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Fine Wine: An Investment That Could Go Sour

Is fine wine really an alternative asset class deserving a place in your client’s portfolio? Probably not. But your client might be besotted by the idea of investing in fine wine.

Where Did Your Client Get the Idea?
Many well-to-do Americans are fine wine fans. Wine is considered a sophisticated beverage having possible health benefits. It turns up in movies. For example, in Casino Royale, James Bond (played by Daniel Craig) shares a bottle of Chateau Angelus, a red Bordeaux wine from France, aboard a high-speed train. Your client reads magazines like Wine Spectator with its 2.8 million readers. Your client discovers articles about enthusiastic collectors paying record prices for coveted wines at auctions. There’s even an index tracking auction results. So now your client wants to invest in wine.

When Does Wine Make a Good Investment?
Only certain wines are auction-worthy and coveted by collectors. These are primarily the First Growths of Bordeaux (eight wines, including Lafite Rothschild, Mouton Rothschild, Margaux, Latour, Haut Brion, Cheval Blanc, Ausone and Petrus) and a few red Burgundies (such as Domaine de la Romanee Conti, or DRC). Outside of France, vintage ports (from Portugal), certain Italian wines and some California cabernets are considered investment-quality. Other wines may get good press or be touted, but serious interest clusters around a small group.

Fine wines are in short supply. Those French chateaux in Bordeaux are legally limited in the amount of wine they can produce from their vineyards. Typically, those famous French first-growth chateaux make about 25,000 cases (300,000 bottles) a year. Think about the number of collectors, French restaurants and wine fans worldwide. There’s not that much fine wine to go around.

Scarcity grows every time a bottle is opened or accidentally dropped. The more time that passes, the fewer bottles remain, and prices tend to increase.

Finally, consider vintages. Wine is an agricultural product subject to weather conditions. In Bordeaux, it’s illegal to irrigate the vines. Water either comes from rain or not at all. Although technology has greatly improved winemaking, some vintages are average, a few are poor and some are truly great.

When chateau, scarcity and vintage are combined, certain wines become the prizes chased by billionaires. In April 2013, a 12-bottle case of Chateau Lafite Rothschild 1982 sold at auction in California for $41,175, which translates into $3,431 per bottle. Back in 1986, the same wine cost about $84 per bottle. That’s an increase of 40 times the initial cost.
That’s why your client wants to invest in wine.

Why Wine Is Usually Not a Good Investment
People have been investing in wine for years. Typically a British fine wine drinker would buy two cases of a wine on release, wait about 10 years until the wine matured and then sell one case back to their wine merchant at twice the original price, effectively drinking the second case for free. If only life were that simple.

Here are the issues facing the would-be wine investor:

» Buying fine wine. It’s unlikely your local liquor store will stock the really high-end wines from sought-after vintages, although specialty shops in major cities like New York, Chicago and Los Angeles should have access to them. Getting fine wines on their initial offering will be difficult because wines in short supply likely go to long-term customers first. You will probably seek to buy your fine wine at a specialty auction.

» Selling wine. Alcohol is a regulated commodity in the United States. Adults may buy wine from licensed retailers or at auction; however, the auction route is usually the only avenue available to wine collectors seeking to sell bottles. Wine also sells on the Internet through dedicated websites. State laws add another level of complexity.

» Auction commissions. Assume the cost of buying at auction is about 20 percent plus applicable sales tax. If the seller’s commission is similar, the wine investor needs to see appreciation of about 40 percent before entering profitable territory.

» Provenance. The auction community takes the chain of ownership very seriously.
Although “buyer beware” is prevalent when you buy most items, it’s generally assumed the wine you buy from a reputable auction house is what they say it is. They will want to see receipts from where you bought the wine originally, such as a paid receipt from that auction house.

» Condition. Wine is a living thing. Fine wine tends to improve with age. Proper storage is part of the equation. Fine wine is generally stored at 55 degrees in a dark area free of vibration. The condition of the bottle, including fill level, foil, cork and label condition, provides clues to how the wine was stored. Like chips on an antique plate, poor storage knocks down the auction value.

» Physical storage. If you own wine for investment, it’s easier to not take delivery and let your wine merchant store it on your behalf or to rent a specialized wine storage unit set up for investors similar to you. Both incur storage costs. You are entrusting your wine to an intermediary who you hope remains in business. If they go broke, problems can develop.

» Liquidity. The fine wine market is pretty thin. Prices stay high when supplies are limited and there’s plenty of demand. If a few wine investors needed to liquidate large positions suddenly, it could move the market sharply downwards. For this reason, it’s likely private sales are arranged in other parts of the world to cash out collectors at prices below posted market values.

» No dividends. Holding wine as an investment is similar to buying a small-growth stock. You are expecting great things but, unlike large, established companies, neither your small-growth stock nor that fine wine is paying a dividend. Let’s assume you owned an established stock, such as a telecom company like Verizon, and it pays about a 4.25 percent dividend when it’s trading around $50 a share. Using the rule of 72, a 4.25 percent dividend reinvested and compounded doubles an investment in about 17 years. Wine pays no dividends.

Does Fine Wine Get Faked?
Absolutely! Almost any product from airplane parts to pharmaceuticals has been knocked off. China was in a love affair with fine wine, specifically red Bordeaux, until recently. It’s not surprising that Chinese collectors, wanting only the best, focused on Chateau Lafite Rothschild. It has been estimated that 70 percent of all the Chateau Lafite Rothschild in China is fake.

Older wines became hot in December 1985 when Christopher Forbes set a world record by paying about $157,000 for a bottle of 1787 Chateau Lafite believed to have been owned by Thomas Jefferson. Afterward, additional bottles turned up on the market, purchased by serious collectors seeking trophy wines. Unfortunately, many of these bottles turned out to be fraudulent. The book The Billionaire’s Vinegar by Benjamin Wallace chronicles the story.

With the demand for older Bordeaux and Burgundies heating up, more bottles appeared on the market. Many were legitimate, many were not. Owners of prestigious chateaux in France would stop auctions beforehand because a wine listed for sale was not actually produced that year or was not bottled in the size listed.
Auction houses found themselves in a difficult position. Suddenly collectors found they couldn’t sell their older wines through their favorite auction house despite the fact they bought them through the same auction house previously. Lawsuits developed. Auction houses were sued for selling counterfeit wines. Collectors were sued for consigning counterfeit wines from their collections. After the fact, it’s extremely difficult to prove you didn’t know something.

Is fine wine an alternative asset class? In my opinion, no. The market is thinly traded, transaction costs are considerable, and you must own the right wines produced in the right years, stored perfectly and possessing impeccable provenance to win. Does fine wine have value? Yes. Is it an investment similar to stocks and bonds? No.

 

is president of Perceptive Business Solutions in New Hope, PA. His book "Captivating the Wealthy Investor" is available on Amazon.com. He can be reached at [email protected].


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