Bordeaux 2009 – Curiouser and Curiouser

“Prices are going to go up. How far? I have no idea. The market will decide.” Corinne Mentzelopoulos, Chateau Margaux

A number of wine producers in New World have dipped their toes into trying to sell their wines through an en primeur-type system, setting prices and obtaining the advantage of certainty of sales and early cash flows.

The Bordeaux 2009 En Primeur campaign, conducted in the Spring of 2010, has been characterised by record price levels as buyers have grabbed almost everything they could get their hands on. 

Against this we have reports that US demand overall was poor, Asian buying was up on the past but much more muted than had previously been forecast, while high prices scared off many traditional European buyers.  The campaign was conducted, after all, against a back drop of continuing global economic weakness.

Moreover, everywhere there were reports of small allocations. 

Then again, according to the authoritative vintage account published each year by Bill Blatch of Vintex, except for pockets of hail affected vineyards (which missed most of the key areas) crop yields were quite high.  The health and balance of the vines in the ideal weather conditions will have meant a reduced need for green harvesting and other forms of yield control.  The level of production of a quality oriented producer certainly need not have been unduly reduced – high production and high quality have occurred in tandem many times before, with the famous 1982 vintage a case in point.

Something in this doesn’t quite seem to add up.  If price setting is a factor of the market, of the law of supply and demand, the balance on the apparent evidence does not seem as one-sided as the pricing would seem to suggest.  Moreover, the question arises whether the supply was as it seemed, or whether this was a case of a “manufactured” shortage?  Was Adam Smith’s “invisible hand” tied behind the market’s back?

This goes to the heart of the way that en primeur marketing works if, as in Bordeaux, it is used as a clearing mechanism.  The way that the Bordeaux system works, with the network of courtiers and negoces as middlemen with selling conducted by importers/distributors and retailers in different countries, clearly implies a mechanism far more sophisticated than the typical direct-style selling campaign referred to as en primeur selling by some New World producers.  Such producers can ill-afford to indulge in the degree of information asymmetry mastered by the Chateaux of Bordeaux.

For this is the secret of the high prices achieved by the often large premier crus of Bordeaux.  Information asymmetry is the market equivalent of a poker bluff. The difference is that the chateau has five cards, but the other players have only been dealt two or three and must decide whether they will ever get another chance to buy at a comparable price. 

In a poor or merely average vintage the answer is often likely to be yes, so that producers are forced to reduce prices and therefore rely heavily on the way wines are reviewed to create some degree of countervailing pressure.

In a potentially classic year (disregarding the sceptics who may point out that every year is a potential classic these days), the chateaux owners have honed and perfected the methods that ensure no one will ever know how much they are actually selling.  By combining small opening tranches that will inevitably be sold out, the lack of information how many tranches may be released or what actual proportion of production will be withheld, then tightly managed allocations so that even reduced demand will be difficult to satisfy.  In the middle are the importers trying to judge the demand of their end customers and well aware that if they do not participate they may experience reduced allocations in other years.  Played carefully, prices may rise even if demand falls – the antithesis of a normal market.

If this is the case, will prices actually be sustained in the post-delivery market?

One can only assume that the gamble taken by the producers is that the wine they withhold from sale during en primeur will be saleable at good prices in 2 years time; that thanks to any unfilled demand and in the absence of other price signals, prices would be unlikely to fall materially.  In the meantime they may be able to open new markets or to sell in regions that struggle with the concept of paying and waiting for delivery later.

The sceptics might also add that there is no saying samples provided to the wine media at the start of the campaign will necessarily bear any relation to the finished wines two years later.  While technically correct, and not ignoring the fact that there are certainly wines every year that turn out markedly differently, it does appear that for the most part there is some degree of consistency between samples and finished wines.

In the case of smaller but highly renowned producers, the likes of some of the leading crus of the Right Bank, for example, there is little doubt that almost all production that is going to market will be sold through the en primeur system.  If loyal regular buyers want it, they have little choice but to buy through the system.

A flawed system?  There is no shortage of commentators who will say so, including many in the Bordeaux trade.  There are regular calls for an overhaul.

For now, however, it is hard to see how the major beneficiaries of the system would want to see a change.  The cards are loaded in their favour, with the 2009 vintage a spectacular example of how lucrative this can be.

An opportunity for producers elsewhere to get in on the act?  I do not think so.

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