Has supply had an effect on price of fine wine?
Supply and demand is one of the most basic models for determining prices in a free market and whilst there is a wealth of data regarding the price of fine wine, it is quite rare to look at the supply.
Supply is elastic. By this I mean that wines offered on the secondary market generally have the ability to outlast any drop in the market and therefore collectors have the choice of whether to accept a lower price, or wait and withhold the stock. There are obviously some factors that reduce the elasticity of supply, such as the circumstances of the owner of the wines and investors wishing to realise a profit even at a slightly lower margin than they would otherwise have done at the peak of the market.
It is well worth looking at price in conjunction with supply. After all, demand is arrived at through desire and the ability to pay, whilst supply is regulated by the willingness or need to sell. The price is ultimately decided at a point where the two meet.
Based upon this premise I have looked at three specific vintages, 1982, 1990 and 2000. I researched the number of bottles sold and the average price achieved for 750ml bottle in 2007, which is the year prior to the abolition of duty on alcohol in Hong Kong. The next two years in the study were 2010 and 2011 which represent the peak of the market and finally I have looked at 2012 as the lowest point of the market. I have multiplied the quantities of wines sold at auction for the first six months of this year as an estimate of the full year’s figures.
Average price at auction
There is much hype surrounding the affect the Chinese have had on the market and as you can see there has undoubtedly been a steep rise in the price of Château Lafite since 2007 and indeed the wine is still trading above those levels.
What is more interesting are the prices being achieved at auction by the rest of the first growths and Léoville-Las Cases. These wines are close to their 2007 level and as such we can say that they are trading at prices that collectors from traditional markets were happy to pay.
Clearly any recovery has almost certainly been delayed by the Châteaux misreading the market during this year’s Futures campaign, but one has to wonder where the bottom of the market is likely to be. Of course there is reduced demand from Asia & traditional markets, but surely the number of wine buyers must be close to the levels experienced prior to the Hong Kong boom.
Bottles sold at auction
Whilst the price for Château Lafite is clearly very healthy compared to the average price achieved in 2007, it is worth noting that the number of bottles sold at auction has not only dropped in the last year, but the numbers are also down on 2007 by 21%.
Percentage drop in terms of price and quantity sold
The percentage drop of bottles sold and price achieved is lowest in Léoville-Las Cases and greatest in Lafite. Obviously much of this can be attributed to the trading history and the room for adjustment.
I would caution against trying to infer too much from such a small sample, even if the amount of data is very large as there are too many influencing factors that will affect the outcome. It would be simple to say that the combined fall in supply and price are all within 10% of each other for all of the first growths except Château Lafite, but the reality is that this is probably no more than coincidence.
Instead I think this last graph reminds us that there are a number of collectors who are willing and indeed wanting to sell, but are waiting for an interesting price. Lafite has suffered the biggest drop in price and the largest contraction in supply. As a result one could assume that interest in this wine will need to be disproportionate to the other first growths, if it is to match them in terms of percentage growth.
Whilst many of the top end wines end up being bought by private or corporate speculators, there must at least be a belief that the market is underpinned by genuine consumers. Obviously a bubble arises when the proportion of speculators loses touch with the inherent value of the product and based upon the graphs above I think it would be fair to say that Château Lafite has experienced such a bubble. What is not so clear is whether the wider Bordeaux market has experienced a bursting bubble or if they are suffering a knock on effect from Lafite.
At the bottom of the market the aims of both the collector and speculator are remarkably similar. Both want to buy the wine at the lowest price possible, so that they can maximise their gain in terms of profit or as a bench mark for tying up cellar space and capital. Furthermore it has to be remembered that many collectors want to realise a portion of their cellar to help fund further purchases.
Regardless of the fact that they may find the term speculator distateful, that is exactly what these collectors are.
I think that Lafite may well rejoin the ranks of the first growths, but I think that some back vintages are starting to become attractive. I for one perk my head up when there is talk of Château Leoville-Las Cases selling for less than it did in 2007!
The following links will take you to prices, bottles sold and scores for the vintages that made up the above graphs:-
*Whilst we have converted large/small format bottles to their corresponding number of 750ml bottles to assess the number of bottles sold at auction, we have not done the same when assessing price. Large/small format bottles have been excluded due to the potential of a rarity premium. Prices are based on the global results of the leading fine wine auction houses.