, has addressed the dilemma of old market versus new by embracing both simultaneously, holding physical auctions in California and hosting live simulcasts in Hong Kong. President Jason Boland said of this approach that it "demonstrates the potential to tap into emerging markets while continuing to service longtime collectors Stateside." The company's third sale, on June 25 (the 26th in Hong Kong), "saw 25 percent of all winning bids and 56 percent of the total number of bids come from the Internet," showing that a physical presence, while not essential, is helpful when it comes to converting bids into sales.

By comparison to the newer markets to its east and west, Europe has ticked along quietly but satisfactorily, with average sell-through rates of 94 percent in London and 90 percent on the continent. In Zürich, Marc Fischer reported Steinfels' "best auction ever," held on June 12. "Everybody -dealers, privates, restaurants-is buying as if there is no more wine available in the near future." He put this down to a renewed optimism within the trade and a slightly stronger pound to help English buyers. Representing only 14 percent of the global auction market to June, Europe's influence may be waning, but what it lacks in the saleroom it makes up for in mercantile trade. In keeping with tradition, London has been at the heart of this year's Bordeaux en primeur campaign, with its established merchants often the preferred source even for foreign buyers, perhaps due to the incremental risk associated with buying wine as a future.

Rough diamond

One such merchant, Bordeaux Index, founded in 1997, was another wine company with first-half sales of 2010 surpassing its 2009 full-year revenues, this time helped by a strong en primeur campaign. Its annual revenue is currently around the £75 million ($112 million) mark. The fastgrowing company moved to its modern City HQ in 2008, far from the age-old Mayfair institutions such as Berry Bros & Rudd, whose cellars served as a hideout for the exiled Napoleon III in the 1830s. At the cutting edge of today's wine trade, Bordeaux Index fosters few relics of the wine trade as we knew it. The merchant's bellicose approach has itself something of the Napoleonic about it. But while the emperor famously labeled England a nation of boutiquiers, this particular shop's founder and managing director Gary Boom is not English but South African, and Bordeaux Index bears little relation to traditional wine shops.

Boom cut his teeth in interest-rate swaps and foreignexchange options as a director of derivatives broker Intercapital (now ICAP). Applying his financial acumen to his wine venture, Bordeaux Index uses sophisticated computer programs previously unheard of in the wine trade, as well as employing two full-time investment specialists to analyze potentially lucrative opportunities. As neighboring jewelers continue to trade the tangible in the form of precious stones in London's diamond quarter, wine is sold electronically at No.10 Hatton Garden.

By 9:30am on June 25, the mood on this trading floor is one of urgency and controlled chaos. At the tail end of the latest Bordeaux en primeur campaign, Cheval Blanc has just been released at £7,900 ($11,780), and Boom declares, "I might as well take a chance on this. I want to get 50 cases." And it is a chance, with prices eclipsing all estimates and rendering his clients' pre-orders obsolete. Only one of numerous expressions of interest for Cheval Blanc stands, at an aggressive £10,000 ($14,900), prompting a cheeky aside from Boom: "Well, he owns it, then!" The château has halved the allocation, and the sales team is putting in calls, scrambling to secure enough cases; but Boom keeps changing his mind, seconds later announcing to nobody in particular, "Let's get up to 40 cases." The second-highest pre-order is yet to be confirmed at £7,900, because the client is unavailable. "He's the second-richest man in Asia; I don't blame him if he wants to have a sleep in the afternoon," sympathizes Boom, who has enough to be getting on with while he waits for the decision. He is simultaneously buying up back vintages in anticipation of the boost they will be given by the 2009 pricing. Ten cases of 1998 Cheval Blanc are bought on Bordeaux Index's online platform LiveTrade and later realize a profit.

At the far end of the open-plan office, a cork pops. It is 9:55am. "Who's opened a bottle of wine?" booms Gary rhetorically, jesting, "It's a bit early!" Despite the questions being fired at him from all sides by his sales team and the constantly ringing phones, Boom intersperses his snap decisions with friendly banter and expletives. The atmosphere is one of a City trading floor: part daring, part risk management, mostly macho, and all quickfire. "I woke up at five o'clock this morning thinking about Latour. I went to bed at 1am thinking about Mouton." It has been a busy fortnight for Boom, who adds, "I need the weekend." His energy, though, seems buoyed by adrenaline as he turns his thoughts to L'Eglise Clinet, also just released. "Okay, let's get this party started! Shall we do it in six-packs? It always sounds nicer in six-packs. Let's do it at £1,750 [$2,610] per six." Nobody questions Boom's salesmanship.

The long and short of it

Meanwhile, the second tranche of Mouton Rothschild is coming in thick and fast, and Bordeaux Index already has 50 cases in stock. "It's always Mouton," protests Boom. "There's always loads of the stuff kicking around." He tells his team to run it past him before buying any more, and yet minutes later-perhaps somewhat predictably-he can be heard on the phone acquiescing, "I'll take that, only because it's you." He's five more cases of Mouton up, but the négociant doesn't have any Cheval Blanc. Ten minutes later, more Mouton is offered at a lower price again, and it is irresistible. Having acquired it, he announces to the room, "No more Mouton," and half to himself, "Shit, we're going long on this." He doesn't seem worried, though, which is unsurprising for someone whose resourceful team-on 1 percent commission-has already sold £888,000 ($1.3 million) worth of en primeur wine by 11 o'clock that morning.

From across the room, Boom is updated on a particular client's purchases so far, amounting to £83,000 ($123,710), and decides to reward him with a special-offer parcel containing Lafite, Latour, and Mouton. "He should be over the moon; it's just a thank-you." And he is, snapping up the hard-to-come-by first growths. One case of Mouton down. And it turns out there was no need to worry about overstocking on Cheval after all. The Asian client has woken up and wants 40 cases, which Bordeaux Index doesn't actually have, so they agree on 20. As the phone hits the receiver, Boom rallies the troops: "We need another 30 cases of Cheval. Let's keep going!" As he is dialing a telephone number, one team member responds, "I'm just trying to work out where the hell we're going to get it from," and immediately he's chattering away in fluent French to a potential source. Boom turns to another colleague, asking him to short (sell) some Lafite on the LiveTrade system.

There is nothing archaic or restrained about this boutique, whose sophisticated shopkeepers use bond yield curves to assess trends for different wines and identify those that are "undervalued." Boom explains to me that trades are constantly going through on LiveTrade, with en primeur prices affecting back vintages and creating new demand. On the day I visit, for example, there is "massive trading on '06 Mouton," which Bordeaux Index bought at £4,500 ($6,710) and is selling at £5,500 ($8,200). All this does not take place without the requisite risk control. On LiveTrade someone offers to sell a case of Lafite 2003 at £11,000 ($16,400), and his identity is investigated before a decision is made on the purchase-in part to ascertain whether the wine is sitting in a bonded warehouse, which for Boom is "like a guarantee." The newest member of the sales team has recently moved from a well-known wine merchant that he refers to as "like a sleeping dog in comparison," with "no buzz, no action, no communication." Bordeaux Index, on the other hand, is "so proactive and rapid fire. Relationships with the négociants are so much stronger," he told me, whereas his previous employer "had one guy who didn't even speak French."

Farr East

Alongside French and Italian employees, Bordeaux Index employs a native Japanese speaker in London, as well as running an office in Hong Kong, and was expecting that between a quarter and a third of their en primeur sales would be to the Far East. In fact, the Hong Kong office represented only 10 percent of the total, with 30 percent going to trade and investment funds and an overwhelming 60 percent to the UK private market. Nonetheless, Bordeaux Index sold £22 million ($34.2 million) of 2009 Bordeaux during the campaign, on the back of tenacious sales tactics. On May 5, Jancis Robinson MW commented on her website, "Prize for the primeur hawker shouting the loudest goes to Bordeaux Index. Their PR machine seems to have overtaken that of Berry Bros this year." The emails came even faster as wines were released. One was titled "Branaire- Ducru... How cheap is this going to look in a few hours?" while another read as follows: "Angélus is a huge brand, favored by James Bond, no less, and is always one of our biggest sellers." Other very British merchants were less enthusiastic. Berry Bros and Goedhuis, for example, frequently warned that wines were too expensive and represented a bad investment. Of Angélus (which Bond presumably drank neither shaken nor stirred), Johnny Goedhuis announced, "We find it shockingly expensive at this price point."

Bordeaux Index attributed "the surprising lack of Asian investment" to Asian buyers' preference for higher-classed growths only, making it difficult for them to secure allocations. This didn't stop one merchant, Farr Vintners, selling 40 percent by value to the Far East (with the UK market accounting for the other 60 percent). Tellingly, by volume, Asia represented only 15 percent of Farr's en primeur sales, substantiating the region's reputation for thinking-and spending-big on its wine purchases. Farr acknowledged in a press release that Asian customers "have mainly bought only first growths and super-seconds." Did across-the-board buyers miss out on the top wines as a result? It is nothing new for lesser growths to be parceled with their more desirable neighbors in order to expedite their take-up. While you might have thought that a willingness to shell out the asking prices for the first growths this year should alone have been sufficient, many hopefuls were disappointed. Moreover, in some instances it seemed no amount of third or fifth growths purchased was sufficient to guarantee a single case of Lafite or Margaux.

Either way, as the first merchant to set up in the Asian wine capital, Farr has undoubtedly benefited from the relationships built by Jo Purcell, Hong Kong director, with total en primeur sales topping £53 million ($79 million). The average price for the 30,000 cases sold by Farr was £1,760 ($2,620)-double that in 2005, when revenues were under half the amount for 29,600 cases. Asia's involvement probably played a part in this surging average case price, which chairman Stephen Browett puts down to "higher demand for the more expensive wines, weaker demand for the cheaper wines, higher release prices, and a weaker pound." Browett added, "There has been virtually no interest from the USA." Jeff Zacharia, president of Zachys, told me that the US-based merchant had had "a very strong campaign," adding that he "had expected less interest [because of the prices and the economy], but when it came down to it, there was a lot of activity." Zachys did not match the 2000 en primeur revenues but "surpassed 2005," Zacharia said, with the caveat that "you needed to sell fewer bottles, so it's all relative."

On premiums

The universally perceived excellence of 2009 Bordeaux and subsequent hype meant high prices were inevitable from the outset. Few, if any, predicted quite how high. Liv-ex's annual release-price competition saw most respondents underestimating the price of a basket of wines (chosen at random by Liv-ex) by more than a third, and even the winner was 13 percent off target. Using the 22 wines comprising its release-price index, Liv-ex calculated that 2009s were, on average, 48.5 percent more expensive than 2005 and 213.7 percent more than 2008 (Fig.4, opposite). And yet the wines flew off their notional shelves. "This is by far the most manic en primeur yet," Gary Boom of Bordeaux Index assured me. "The intensity is ten times more than before. I've never seen such a complete scramble to buy stock. These wines are selling out within minutes rather than hours."

It wasn't only Robert Parker who scored the vintage highly (giving more potential 100-pointers than ever before); praise for the wines was widespread, despite a general consensus that the quality was not as consistent as 2005. So, do the wines really merit such premiums over arguably comparable vintages such as 2000 and 2005? It's highly unlikely they are 48.5 percent better than the 2005s, and while one or two châteaux might have improved this much, the price hikes were across the board, with a few exceptions, including Pavie, released just below its 2005 price, and Pavie Decesse lower than '05 by 12 percentage points. On the secondary market, however, 2009s are trading at a 35 percent premium to the 2005s (looking at the same 22 wines tracked in the Liv-ex release-price index). This seems extraordinary, though I suppose they might verily be this much better. Regardless, 2009s have not escalated in the same way as the 2005s yet, so at this point it appears the free market is working to an extent, selfleveling in line with consumer appetite. This means the key differential lies with the châteaux.

Value creation

Wise to the returns being made in the secondary market, producers decided they wanted a bigger piece, adopting two decisive tactics. First, they have tried to set initial prices closer to ultimate potential, making historic levels of return on en primeur investments seem unlikely for the acquirer of 2009s. To match the 2005 vintage's average price increase of 39.1 percent (see WFW 28, p.202, for more detail) from such a high starting point would result in an unfathomable price differential between 2009s and other great, older vintages. It is not impossible, however, with some wines having traded up significantly already, such as Duhart-Milon, Pontet-Canet, and (surprise, surprise) Lafite Rothschild.

Liv-ex release-price index, 22 top châteaux (first tranche only)

Liv-ex release-price index, 22 top châteaux (first tranche only)

In the previous issue, I advocated buying en primeur as an investment in good years, proffering that "the '09 vintage promises great reward and little risk," despite more risk in less highly esteemed vintages. I pointed out that châteaux are keeping back more and more stock to benefit from price gains once out in the market, but like most, I underestimated the extent of the hike they would themselves apply to the wines at release. Bearing this in mind, 2009 wines are likely to prove a less surefire investment than hoped-though most first growths and super-seconds, at least, are so far standing up to ambitious release prices. Some mid-priced wines have decreased in value since release, and only time will tell how well the vintage will retain its wow factor. It might well depend on the next few summers in Bordeaux.

Performance on London release price as at July 20

All the 2009 first growths were trading above their 2005 counterparts by the end of June. The 2000 vintage, nine years closer to its prime, is pricier than its 2009 counterpart only for the two Rothschild-owned first growths. In fact, Liv-ex found that by the end of June, the 22 wines in its release-price index were, on average, already trading higher than any "available vintage, bar 1982, despite its being two years away from delivery" . With 2009 Bordeaux already so highly priced, many have been turning to (relatively) more affordable back vintages: 2006 and 2004 wines represented 14.5 and 8.6 percent respectively of Bordeaux trade on Liv-ex in June. Moreover, many investors anticipated the knock-on effect of the 2009 pricing on former vintages and, by buying these, helped increase prices further, in an even greater upward spiral. The only vintage that doesn't seem to have profited is 2007, which has the lowest average prices of the past nine years. Despite rises elsewhere, six of these vintages-at half or less than half the price of the '09s-still seem to represent sound value by comparison, especially when one recalls the conventional wisdom that a good château makes a good wine even in less-than-perfect vintages. In an email to customers offering back vintages of Lafite and Latour in mid-July, Berry Bros & Rudd noted that, in the light of 2009 prices, "some of the top wines from 2005, 2003, and 2008 are looking like increasingly attractive buys."

Slicing the pie

In order to benefit from any post-release upswings, the châteaux have hedged their bets. Alongside precipitous release prices, their second maneuver has been to keep back higher quantities of stock than ever. Tranche sizes have been shrinking for the past decade or so, as châteaux have become less and less reliant on the en primeur system, and this year many merchants observed that they were again noticeably smaller than last and struggled to get their hands on the quantities they thought they could rely on, with consumers suffering as a result. Many châteaux, particularly the higher-classed growths, which can charge more for their wines, no longer need to ease their cash flows by selling their wine years before it is ready to drink. If such producers do not need to worry about having this capital tied up, then they are participating in en primeur campaigns almost out of tradition and expectation. With the historic rationale behind the system at risk of becoming obsolete, en primeur seems increasingly to be used as a tool for creating hype, anticipation, and desire around certain wines or vintages.

First-growth current trading prices

The less a château releases, the more its wine becomes a status symbol-as with the scarcity factor at play in the notoriously long waiting lists for handmade Birkin bag. (A Birkin can even be sent for a "spa treatment," just as a wine can be reconditioned au château.) If Hermès can do it, why should we begrudge the châteaux their right to sell their product for the market price, rather than let investment funds enjoy the "top of the milk," if they are no longer bound economically to an arcane arrangement? Either way, begrudge them we will, when some of our favorite wines have become the stuff of legend and are no longer within our grasp. Of Château d'Yquem, Browett said, "Sadly the proprietor, LVMH, has been deaf to all sensible advice and has continued the trend of overpricing this great wine, thus alienating a large percentage of customers who were planning to buy it." Those who could not or would not buy the big names on release will have to wait for these wines to trickle out into the secondary market, where prices should in theory be even higher, though many remain flat so far.

One sure source of '09s in years to come will be auctions. It is increasingly common for high-quality producers to release wine directly through auction houses, several years after the vintage's original release. They can be anonymous, as consignors so often are, though the potential premium associated with the guaranteed provenance means the châteaux and auction houses alike are incentivized to publicize the illustrious source. Sotheby's Hong Kong sale on May 21 featured 330 lots direct from the cellars of Cheval Blanc, Yquem, and Dom Pérignon. In attendance was Pierre Lurton, general manager of Cheval Blanc and CEO of Yquem, no doubt adding to the air of exclusivity and authenticity that attracted hundreds of bidders, who acquired every single lot on offer. Lurton, unsurprisingly, was "truly delighted" with the world-record-breaking results of the auction, saying, "The wines will now reach an ever wider audience in Asia, and they all show extraordinary freshness and beauty due to their direct-from-the-château provenance."

Average current price by vintage (22 top châteaux)

Average current price by vintage (22 top châteaux)

At Acker's "Imperial Cellar" sale in May, several lots were offered direct from Château Margaux, five of which sold for almost $400,000 to the benefit of the Great Wall Society of China for the preservation of the wall (presumably boosting the château's reputation in the country). Auctions, as distinct from en primeur, have the advantages that the wine is ready to drink (or nearer being ready), less storage is required, and the asset is tangible, in bottle-not to mention that auction could, for some 2009 wines, prove a less expensive source than en primeur. Moreover, when auctions boast wine direct from the producer's cellar, this cuts out the middlemen and insures the safest provenance next to en primeur. In my next column, I will address some of the issues surrounding provenance for wines not purchased en primeur or ex-château.