It’s Good to Be The King

(Originally published January 2009)

The big snooze this time around is Hanes is officially collecting his beer tasting notes on their own separate website page. Beer consumption has outstripped wine consumption over the past month or so by a considerable margin. This should normalize back in favor of wine in a few months or so. But, alas, there is a lot of beer out there and Hanes’s mania for complete knowledge compels him where few others dare to tread. Read all about it here.

Back to the world of wine. Year end top ten lists suck ass and only the lamest of the lame produce them or consume them. Got it? Harumph. So, none of that nonsense here. Instead, a quick prospective look at wine sales in 2009.

Any wine retailer can tell you that sales are down over recent years and that people are “trading down” price wise with what is purchased. With the current economic climate, not a surprise. But that’s the surface story. The Wine Speculator just published an article that wine auctions declined by $25 million in 2008, with a very sharp decline during the fourth quarter. This appears to underscore that the flood of money into wine investments is drying up (investments versus wine purchased to consume). Maybe yes, maybe no.

Hanes suspects a slightly different scenario is playing out. Rich people didn’t get rich by being dumb. Well, at least half of them didn’t. Fine wine is part of a lifestyle and that lifestyle is not out of style. Hanes is fond of saying that there were plenty of millionaires during the Great Depression and that holds true for today. No lack of Richie Richs with money to burn today and tomorrow. Don’t shed tears for the downtrodden of Washington Mutual or Lehman Brothers just yet. Hanes thinks what is happening now is what has happened during any severe, prolonged economic downturn in America’s past. The truly rich are waiting and waiting. They know the product is out there, wine is a tangible thing, it doesn’t disappear like paper investments. The High Net Worth crowd knows they can outwait the rest of the rubes and are doing so.

Producers have to sell through to raise capital to keep their wineries afloat. A lot of this depends on how much leverage the company has taken on versus how much true business equity they possess. Just recently if has come to light that the famed Château Latour of Bordeaux is for sale. Big whoop. The wine still sells for a bazillion times what it is worth (unless you believe worth is what the market will bear rather than intrinsic, you capitalist pig you). Most rich people can figure out that producers needing cash will at some point feel the pressure to sell at a deep discount to get any capital liquidity into their business. This, in turn, holds true for the wholesalers as well as the retailers. It’s simply a matter of patience.

In the stock market you can’t “predict the bottom” because the system is too dynamic and fast paced. In wine things change, but at a much more real time pace. Hence, the buyer with cash reserves can watch and wait. Which is what Hanes thinks is happening on a large scale among potential high end wine buyers. They want to be sure the “three tier system” of producer, wholesaler and retailer is feeling maximum pain before buying. And, really, why not?

Anecdotally speaking, producers on the whole are feeling a really big pinch. Too much similar quality product and competition, no cash to spend on things like marketing to differentiate product offering. And more new product (mostly cheaper) coming on line all the time. For what Hanes has seen and gathered, wholesalers are having more and more “closeout” and “inventory reduction” sales than ever. Sorry for them, a lot of this wine is crap that won’t move at virtually any price and is just dead in the water. When this happens they have to start putting the higher end “cherries” on discount just to generate sales and liquidity. And this is the moment we’ve all been waiting for, the truly desirable wines offered for 50 cents on the dollar.

The first immediate rub here is the retailing part of the chain. Most reputable higher end wine stores are already sitting on a lot of stock which isn’t moving. The question quickly becomes one of the store’s ability to “protect” its profit margins. If a wholesaler is offering you some pretty nice cherries at great prices can you even afford to buy them at the discounted price? You can go in lots of directions. You can blow out the existing stock at a very thin profit margin to raise the cash to buy the new wines being offered. If a retailer can successfully move this existing stock (a big if), then the question becomes do you price the newly purchased wines at your regular markup or at a lower markup? Do you price off of the discounted price you actually paid or off of the normal “frontline” price the wine went for before the wholesaler discounted it? The retailer wants to maximize their profit but maybe this isn’t quite up to them. The newly purchased wines have to sell and sell quickly.

For it is the end customer holding the cards right now. What will entice them to buy and inject liquidity into the whole three tier system? Again, it’s the best price on the best product. Which means lots of pain for those in the wine trade. Product scarcity isn’t a true motivator right now, there’s lots of great wines out there on the shelves (not hidden in the back room) and for any kind of palate or wine preference. The wines are sitting right there. And sitting there. And sitting there. Without the sense of urgency that comes from buyer competition, it’s more a question of who will blink first, the retailer or the buyer? And Hanes says it is going to be the retailer. If one is a buyer of high end Bordeaux, Burgundy, Cali Cabernet, Barolo, etc. they should be smiling like the cat who ate the canary. It’s not today and maybe not tomorrow but 2009 may turn out to be one of the best years in recent memory for high end wine buying. From the buyer’s perspective. Any buyer with cash to burn is gonna get courted harder than Angelina Jolie at a biker’s bar. The buyer is calling all the shots. And when enough of them sense the bottom has been reached and start to stock up for their cellars or as pure investment plays, only then will the wine industry as a whole be able to relax. The days of normalcy are coming but not before quite a few more wholesalers and retailers go out of business first. 20% off? 25% off? Sneers! It’s going to take more than that to get the money off the sidelines.

Same thing with the auction world. Don’t cry for them, Argentina. Most large prestigious auction sales are investments and who buys high when you believe the price will soon drop precipitously? The auction houses will all land on their feet because they don’t take the risk, it’s not like they buy the wine from the consignors. All they have to deal with are angry consignors who didn’t get the price they wanted. Well, tough titties, the other auction houses couldn't get you the desired price either so you’re stuck. Time will pass, new consignors will come along or the disgruntled ones get greedy again and we’re back off to the races. It’s really a Ponzi scheme like Madoff was running but the auction houses will only feel the pain through lowered commission fees. Big deal, fire some grunts and rehire others later.

The only ones who will get hurt at the consumer end are the investors who couldn’t see the crash coming and paid $20K for a case that sells for $10K today. Well, boo-fooking-hoo. Sell it to the smart rich guy now or hold it until the world is once more flooded with dumb rich guys like you. It won’t be that long.