December 19, 2011

How to Tap Into Fermenting Burgundy Prices

The prices of some top labels have risen as much as 114% in past 12 months or so, industry reports say.

Wine prices are heading up again—only this time it’s Burgundy wines and not Bordeaux capturing all the headlines as recent Burgundy auctions have been setting records.According to a recent report from WineSpectator, “Move Over Bordeaux: Burgundy Steals the Show at Asia Auctions," prices for the top Burgundy wines are rocketing higher.

“As a category, the 102 Burgundy listings tracked by the Wine Spectator Auction Index rose 16.42 percent from the third quarter of 2010 to the third quarter of 2011. Many wines fared even better," said the report. "Domaine de la Romanée-Conti (DRC) Romanée-Conti 1996 was up 114% to average $13,310 per bottle, G. Roumier Bonnes Mares 1985 was up 90% to average $2,681 per bottle and Joseph Drouhin Montrachet Marquis de Laguiche 1996 was up 41%, averaging $462 per bottle.”

Several factors are driving the price increases.

Karl H.K. Lung, AIWS is principal lecturer at the Hong Kong Wine Academy in Kowloon, Hong Kong. In an e-mail response, he reports seeing increased interested in Burgundy wines among his students and industry contacts. Similar to buying trends in Bordeaux in recent years, though, he says that buyers’ interest is concentrated at the top end of the market.

High prices for the top Bordeaux is a factor, explains Lung. “Many seasoned wine drinkers considered the price of fine Bordeaux wines, especially those from the top chateaus, way too expensive, and are buying wines from other wine regions which now offer much better value compared to those from Bordeaux. Meanwhile, I am not surprised that many Bordeaux wine buyers were (in the market) for speculation and after the strong rise in the past few years, are now taking profits, and we already see some softening in Bordeaux.”

Lung believes another factor is less familiarity with Burgundy wines among new buyers. “I think probably another reason is that everyone is now familiar with the top wines in Bordeaux, so it lacks the feel of ‘something special’”, he writes. “Given that Burgundy is the next well known fine wine region after Bordeaux, it is not surprise that people will switch to Burgundy. However, this rotation buying is not limited to Burgundy. Top Italian wines (Barolo, Brunello, etc.) are also seeing stronger demand.”

The price increases weren’t completely unexpected. Jack Hibberd, research manager at the Liv-ex, a fine wine exchange in London, says there were indications in the past year or so that Burgundy prices were set to move higher. “There was a lot of chatter in the trade about DRC and other top Burgundies,” he explained in a phone interview.

The price move is large a supply-and-demand effect, however. Hibberd notes that most top Burgundy wines are produced in very small quantities relative to top Bordeaux. Consequently, a change in demand from buyers can lead quickly to substantial price moves.

Jamie Ritchie, CEO and President for Americas and Asia of Sotheby's Wine in New York, also points to Burgundy wines’ limited supply. The production for Bordeaux chateaus ranges from roughly 7,000 to 40,000 cases per year while in Burgundy the range is approximately 500 to 2,000 cases.

The Romanée-Conti vineyard, for example, consists of 4.4 acres and produces about 450 cases per year. The small supply of top Burgundy wines should sustain the wines’ prices, Ritchie believes.

“With Burgundy I don’t see the prices really coming back down much,” he says. “The top wines are in such limited production and there is a growth in demand for them. I think the prices will continue to be pretty strong.”

If your clients are interested in buying Burgundy wines potential investments, Ritchie suggests they stick with the top tier. “I would be recommending buying the producers you like, the best producers and the best vintages and securing that wine as soon as possible,” he explains.

“Because I think over the long term Burgundy just gets more and more expensive and it gets scarcer and scarcer as the worldwide distribution adjusts to the new markets. Burgundy has got a myriad of different growers and producers who make Burgundy. So, I think from an investment potential, you’re only talking really about the very top level,” Ritchie shares.

As with any asset class, though, diversification makes sense. “I wouldn’t recommend someone build a Burgundy-only portfolio,” Hibberd cautions. “There are inherent liquidity problems in terms of selling the wines as the market isn’t fully liquid. Due to the limited production of a lot of these wines, they’re hard to source and finding exactly what you want is difficult. So, although there’s no reason you can’t include Burgundy in a portfolio, it would make sense that the portfolio has a broader base, i.e., has a majority of Bordeaux. The key to success of Burgundy is really access, access to things like DRC, etc.”

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