I recently wrote a review of a subject which was highly visible in
Europe, but almost completely absent here. I'm talking about investing
in wine; not the infrastructure or retailing, but wine as a commodity.
In Europe, the US and Asia wine is very definitely an 'asset' and
regularly traded in huge quantities.
Wine trading has a long history, originating in Bordeaux, probably, where wine 'futures' saw traders gamble on long term profits by buying early - usually before the wine was even bottled (en primeur) then selling on to buyers at greatly increased prices on the back of increased demand. The system has worked for more than 150 years and profits have enticed many more to buy and sell wine as a commodity much like other collectibles. Now, specialist investment houses, insurance companies and retirement funds use wine as an asset to be traded. And it is very big business.
It is estimated that trading in wine generates some R21billion a year. Markets have been quick to realise the substantial amounts that wine has realised. Hong Kong even abolished sales taxes and duties on wine in order to establish itself as a wine trading hub. It worked; in the first three wine sales of 2011 more than R173 million was traded and it now trades more wine than London and New York combined.
The profits realised by the buying and selling of wine are staggering. When I wrote a year ago the world was deep into its worst recession for eighty years, most commodities were giving ever smaller returns to investors. Interest rates for savers in the UK and most of Europe were at 0.5% p.a., most market indicators were negative. Yet in that 12 month period, fine wine had achieved higher returns than shares, crude oil or gold. Prices for the top five Bordeaux châteaux had risen by 57% between 2000 and 2010; gold had risen by 35% over the same period and oil by 20%.
A generally accepted figure in the investment industry for wine is that it needs to achieve around 15% p.a. to make it a worthwhile investment (after costs of storage, duties, sales fees etc).
Consider, then, Chateaux Lafite 2004 vintage. On release (en primeur) it sold at R800 a bottle (all prices converted) - a 33% increase on the 2002 price. Consumers might have got it at R1 000 from dealers/negociants. Last year I wrote that Lafite from Berry Bros and Rudd in London would cost you R6 000. Today it is on their list at R10 440. That is an increase of 940% over 8 years, or 117% a year. So, gold might get you a 20% return in a year; Lafite 117%!
Another example: Châteaux Latour 2000 was R1 750 a bottle on release, R2 730 a year later and R4 450 in 2002. That was an increase of 150% in three years. Expensive? Well, today it is on BBR's list for R18 000 a bottle; that is an increase of 920%, or 77% a year. How about Latour's 2008 vintage? In December 2009 its market price was R32 400, in December 2010 it was R168 000; an incredible 418% increase in one year! (According to wineinvestment.org).
One last example to make you salivate. In 2006, Châteaux Lafite 1982 sold for R55 000 a case. Last year, in the middle of the recession, a case sold at auction for R430 000, an increase of R75 000 every year, or eight times its weight in silver.
Yes, there are costs - and rules - involved. You need to buy direct to realise the best returns, or at least en primeur through a reputable dealer such as 'Winecellar', 'The Reciprocal Wine Trading Co', or 'The International Wine Company' and you need to stick to cases of 'blue chip' wines such as Bordeaux first growths, top Burgundy, Rhone and a few from Italy or Spain. You need excellent storage, to be prepared for shipping and transport costs, duties and VAT and then if you are going to resell you need a license to do so and a means of getting your wine to market.
And there is the rub. Presently, there is no market for trading wines in SA. No general auction houses - the most common means elsewhere - deal in specialist wine sales and there are few other opportunities to trade wine here.
Significantly, the only specialist wine auction here open to the public, the Cape Winemakers Guild Auction reports growing interest from private buyers, who now outnumber trade buyers. You could trade 'online' with an overseas auction house, but don't forget your wine has to be kept somewhere (WineBid.com charges around R70 per case per month storage) and that the auction house will take around 15% commission from buyers and 20% from sellers as well as 1.5% insurance.
You could invest with a company using wine as an investment asset, and there are lots, but you don't usually get to decide which wines are invested in, when to buy and sell or even to see the wines. Such companies boast significant returns for investors (Albany Portfolio Management report that their customers' portfolios increased by an average 58% in 2010) but costs can be as high as 40% and many take subscription fees at the outset and performance fees of around 20% from any profits.
There are many variables, and costs to consider, not least of which is the risk factor involved with any investment. It does seem, though, that wine has outperformed most other investment commodities, sometimes by a considerable margin.
'Liv-ex', the specialist wine trading analysts track the market carefully and report that returns for the top 100 wines have fallen by 18% this year, but over five years have seen 101% growth, so investment should be for the long term. In a recession, 20% per annum seems a healthy return. Liv-ex's April report reflects continued negative growth, however, so the caveat emptor still seems to be 'hold, hold, hold', and don't risk what you can't afford.
Whether South Africa could sustain a wine trading platform is a subject for a later article, and when all is said and done, there is a key question to ask, and that is 'do you see wine as an asset, to be traded for profit, or to be drunk and enjoyed?' As Eben Sadie told me, "I don't want people to buy my wine to sell, I want them to drink it".