The Lafite Puzzle by Andy Xie
China’s impact on the French fine wine investment market has been enormous. The French fine wine index (Liv-100 index) is up by roughly 37% from a year ago, 24% year-to-date, and its upward momentum remains strong.
Not many asset classes have hit new highs above their mid-2008 levels. In addition to fine French wine, gold and China’s residential property sector also reached new highs in 2009. But I can’t recall any others. And among the big three, French fine wines seem to have performed the best.
Chinese interest in fine wine investments
There is little doubt that Chinese buyers, and not Wall Street traders, are the real force behind this positive trajectory for French fine wine investment. Bordeaux wine producers are talking about the market in China and Chinese buyers seem to dominate the en premeur for the 2009 vintage available from next year.
Chinese mainland buyers are even increasingly pricing out buyers from Japan, Taiwan and Hong Kong in the quest for ‘first growth’ fine wines.
French wine is, of course, very different to a Louis Vuitton bag as when you drink a bottle of wine, it is gone for good. However, you can store it as an investment, but this is a complicated and costly process.
For most Chinese fine wine buyers, investment is actually a secondary consideration and drinking it now is now becoming more important. Yet this seems inconsistent with the dominant Chinese preference for accumulation. So the question is, why is there so much demand from Chinese investors?
The origin of the Chinese demand for fine wine
The business drinking culture has been changing in China, like elsewhere, liquor consumption (like baijiu) has been declining out of health concerns. So the need for alcohol in business entertainment has produced a uniquely Chinese phenomenon: a massive demand for Chateau Lafite fine wine because Lafite is one of the five first growth wines from Bordeaux.
Like Japan in the 1980s, an important factor seems to be the need to lubricate business relationships. This phenomenon plays out across the world during rapid economic development, from which China has benefited in recent decades. Successful economic development may require a little intoxication – when one sinks a lot of money into an under-developed economy, it takes courage.
A brief look at Lafite fine wine
France classified Bordeaux wines into first to fifth growth in 1855 for its World Expo. At that time four chateaux – Lafite, Latour, Haut Brion, and Margaux – were classified as first growth. In 1975 Mouton also qualified.
The chateaux in some of the Bordeaux areas like Pomerol and St. Emilion do not participate in this classification system and have started their own, with some of their wines becoming even more expensive than the five first growth wines. Nevertheless, the first growth label travels well, especially to a new fine wine investment market like China.
Among the first growth wines, Lafite has taken on a life of its own, rising much quicker than the fine wine market as a whole, and other first growth wines in particular. For example, 2000 vintage Lafite has appreciated by about 550% in pound sterling since 2005, compared to 180% for the market as a whole.
The most comparable wine to Lafite is Latour, and the price of its same vintage has risen roughly in line with the overall fine wine investment market. The price differentials between Lafite and other vintages of first growth wines are not as dramatic as for the 2000 vintage, but they are still large. Something special has happened to Lafite these past few years and that something is China.
The recent popularity of Lafite in China
Essentially, Lafite has become the unofficial Chinese wine for business entertainment. There are several theories as to why this is the case, the most popular being that the Chinese translation is easy to say and sounds nice as it rolls off the tongue. I am not sure that this is the best explanation but drinking at business events in China is not really sophisticated and it is more about getting tipsy quickly. Corporate guests are expected to be impressed by the price of the expensive fine wine, and not the taste of it.
Will there be a Lafite bubble?
Is the Lafite phenomenon a fine wine investment bubble? As Greenspan has said, one can never be sure if a bubble exists until it bursts. It is possible that Chinese drinkers appreciate something in Lafite that other drinkers never did. Hence, as the Chinese become richer and spend more on fine wines, Lafite benefits from this source of demand more than others. So the Lafite phenomenon may actually be a price revaluation, rather than a bubble.
Another effect of the Chinese preference with Lafite could be that other first growth wines will get the Lafite treatment over time. Chinese demand for Lafite is due to a lack of knowledge about the other alternatives, so when Chinese drinkers become more sophisticated, the demand for other first growth wines will probably increase. This could be a rising tide that will gradually lift other fine wines.
The second scenario is possible, and it has to do with the French system for wine production and the laws that make it impossible for the great wine chateaux in Bordeaux to increase production. Bordeaux wine producers have to go for quality and high price rather than quantity. Hence, when a new source of demand comes, the price always goes up.
The rise in counterfeit Lafite
Indeed, the Lafite price is now so high that it has led to a large counterfeit industry. Some analysts estimate that 70% of the Lafite consumed in China is fake, I have personally experienced this on a few occasions, although the people who served me fake Lafite were unaware of its questionable provenance because they paid the same high price fetched by the genuine article.
I could tell that the fake was good wine too, probably a good second growth poured into a Lafite bottle. Forgers have targeted the legendary 1982 vintage in particular. Many wealthy Chinese have bought large stocks of 1982 Lafite and the odds are most of it is fake. There are so few bottles of the real vintage left that it is highly unlikely to find several cases of the real thing.
What does this mean for non-Chinese investors?
When the Chinese economy matures in ten or 15 years and business entertainment declines in importance, Lafite prices may come under pressure. At this point demand will be mostly for self-enjoyment and hence, more price sensitive. Japan has already gone through this cycle.
A market is efficient when informed consumers make rational choices and an efficient market motivates producers to improve quality and control costs and this cycle leads to great brands that last.
The French wine market was like that, but I am afraid that Chinese demand is decreasing the market efficiency and may bring down great brands over time. When winemakers see prices resulting from propaganda, not quality, they will focus on marketing and decrease their investment in improving quality. It would be a tragedy if Chinese demand, by bringing easy money, brings down a French legacy that has lasted for five centuries.
Amphora is one of the leaders in London fine wine investment and we believe that choosing to invest in fine wines should be an enjoyable, as well as, a profitable experience. However, we advise our clients that as with any traded commodity, wine investment in the UK and across the world can go down as well as up in value.