The Wine Trade

2012 saw the fully fledged re-emergence of the lucrative fine wine trade. At the forefront of development of the fine wine trade stands a company which has been trading wine since 1698. Berry Bros & Rudd have their original store located in London, and their expansion can be found in Hong Kong. They do offer high quality wine for purchase and consumption, but where they have created the greatest profit is the interest in fine wine as a long term investment.

The majority of fine wines available for investment come at a variety of prices; however they recommend a starting price of approximately £10,000. The attractiveness of the fine wine trade can be found in two areas, the first is boasting rights to having the finest collection of vintage and fine wine, as well as creating a relatively safe long term investment. The best wines only rise in price over time, and this is where the investment potential lies.

What really began to create a booming trade is the possibility of trading wines between investors; this started trade in order to gain new bottles by trading a currently owned bottle as well as an additional sum of money, in order to have a new more lucrative wine in the investment portfolio.

The credentials of this type of investment are still questionable especially if one is hoping to create a proper investment out of fine wine, the two deciding factors in the price of wine is the availability and critic opinion.

For an example a selected wine is Ch. Latour 1993 – Pauillac

The wine was made to a limited number of 200 cases which equates to 1,200 bottles. This can be analysed as the creation of perfectly inelastic supply, as the supply is at a fixed quantity. This particular vintage will never be produced again, and this is what helps to determine the value of wine.

The demand for the wine is decided by two factors the most important being the “Robert Parker Rating”, this rating will be the realisation of the demand for the bottle. The rating is done by Robert Parker the most internationally acclaimed wine critic. A bottle with a 90+ rating (out of 100 and 50 being deemed an “unacceptable wine”) means that there will be an instant increase in demand. Then what makes fine wine a lucrative investment is the factor of time, as demand increases over time as the value increases. This is shown in the graph below:

There are exceptions to the model below, some wines after passing a certain age are considered to lose their finesse and flavouring so they begin to slowly depreciate in value. Some wines are also subject to hype which tends to cause an upward shift in demand.

A growing part of the trade is “En primeur” which is the acquisition of the wine before it has been bottled. This is becoming popular with those unable to buy bottles at peak prices, as prices are extremely low in the “En primeur” stage as there is the possibility that the wine ends up with bad quality, or fails to reach the status of a “fine” wine.

There is also the stage of initial valuation, before the wine is released for rating. This establishes what the producer believes the base price of the wine should be. Certain regions have experienced higher initial valuations for their wines, due to the difficulty of production and the result of extremely high quality wine. The wine trade is beginning to take on considerable form, and soon may rival the extremely well developed whisky trade. What some investors may find most disappointing is that the majority of the time they never taste the fine wines they trade, as opening the bottle will completely eradicate any value of the bottle.

The main aspect of the wine trade is that there is no longer a physical trade of the wine, the trade is done through bonded warehouses as this allows the wine to be exemopt from VAT and other taxes that different countries might levy. The exsistence of private fine wine collectors is rare, and this is what differentiates a fine wine investor and collector.

Berry Bros & Rudd have two royal warrants, and their biggest competitors Lay & Wheeler (wine merchants since 1854) are beginning to stock many single bottles with a valuation above £15,000. But what has increased the interest in wine as an investment commodity is the creation of London International Vintners Exchange (liv-ex), they created they Fine Wine 100 index which tracks the price of the most sought after wines in the world. This is a booming market which has already outperformed the FTSE 100 during various months throughout 2011 and 2012. The creation of the Fine Wine Index has led to a lot of foreign investment into European wines, especially from China. The reason behind this is the fact that fine wine has long held a status of opulence in Europe, and wine was never a big part of Asian culture. This has led to both the increased consumption of fine wine, and increased investment as highlighted by the liv-ex annual report of 2011.

However, times have changed and it is important to look at how the index has evolutionised. Between 2000 and 2010 the index traditionally offered double returns, this is similar to highly rated and investment grade bonds. It can be noted that in late 2010 the index began to shoot up and this was driven by new entrance in the market from Asia as previously mentioned. This created a hype around the fine wine index which brought to public attention in 2011 and 2012, however it can be noted that the index began to fade out by mid 2012 to levels that the index was in early 2010 before it became a trend. This can be attributed to the commodity charecteristic of wine.

I would argue that the characteristic of wine as a commoditiy is a hybrid between the investment chareteristics of percious metals and stones, and art. Precious stones and metals are always considered scarce by the market and always highly valued by society, but unlike wine they benefit from the fact that they do not expire. But this is where the artistic attribute comes in which keeps the value of wine for a given period of time, as each vintage of wine in unique, it is impossible to find two vintages alike whether it be fine or simple wine. This is why wine as a commodity for investment began to fade, as art can be maintained but wine after a certain amount of years simply expires and its value is wiped off.

Fine Wine has displayed itself at times as a worthwhile commodity to invest in, however the question remains what will become of the market once the traditional fine wine is consumed or begins to degrade,  and what will replace it?

Lay & Wheeler:

http://www.laywheeler.com/

Berry Bros & Rudd:

http://www.bbr.com/

Live Wine Stock:

http://www.liv-ex.com/

Updated: 22/01/13

The Decline of The All American Guitar

Fender Musical Instruments Corporation has been subject to a massive decline in sales and profitability over the past four years. The company established itself as a leader in the guitar market in 1954 with the release of the iconic Stratocaster. However, the guitar is a discretionary item and it does not have the same popularity as it did when rock music was at its height in the 1960s, 70s, & 80s.

The company has struggled its way through the recent recession, with Weston Presidio the private investment firm that owns half the stake of the company has been looking for an exit due to the lack of profitability. The firm wanted the company to go public in March but investors rejected the idea with the concern of worse growth and a dramatic devaluation of the company.

The lack of growth and decline in profitability can be explained by the drop in demand for electric guitars in general. Sales of all music instruments have dropped approximately 13% from the peak in 2005, showing the decline of consumers spending their disposable income on instruments. Even though there has been a considerable drop in demand, Fender has been limited in its ability to change prices due to the cost of labour in North America as well the necessity of keeping the brand image. There is also the issue of how guitars are produced; all the guitars that Fender produces in North America are reliant on workers. There is no single stage in the manufacturing process that is all machinery; this means that changing supply is difficult without the dismissal staff. This has led to a surplus of fender guitars in both the United States and the United Kingdom. There is a limited change in supply and price but a dramatic change in the demand.

In the graph above the situation which has occurred is depicted, with the large decrease in demand with a small change in price and no change in supply. Below is a possible scenario of surplus as Fender may not be able to change price to suit the demand for the product and struggle to adapt supply therefore the possibility of not reaching equilibrium.

Guitar retailers have also heavily suffered from this; stores such as Sam Ash, Guitar Centre, & Dawsons (U.K.) have all reported a decline in sales of fender guitars and have begun taking a loss from current stock. Guitar Centre which accounts for approximately 1/6 of Fender sales has severely declined in profitability with Moody’s issuing junk status (Caa2) on its debt. Retailers have had to generalise their stores now offering a variety of other instruments such as synthesizers where there is a greater demand.

A major factor that has affected Fenders growth and profitability is the prospering of Asian instrument manufacturers such as Yamaha. Yamaha has begun to take a dominant share in the market, with cheap high quality guitars. The company does not suffer from high costs of labour or a brand image to maintain. So Fender has suffered due to the cross demand for cheaper and high quality alternatives such as Yamaha. The price of a Standard American Stratocaster ranges £1,200-£1,400 whereas the Yamaha quality equivalent cost ranges £600-£800. During a period where less income is disposable there is a considerable contrast in prices.

The guitar manufacturer faces a greater problem as its consumers have a nostalgic demand for vintage Fenders, this leads to the resale of already purchased guitars and the presence of stores committed to only selling vintage guitars. Fender has attempted to exploit the demand for their vintage guitars by producing re-issues, but to no success. Fender has begun moving its production to Asia but have so far been unable to compete with companies such as Yamaha.