Ella Lister looks at how fine wine has performed recently in comparison with the stock market, rounds up the auctions of this year’s first quarter, and presents the final part in her series on wine-exchange platforms

Wine has underperformed the stock market over the past year but proved a safer store of value than gold.

Inevitably, with another en primeur campaign upon us, the press has been focused on Bordeaux, as was I last issue.

However, it seems that the excitement around a Bordeaux resurgence earlier this year was a touch premature. Based largely on a 1.8 percent boost for the first growths in January, as per the Liv-ex Fine Wine 50 index, this buzz dissipated almost as quickly as it materialized. The next two months saw the index fall again, finishing the first quarter up just half a percentage point, and down more than 5 percent over 12 months.

BLITHE SPIRIT
If the gap seemed to be closing between top Bordeaux and the rest of the fine-wine universe, it began to widen again in February and March. The broader Liv-ex 1000 index has remained flat since June.

Interestingly, the trade latched on to the hope of a Bordeaux comeback, but all the signs are that they are less reliant on the region than in the past. In other words, it would be a bonus for them, but they have built up other revenue sources and are thus happier to take it or leave it where Bordeaux is concerned. This trend is borne out by trading activity on the B2B Liv-ex exchange, which in March saw the most trade by value for 24 months-this in a month that is historically quieter as merchants hold their breath in anticipation of the coming en primeur campaign.

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Healthy trade-not least for regions outside Bordeaux-implies more than anything else that Bordeaux, and en primeur in particular, simply hold less sway than in the past. The fine-wine market blithely carried on regardless, with Champagne representing a record 9.6 percent share of overall trade.

As other regions come out in force, Bordeaux's trade share has dropped steadily since December, now at 73 percent compared to an average of 79 percent during 2014.

It is likely this will pick up somewhat as en primeur releases draw buyers' attention to the region. Already in the first two weeks of April, Bordeaux's share has jumped back up to 82 percent. However, the long-term pattern looks set to continue: Bordeaux's share has fallen for four consecutive years, down from 94 percent in 2010.

Nonetheless, wine merchants are positive about the direction of fine-wine prices for the rest of this year. More than 90 percent of those surveyed by Liv-ex blithely predicted that its Fine Wine 100 index would rise by the end of 2015. The average prediction was an 8.7 percent gain from December 2014, to finish at 259, which would represent a significant turnaround (fig.3, left). Merchants were proved wrong last year when they forecast a 3.7 percent rise and instead faced a 7.3 percent drop. Q1 2015 AUCTION ROUND-UP Following 2014 full-year figures up slightly on 2013, the first quarter of 2015 was less promising .

Total revenues for the quarter were down 11 percent year on year but higher than during the same period in 2013.

This was largely due to decreased sales in Europe and Asia, down 32 percent and 18 percent respectively. Meanwhile, the US market remained strong, growing 4 percent compared to the first quarter of 2014, pushing it over the halfway mark in terms of global share, at 52 percent.

Zachys president Jeff Zacharia noted the resurgence of the US in the first quarter, saying, "Without a doubt, the fine-wine market is picking up, especially here in the United States, where we saw strong support from old and new buyers both in the room and on the Internet." The firm's managing director, Jamie Pollack, picked up this theme following Zachys' La Paulée de New York sale: "An astounding success, with competitive bidding on ultra-rare lots of Burgundy and Krug Champagne resulting in the largest US auction in nearly a decade." She concluded, "After a number of years of Hong Kong leading the charge in the fine-wine auction world, it seems like there is a renaissance in the New York wine auction scene."

Spectrum Wine Auctions president Jason Boland confirmed the preeminence of the North American market, saying, "The first quarter of the year showed continued growth and a resurgence in the domestic buyer." He added that US bidders "represented most of the top ten largest buyers in our sales over the first quarter."

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Despite shrinking sales in Europe, continental houses were upbeat. "We were very surprised how well the auction went," exclaimed Marc Fischer of Steinfels in Zurich. "Due to the free float of the Swiss franc mid-January and, as a consequence, the weaker euro, we made very cautious estimates and expected less interest from abroad," he says, continuing that "the contrary was the case."

MAINLAND MANEUVERS
In Hong Kong, wine auctions remain more glamorous affairs than in Europe (if not as hot as the US scene right now). At Acker Merrall & Condit's auction in Hong Kong on March 21, Grissini restaurant at the Grand Hyatt was more or less full, and the wine was flowing.

Nonetheless, any perceived diminution in Hong Kong's enthusiasm was headed off at the pass, with the auction simulcast to locations in Beijing and Shanghai, where there were approximately 40 and 60 guests respectively. With title changing hands in Hong Kong, this setup circumvents the usual hurdles of obtaining permission to hold live auctions in China (usually via a joint venture with a national house) and then getting the wine into the mainland with the heavy taxes and inspection procedures that entails. Acker has found a smart solution.

Christie's held a sale on the same day, a few minutes away at their offices in Central. The auction was slightly lower-key than Acker's, with canapés instead of full-blown lunch, and a mix of round tables, with rows of chairs toward the back, lending a more studious air. Christie's also has its eye on the mainland. As the only non-Chinese auction house to have its own permit, Christie's is in a strong position. The house recently announced it would hold the first mainland wine auction to include the duties, so that wines can be taken straight home.

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Sotheby's also did something a little different in Hong Kong, bringing to auction a single-owner collection of wine and watches in early April. "We're always cross-marketing behind the scenes," said Jamie Ritchie, CEO & president of Sotheby's for the Americas and Asia. He told me the crossover between wine and watch collectors is "greater in Asia than in the US," where wine collectors are more likely to be buyers of contemporary art. The next most popular category among American enophiles is the Impressionists. What that says-if anything-about American and Chinese wine collectors, I will leave you to decide. ONLINE WINE EXCHANGES - 3 In the past two issues, I examined the relatively new phenomenon of online fine-wine exchanges. In the third and final part of this mini-series, I will dig deeper into the challenges that these exchanges face. It is such a simple concept, it seems astonishing the service hasn't been in place for longer. However, anyone familiar with the centuries-old, arcane ways of the fine-wine trade won't be surprised it has taken this long. There are two main challenges behind the delay, and if anything will scupper the progress of the exchanges, it is these.

The first is the reluctance of the old guard to see any modernization that might interfere with the comfortable status quo. The second is provenance, or the non-fungibility of fine wine. One case is not interchangeable with another, as one gold bar or one barrel of oil might be, or indeed one hundred-dollar bill.

MERCHANT RESISTANCE
The first reason has not been entirely dispensed with: The merchants are, unsurprisingly, unnerved by the arrival of this new species of competition on the scene. These exchanges are particularly threatening since they offer significantly lower margins than traditional routes to sale, at around 3 percent on either sell or buy side. A merchant makes at least 10 percent on broking, whereas auction houses charge buyer's premiums of around 20 percent. Stephen Maunder, CEO of Cavex, sees wine exchanges like his as "leveling the playing field between private and corporate entities."

Nick Martin, founder and executive director of Wine Owners, insists that none of its users ("be they brokers, fund managers, enthusiasts") are worried that the platform is competing with them. Both Martin and Maunder place great emphasis on the fact that merchants do use their platforms, in spite of outward skepticism, bordering on contempt.

"They'll lift cheap stock," says Maunder, adding glibly, "Money always talks." Another appealing aspect for the trade, according to Maunder, is increased liquidity. "Not all merchants have the whole customer base," he points out, saying, "There'll certainly be times where we have a better bid or a cheaper price."

James Miles, co-founder and managing director of Liv-ex-a long-standing exchange platform open only to the trade -cautions, "I would seriously question the viability of the trade using these platforms long term, unless they want to trade at 3 percent margins and give their customers to a competitor."

PIGGIES IN THE MIDDLE
The arcane nature of the wine trade means that the norm is still for several players to take a cut before a case of wine reaches the end consumer. There are so many layers, and so little transparency, that tens if not hundreds of two- or three-man-band merchant spin-offs are able to survive in the UK alone, simply sourcing and broking wine on the secondary market. I spoke to one such startup recently, whose founding partner explained to me that they find wine people want-mainly from other, often obscure members of the wine trade across Europe. Each player needs to take their cut, and each step involves costly logistics, so it seems indisputable that this cannot be the best outcome for the end consumer.

If the consumer wants to sell wine back on to the secondary market, there are traditionally two options: selling at auction or back to the merchant. Consigning to auction takes months, incurs hefty commissions, and can have unpredictable results. Selling via a merchant or broker can also be an inefficient process. I spoke to one collector who wanted to sell some DRC so embarked on the following long-winded process. First, he sent a list of wines to several merchants, consolidated their replies, and compared pricing in an Excel spreadsheet. The wine was listed with one merchant, and once or twice he was contacted to see if he would accept a slightly lower price, which he refused. After a few months had passed, he contacted the merchant to inquire whether the wine had been sold. It had, he was told, one or two months previously, and yet he had not been informed or paid.

Doubtless the process is not always so clumsy, but it nonetheless leaves rather a lot to be desired in terms of transparency and efficiency, which is where the online platforms hope to make a difference. "I do see electronic trading as a natural progression," says Miles. However, he does not subscribe to the idea that this obviates the need for the traditional merchant or broker. "I see our members going more and more online, as broking-type services," he says, believing that merchants will want to retain ownership rather than use a third-party service. Miles backs up his customers, exclaiming, "The idea that middlemen play no role in any market is just oversimplifying things!"

PERSONAL TOUCH
It remains to be seen if all these players now being able to come together in one marketplace will result in the many links of the fine-wine chain being radically reduced. In that eventuality, the platforms are potentially game-changing.

The real disruption would be if producers started to sell directly on these platforms. Miles thinks this is unlikely, since it would mean "a whole new world of costs for them."

Somewhat ironically, the advent of these electronic and largely automated exchanges does not necessarily mean greater efficiency. "We do a lot of broking off-screen," discloses Maunder, who often has a "reasonable idea of who might want" certain stock. That way, stock that is listed has already been brought to certain buyers' attention and "gets bids straightaway." As we saw in Part I of this series, Bordeaux Index's LiveTrade platform is often treated more as a catalog by the merchant's customers, who then call up to carry out the trade.

MARGIN MANIA
James Miles pertinently observes that traditionally high commissions in the wine trade are because "the inherent costs of moving wine around are high," and "not because merchants are ripping people off." He questions whether the low commissions offered by the likes of Cavex and WineBourse are sustainable especially given that the volumes in fine-wine trading will never be on a level with other models in the financial or commodities world (simply because of the limited amount of fine wine produced). Martin is more sanguine, saying, "We've done a back-of-theenvelope calculation and estimate that there's between £4 billion and £6 billion worth of private-client stockholding in the UK." He believes the volume is there, but it's a case of tapping into it. "We need to get people to think more proactively about their wine collections, rather than letting it rot, frankly," he declares.

The new platforms are certainly using unprecedentedly low margins to entice users to their platforms. "Any volume discounts we will make on a bespoke basis," says WineBourse co-founder and managing director Matthew Starr, but the published rate is as low as 1 percent. Some exchanges are reportedly waiving seller's commission altogether in order to gain new custom and encourage a flow of stock.

If the exchanges do continue to grow and thrive, it seems inevitable that the trade will gradually accept them as a fact of life and find they are better off embracing them than ignoring them. However, their survival should not be taken for granted, according to Miles -mirroring the view of many of his merchant clients. When asked if they will last, he mused, "Possibly not in their current form," adding, with reference to previous failures such as Uvine, "I don't see what's changed."

LESSONS IN LIQUIDITY
Miles is not convinced these players can create the necessary liquidity: "No matter how low the commission, if they haven't got the liquidity the prices will still be crap." Miles knows firsthand how difficult it is to create liquidity, even with larger merchants as clients as opposed to private collectors.

Fourteen years after launching Liv-ex, Miles told me that transactions account for only half the company's income, alongside data and logistics, implying that it would not survive on the exchange revenues alone.

Starr is more bullish, saying, "We see a market that has potential for a significant amount of growth," and he believes that additional liquidity will help this growth. "Liquidity begets more liquidity," he puts it, neatly. Maunder concurs, saying, "I know people who have wine that's become illiquid," reasoning that "if you can't sell, you can't buy." He sees wine exchanges as a remedy and is confident that "the noise in our sector of the market will become increasingly loud." While it has not yet recouped the original investment, Cavex is "turning profit on a monthly basis," Maunder discloses. He was pleased to see more competition in the shape of Wine Owners and WineBourse, saying, "It shows serious people have looked at it and think there's an opportunity." He even believes there is "probably room for more" similar platforms.

PROBLEMATIC PROVENANCE
Reluctance of the old guard aside, there remains one key barrier that is likely to slow the domination of the new platforms. That is the issue of provenance as it relates to a non-fungible product such as fine wine, and the costly logistics that entail. The clear disadvantage for independent exchanges such as Wine Owners, Cavex, and WineBourse is their not being linked to any one warehouse. Unlike BBX (Berrys' Broking Exchange), these exchanges cannot claim that the majority of wine listed has been sitting in their own climate-controlled warehouse since release. Moreover, they cannot trade on the reputation and trust that Berry Bros & Rudd (BBR) has built up over centuries.

These newcomers, in opening up the secondary market for consumer-toconsumer sales, are necessarily removed from the notion of being able to rely upon the name of the business selling the wine. Why should a private buyer on a consumer-to-consumer exchange trust that a private (and anonymous) seller has properly looked after the wine listed? Of course, the same questions should theoretically arise when a merchant brokers a deal between two private customers, but often the question goes unasked because the buyer automatically trusts the merchant or, indeed, the wine has never left that merchant's storage facility.

Cavex attempts to address such questions by accepting only in-bond stock. "When we devised the model, we did it to strip out anything that might cause issues in the future," explains Maunder. WineBourse made a similar decision, accepting only in-bond wine from UK warehouses. "Focusing on the UK market is our first line of defence," explains Starr, whose research led him to believe that the storage "quality and structure is better than we've seen anywhere else." For the moment, any wine sold on the platform has to be transferred to a custodial account at London City Bond before the trade can be settled. Selling only in-bond wine by no means eliminates all provenance questions, since it assumes a cool chain for all prior transportation between bonds, and that all bonds themselves have proper climate conditions.

Arguably, this is no less of a concern with wine sold by a merchant, except that a customer can get to know and trust a particular merchant for its consistency and efforts to sell only pristine stock. WineBourse takes a narrow approach, not accepting any wines older than 1990, due to "very large provenance risks." Starr explains, "We really focus on the most pristine and liquid part of the market." Also with liquidity in mind, Bordeaux Index's two-way trading platform Live Trade is more limited still, featuring only a handful of very "tradeable" Bordeaux wines, where there is enough transaction history for Bordeaux Index to take a confident position.

Cavex does not have regional restrictions, though a more liquid wine may be more likely to find a buyer. For example, Bordeaux enjoys a higher bidto- offer ratio than most other regions on the exchange. The region represents 55 percent of offers by volume and a whopping 84 percent of bids. Conversely, Burgundy makes up 22 percent of offers by volume and only 5 percent of bids, implying that Bordeaux sells through more efficiently than other regions.

PASSPORTS, PHOTOS, AND PANACEAS
As far as provenance is concerned, Cavex relies on the seller choosing one of three different "contracts" under which to sell wine on the platform: A for pristine stock, B for minor issues such as lightly scuffed labels, and C for anything more serious-for example, a non-original carton. The latter must always come with a photograph, and if wine under any contract is found to be otherwise than stated, it is the seller's obligation to provide a satisfactory replacement. A photo must also be provided for any wine older than 2000, and the exchange will not accept any wine older than 1960.

Wine Owners differs in allowing duty-paid stock, opening the platform to a wider pool of potential stock, but risking running the gauntlet as a seller could transfer wine from under their stairs to a bonded warehouse for the purpose of listing it. Martin is intent on underlining that the buyers always have the right, post-trade, pre-settlement, to run an inspection report of their own and turn down the wine (though this has never actually happened).

"The starting assumption is that wine is not fungible," insists Martin, who has introduced a concept called a Wine Passport, in order to try to get over the hurdle of not having a source of proven stock. It merely allows people to fill in provenance information about a wine so that this can be collated and added to, and a picture built up over time. The tool is thus no immediate panacea but, rather, a "medium- to long-term goal," accepts Martin. And it is an admirable goal, but as always where provenance is concerned, unless all the players in the market are willing to put the effort in, the provenance chain is broken.

Maintaining the chain requires up-front effort and cost-be it record keeping or refrigerated transportation -which may end up benefiting a future owner of the wine rather than the person expending the effort. Unsurprising then-if dismaying-that Wine Owners' users are not really using the Wine Passport. A more immediate solution can come in the form of photography, which the seller may opt to pay for prior to listing the wine; otherwise the buyer can have photographs taken prior to settling, at a cost of £7.

Like Wine Owners, BBX has a broad selection of wine from many and varied regions and price points. Listings are 50 percent Bordeaux and 25 percent Burgundy, the remainder being Rhône, Champagne, and so on. The majority of wine on BBX has been stored in BBR's climate-controlled warehouses since it was shipped over from the producer. However, clients are able to store wine there that wasn't purchased from BBR and, subsequently, to list it on BBX.

Any incoming stock is subject to "strict controls," with bottles removed from cases, inspected, and photographed outside and in. Matthew Tipping, fine-wine sales manager at BBR, assures me that this is a rigorous process with customers informed of any problems and the case returned if necessary, with a receiving fee of £7.50 per case to cover this process.

BBX, with £15 million of revenues, is proof that the online wine-exchange model can be extended successfully to consumers. The independents not linked to a merchant simply need to overcome the challenges explored above. If they can win the acceptance of the old guard, the trust of their users, and the liquidity battle, they might just be on to something.

If they can win the acceptance of the old guard, the trust of their users, and the liquidity battle, they might just be on to something.

For the complete version of Liquid Assets, please refer to Issue 48 of the print magazine.