Too much wine at too high a price
It has become a regular theme in MoneyWeek for us to argue that older Claret looks better value than younger Claret. We’ve long argued that wines released en primeur since 1995 have tended to be too expensive to justify the opportunity cost of holding them. We’ve shown that there is a huge differential in supply between mature and young Claret (the total stock of the 2000 vintage on offer in the UK exceeds the total stock of all wines on offer from the Eighties). Despite this, wines such as the Mouton Rothschild 1986 trade at similar prices to their younger 2000 siblings. In the wake of the relative failure of the recently completed 2004 campaign, such anomalies are becoming unsustainable.
Although prices were lower than 2003, the 2004 vintage was still largely priced too high to sell in big volumes. It’s true there were some successes, but prices were often high relative to the quality of the wines. To value wine, we use our ‘POP’ (price to points, or ‘power of Parker’) ratio method. This is a loose method of valuing wine by dividing the price by its Parker score to measure how much pleasure each pound generates. To give each point more relevance, we shorten the traditional 100-point system to 20 points, by subtracting 80 from the score (ie, 95 = 15). The reason for this is twofold. First, a wine with less than 80 points would not be considered investment grade in the secondary market. Second, the impact on price between 95 and 98 points is much greater than 3%, so shortening the score to 18 and 15 respectively (a 20% difference) goes someway towards reflecting this. An update of last month’s fair value analysis shows that on average the top wines were 11% overvalued, suggesting consumers were right to avoid the vintage.
Until now, the top Chateaux have been immune from the crisis affecting much of Bordeaux’s wine industry, but to us it seems that even the best wines are overpriced. Even before the difficult 2004 campaign, there were high levels of unsold stock for 1998, 1999, 2001 and 2002 at the Chateaux and in the supply chain. That the 2004 vintage was one of the largest crops on record hasn’t helped. Given that 2004 hasn’t sold well and that early reports suggest another big harvest in 2005, the wine lake looks set to swell. With five unsold vintages in the pipeline, prices of young Bourdeaux should not be on the up. To some extent, these factors have already affected Chateaux release prices. And indeed, most prices have declined since 2000, although our index of ‘Left Bank’ opening prices shows these record levels were matched again in 2003. But as our work on investing in en primeur has shown, the Chateaux have been the biggest beneficiary of the bull market in wine during the Nineties. Our index of the top 25 names was up five-fold between 1992 and 2004, for example. The Chateaux have benefited from an environment of easy money, but in a less accommodating environment and with plenty of stock about, prices will have to be lower still to sell future harvests and clear the backlog.
While the Chateaux on the left bank released their 2004s above the level of their 2002s, owners on the right bank released at the lowest prices since 1996. Worryingly for these proprietors, the wines still failed to attract much buying interest. With an average price of e30.70 per bottle, they’re still not good value against an average of just e18.50 on the left bank. But left bank or right bank, the problem remains the same: too much wine at too high a price. When micro-economic reality hits home, expect to see a wave of wine headed this way. Having some dry powder at this time will prove rewarding. The wines, after all, are delicious.
