Five years ago, top Bordeaux was the only wine to be collecting and serving in new markets around the world. Now, the whirlwind romance has turned sour. JEANNIE CHO LEE asks whether it can ever be rekindled, or is it the end of a ‘golden era’.
RISE & FALL
On a cold winter’s evening six months ago, I welcomed a group of wine merchants and opinion leaders for dinner in Shanghai. There was no specific agenda; it was a casual gathering of friends to swap stories, gossip and drink wine. I asked everyone to bring a bottle, and was astonished to find that among 16 people, not one brought a Bordeaux.
I hosted a similar dinner for a dozen folk this spring, and again there was not a claret to be seen. This time, I was not surprised. Out of the twice-weekly, sometimes nightly, private wine dinners I attend, there have been only three Bordeaux-themed events over the past 12 months. The disenchantment with Bordeaux in China and Hong Kong runs deep. It is now well into its fourth year. From seasoned collectors to wine newbies, the sentiment is the same – Bordeaux wines are not something to flaunt or share. In Beijing it is even worse, with once much-coveted wines such as Lafite and Margaux now associated with excess and luxury, and avoided publicly. Instead, they gather dust in restaurant cellars and merchants’ warehouses.
As recently as 2009, China represented a mere eight percent of Bordeaux exports. It was only the region’s fourth-biggest export market by volume and didn’t even rank among the top five by value. Within two years, China, together with Hong Kong, had become Bordeaux’s most important market by value and volume, importing about five million cases a year. By 2012, top châteaux were confiding to me that they calculated between a third and half of their production was destined for China. Lafite was the darling of the business elite; all the top châteaux including Pétrus, Mouton and Margaux were available only on allocation, and the young 2009 futures were trading for more than US$1,000 per bottle.
Prices have come down by 40 to 60 percent from this peak, and demand has waned. To understand why, one needs to be familiar with guanxi, the social currency that lubricates business deals and forges relationships in China. In the past 15 years, generously pouring top Bordeaux wines became part of the business fabric, a way of ‘giving face’ and showing respect to important clients and officials. All of this changed in 2012. President Xi Jinping’s crackdown on corruption, and the subsequent enforcement of frugal spending, had a direct impact on the demand for high-end Bordeaux.
John Watkins Jr, former CEO of importer ASC Fine Wines, says as much as 50 percent of all premium wine in China was related to government spending. “The austerity measures meant that 80 or 90 percent or even more of these purchases were eliminated.”
Gifting of fine wine has fallen off dramatically, says Marcus Ford, general manager of Pudao Wines, the retail arm of Summergate, one of China’s largest importers. “We have seen internal company memos from large multinationals which preclude their senior executives from using premium wines [defined as being more than US$25 per bottle] for entertainment or gift purposes.” Ford estimates that in the case of first-growth Bordeaux, this accounts for a fall in demand of up to 70 percent. “There is certainly a huge amount of these wines still in warehouses in China. What we are seeing is an increasing sophistication from wine buyers, with a greater emphasis on value.”
The impact on the industry has been dramatic. Many importers have been forced to close or are being bought by larger companies with deeper pockets. Summergate is one such example; in September 2014, it was taken over by Australian retail giant Woolworths.
Ford says about 1,000 out of the 6,000 or so importers in China exited the market in 2014. Those that remain are being forced to adjust their strategy, relying less on executives in the gifting and banqueting world, and more on true wine lovers. Many see this as a positive shift since merchants must now cater to genuine consumers and collectors. “The market will continue to expand, driven by nearly 40 million real wine consumers – people who buy imported wine and drink it,” says Watkins.
It is not only the wine trade in China that is trying to weather the storm, but hotels, restaurants and all food-and-beverage outlets selling high-end wine. In the past several years, many restaurants reliant on government and private banqueting have shut their doors, shrinking the wholesale business. The official government banqueting budget has been slashed to about RMB 100 (US$16) per person, depending on the province. Ordering any expensive wine, spirit or food such as abalone or sea cucumber is frowned upon. The most popular items on the wine list these days, according to Kerry Qin, sommelier of the China Grill at the Park Hyatt Beijing, are moderately priced non-Bordeaux wines – he cites Cordero di Montezemolo Langhe Arneis DOC 2012 and Bodegas Maurodos San Román 2009, priced at US$135 and US$147, respectively. Bordeaux is moving much more slowly than in the past, with fourth and fifth growths being most in demand.
China’s crackdown on extravagant gift-giving is not the only factor behind Bordeaux’s woes, however. The increasing power of the châteaux and their need to maintain an upwardly moving pricing strategy is frustrating some traders. Eric Desgouttes, general manager of Hong Kong and China importer Kerry Wines’ Fine Wine Division, rolls his eyes with the exasperated look of a parent dealing with a spoiled child. “The last four vintages [2010 to 2013] have been a great challenge to sell en primeur because prices were too high,” he says. “In most cases you can buy many of the same wines cheaper than when they were released. If en primeur prices remain out of line, my advice to our company and our customers will be not to buy futures.”
Watkins adds: “The high-growth ‘bubble’ period for imported premium wines, fueled by government-funded purchases, is completely over. We do not foresee it returning.” Watkins believes interest in en primeur revolves more around the quality and buzz surrounding the vintage, and that none of the vintages since 2010 have been considered special. Overall, though, he is cautiously optimistic about the immediate future. “There was certainly oversupply of Bordeaux in China from 2011 to mid-2014. But based on the customs clearance statistics, imports from France began to increase in the second half of 2014. Bordeaux still represents 50 percent of our sales.” And China, it shouldn’t be forgotten, remains the number one destination for Bordeaux red wines.
Supply of young Bordeaux remains plentiful in Asia, Europe and the United States. “I think there is pressure for some importers to reduce large [high value] stockholdings,” says Jeremy Stockman, general manager of Hong Kong and China retailer Watson’s Wine. “This is particularly true for some of the newer importers.” For consumers, then, this is the time to consider restocking cellars as importers slash prices and sacrifice margins to generate cash flow.
Forty years ago, negociants wielded as much power as the châteaux, soaking up their inventory to give producers a steady income year after year despite vintage variation. Now, the power lies among the top 70 or so châteaux, which are reluctant to drop prices on en primeur wines even if consumers and trade alike bemoan rising prices and stockpiles of inventory. For the châteaux, lowering prices risks devaluing their young, unsold wines and can adversely affect the prices of older vintages. Clearing stock in this way has a cascading effect – and going down in price is always much easier than climbing back up the ladder.
The quality of recent vintages has not helped. While 2014 is an improvement over 2011, 2012 and 2013, the market is still awash with young, unsold claret. But reducing prices on a vintage such as 2014 can send the signal that the wine is inferior to previously higher-priced vintages. The dilemma remains: reduce prices to meet over-supply, lower demand and market conditions, or keep prices high to maintain brand and market position? Every château must make this decision and, as yet, there is no agreement on which is the ‘right’ approach. Prices are all over the place, some staying flat while the majority has increased from 2013.
One key factor can sway how a château decides to set prices, however: high scores from critics such as Robert Parker. In 2011, while doling out high ratings to numerous châteaux for the 2010 vintage, Parker warned about exorbitant prices. The market took no heed and the 2010s were priced higher than the similarly well- received 2009 vintage. The price was too high for consumers and the trade to swallow; there are still plenty of 2010s on the market. Anyone who paid peak prices for them in 2011 will be kicking themself for tying up their money with little hope of any return.
This year, though, marks a new era for the way in which ratings influence prices, since Parker announced his retirement from evaluating Bordeaux En Primeur [see our Grape Debate feature on Parker’s waning influence, page 112]. With his ratings no longer a key factor, market forces and economic sentiment will have a stronger influence in determining prices.
For importers and retailers like Watson’s Wine’s Stockman, the main concern is diminishing demand and sales of Bordeaux’s top wines, the part of its portfolio that previously offered both volume and good margins. One London fine-wine merchant, who wanted to remain anonymous, confided: “The top châteaux are just too rich. And being rich makes you both complacent and arrogant. They don’t need to sell, so they don’t worry if their prices are out of line and no one will buy. Consumers are feeling this as much as we are, and they are not interested. Who can blame them? There are many other fine wine regions in the world and consumers are turning more towards Burgundy, Rhône, and top Italian and Spanish wines.”
At its peak, China and Hong Kong made up nearly half of many top châteaux’s young wine sales. Sales of older wines grew too, with Hong Kong’s auction sales in 2010 and 2011 surpassing New York and seeing the region, for a few years at least, crowned as the fine-wine auction capital of the world. While that crown has since slipped, Hong Kong remains an important auction market, just behind New York with London a distant third.
Now, though, the Bordelais are eyeing the American market, with the weak euro and the rebounding of the US economy adding fuel to their hopes. Jeff Zacharia of Zachys, which has retail and auction businesses in New York and Hong Kong, is optimistic about US consumer demand, pointing out that during the 40 years of the firm’s existence, he has seen “a number of swings in the business”. “While we are certainly off the peaks of 2011 and 2012, as long as we find the right price there is still a lot of demand for the great wines of Bordeaux,” he says. “We had a good year for Bordeaux in 2014 and 2015 is starting out even stronger.”
While retail looks hopeful, Bordeaux needs to overcome hurdles in restaurants, where American sommeliers’ constant search for the new and different – particularly in the trendsetting urban centers of the east and west coasts – sees the region left out in the cold. Fashionable restaurants, such as Slanted Door in San Francisco, hardly have any Bordeaux on their lists, a trend reflected in numerous restaurants on both coasts, where the lists are curated by savvy young sommeliers.
In the Year of the Goat, February 2015 to February 2016, Bordeaux producers will rely more on traditional markets such as the US, United Kingdom, Belgium and Germany, to pull the region out of its slump, both in terms of sales and image. The changing economic environments in Europe and the US are helping to shift attention to the West. The austerity measures in China are likely to continue for the next several years and the prevailing Asian sentiment is that there is no reason to buy Bordeaux as futures. The question is, for how long will Bordeaux as a whole be shunned by a public wary of being judged for excessive material outlay – an unwanted image that has become ingrained in people’s minds.
Patricio de la Fuente Saez, managing director of Hong Kong-based distributor Links Concept, is hopeful that the mood will change. “The austerity measures are a correction in the market and Bordeaux will always be popular in China; I have no doubt about that whatsoever,” he says. “Bordeaux sales in Hong Kong have always been very strong and will continue to be strong; the richer people get, the more they will continue drinking Bordeaux because it is perceived to be the best that money can buy.”
THE FUTURE OF FUTURES
Ultimately, the centuries-old Bordeaux distribution system will take more than a few missteps to crumble. Collectors in the US have always been finicky buyers, purchasing the ‘best’ vintages while passing on the mediocre ones. When there is a great vintage, another 2009 or 2010, I for one foresee the Americans coming back strong. However, as Zacharia of Zachys says, the en primeur system is “weakened and fragile”, and it will take the combination of a great vintage and a serious price correction for the Americans to return to the futures market en masse.
What we have gone through in the past four years is a necessary price correction, a return to sanity and a welcome relief from spiraling prices. There is no doubt in my mind that despite the challenging times, Bordeaux will survive and win back the hearts of wine lovers, thereby allowing the trade to make enough margin to continue running a business. But how quickly can this be achieved?
In China, the steady consumption growth rate of about 10 percent per annum for imported wines is healthy and reflects real wine interest rather than speculators driven to invest by a hyped-up trade. Moderately priced Bordeaux at US$30 or below offer both value and quality. Sadly though, the pricing and behavior of a handful of top châteaux continue to affect the perception of the entire region, meaning buyers are looking elsewhere, notably to Burgundy, Rhône, Spain and Italy.
Ultimately, nearly all fine-wine businesses rely to some extent on Bordeaux, be it via futures or older vintages. There are too many stakeholders both in the production and trading of Bordeaux wine for the region not to rebound within five years. The most fragile part at present is whether the en primeur system will survive if the Bordelais get the pricing wrong with the 2014 vintage. The responsibility lies with the Bordeaux elite – châteaux such as Lafite, Margaux, Haut-Brion, Mouton, Cheval Blanc, Ausone and Pétrus – to get the prices right.
Like China itself, Bordeaux’s image and prices are dictated from the top, and these decisions have a strong trickle down effect. If prices are reduced sufficiently, these elite players will win back the hearts of wine lovers and appease the trade; otherwise, they will disappoint everyone once again and create a serious fracture in the system. Bordeaux’s place on the tables of New York’s Upper East Side and the private clubs of Shanghai is not as assured as some châteaux might believe.