En Primeur is dead, long live En Primeur

In the following blog – an extension of an article in this month’s Cellar Watch Market Report  we discuss the benefits of En Primeur, why recent campaigns have failed and what needs to change to ensure that the system is a success.

Commentators have long predicted the death of En Primeur. Many will argue that this year it finally died. Liv-ex members – who account for almost all the trade in En Primeur worldwide – report that sales are so small as to be irrelevant. One prominent merchant has sold less than 1% of the En Primeur than it sold in the 2009 vintage. To many, this is confirmation that the system doesn’t work, but like the end of any monarch’s reign, this is a temporary passing. The dynasty lives on. Long live En Primeur.

As Neal Martin points out in his excellent piece on 2013 and the En Primeur system on erobertparker.com: “The media have been united in its proclamations that primeur doesn’t work. They are wrong. Primeur does work – but only at the right price.” In our view the problem is less structural than cyclical. Bordeaux has always been prone to fantastic booms and busts and the last 10 years have been no exception.

As Michael Broadbent noted in his foreword to Mahesh Kumar’s book Wine Investment for Portfolio Diversification (2005), the bull market for red Bordeaux in the 1960s saw opening prices rise dramatically  from 11,000 francs per tonneau for the brilliant Lafite 1959 to 70,000 francs per tonneau for the very poor 1969. Prices finally peaked in a frenzy of buying in 1972 (a terrible vintage). The resulting bust, made worse by the oil crisis and a string of weak vintages and scandal, didn’t fully recover until the early 1980s. As Simon Berry – of the eponymous merchant Berry Bros & Rudd – noted in a recent blog, there are parallels to be drawn between the 1970s and now.

There are certainly many in Bordeaux (and elsewhere) that believe the chateaux have all the pricing power. There is no choice but to accept an allocation each year through gritted teeth – whatever the price – for fear of missing out next time. Many owners have convinced themselves of this too, have widely abused the allocation system and now think of their wines as luxury brands. As Martin points out, many newly minted chateaux have built “gilded palaces” to prove it. These sentiments appear to us to be little more than hubris after one of the great fine wine bull markets of all time. As it proved in the 70s, pricing power is transitory. So it will prove this time.

As the chart below shows, it has been a sellers’ market for En Primeur since the 2005 vintage. With the exception of 2008, when the global economy was close to collapse, (as measured two years after the release) collectors have lost money buying En Primeur. Moreover, trade margins – represented in the chart as the difference between the UK release price and the ex negociant price – have all but disappeared. 

En Primeur_price comparisons

Many chateaux owners grandly declare that they want to keep their prices high to protect the “brand”. This is disingenuous when two years later the same wines are being heavily discounted in the market.

Unlike buying a Louis Vuitton hand bag or a pair of Gucci loafers, En Primeur is largely a financial transaction. Fine Bordeaux, unlike a luxury good, does not need to be purchased and consumed today. There are few Cru Classe wines that are either ready to drink or unavailable in the market 10 years after release. En Primeur provides cheap financing for the chateaux, allowing them to sell the wine before it is available for delivery and finance the next vintage. In return the merchant and collector are offered an advantageous price as a reward for buying in advance.

As a result, “brand value” in fine wine is built not just on making great wines, but also on ensuring that everybody in the chain, from negociant to drinker, benefits financially from the system. Contrary to conventional wisdom (particularly amongst chateaux owners), keeping prices high does not protect the brand: it destroys it. Unlike Louis Vuitton or Gucci (which have total control), wine producers have limited command of quality, supply, distribution or price. Despite the considerable resources many chateaux now have at their disposal, these are mostly dictated by Mother Nature and the market.

As chateaux owners prepare to pack up and head to Cap Ferret for their summer holidays, it will be dawning on them that the world has changed. As one negociant declared during the recent vintage “we can’t be the chateaux’ bank forever”. To understand what he means, look no further than the published accounts for the leading Bordeaux negociants. After many Chinese buyers cancelled their orders of the very expensive 2010 vintage, the 2011, 2012 and now 2013 have failed to sell through. As a result, Bordeaux is sitting on huge unsold stocks. Many negociants are now showing bigger stocks on their balance sheets than sales. This is plainly bad business and unsustainable, particularly when many wines are now worth less than what they paid the chateaux for them. The chart below indicates how margins from holding unsold Crus Classe for the last three physical vintages have all but disappeared for the negoce.

En Primeur_Last trade vs ex chateau

Nevertheless, despite all this bad news, En Primeur is still a genius system. While it has its flaws – what system doesn’t? – there is no marketing and distribution machine quite like it. It is the envy of the wine world. The idea that a Bordeaux chateau can sell its crop, with one phone call at eye-watering prices, two years before it is bottled (and many decades before it is ready to drink in some cases), is beyond the wildest dreams of wine growers everywhere else.

We certainly believe that En Primeur could and will be improved, as technology and greater transparency bring more scrutiny to bear on pricing, tasting samples and counter-party risk (to identify three of the system’s biggest weaknesses). The system would certainly benefit from disbanding the widely abused allocation system. Anything that made pricing more commercial and less political would be a good thing. En Primeur, however, will survive, because it is the best system there is and over the long-term it works for all stakeholders. Moreover, as boom turns to bust, and financing becomes scarcer, En Primeur seems likely to become more (not less) important as a source of finance for Bordeaux. For buyers with cash to spare, it may be – as it was in the mid to late 70s – a golden age.

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