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BORDEAUX—THERE JUST AINT NOTHIN ELSE LIKE IT

I spent most of last week with Florent Dumeau, with whom we have been working on an exciting new project in Spain. Florent does great work for us and is one of the world’s most gifted winemakers. Florent was trained the the University of Bordeaux and has worked at a number of the Grand Crus. The week reminded me that I have wanted to do some posting about the Bordeaux market for a number of months and as that market goes from the outrageous to the sublime to the perverse, it’s just too juicy to ignore.

The Bordeaux market has been in a severe (and worsening) depression for at least four years. The situation is due to a complex combination of things: Reduced demand (market doesn’t like most of their products and French consumption is declining), overvaluation of assets (returns cannot service absurdly high real estate prices), arbitrary price controls (it is illegal to sell below certain set prices), subsidies (have eroded competitiveness) and over regulation (limiting the creativity of the producers).Needless to say, the result is absolute turmoil.

Other wine markets are or have been in turmoil over the last few years, but the free market tends to bring order fairly quickly to those markets. California suffered badly during the early 2000’s. Their response was: Two-buck Chuck, ripping out vines that were unproductive or unneeded, development of more exports and lots of consolidation (Constellation made many of their key moves during this time). The market now is in good shape.

The Australians are now in the same position as the Californian’s were. They are doing pretty much the same thing: Focusing on exports, cutting prices. There have been some major changes in ownership of assets.

Fundamentally, the problem with the wine market is that when it goes into oversupply in a given area, e.g., there is more wine than buyers, wine becomes worth close to nothing. Fast. Once wine becomes worth nothing, the value of all production related assets in that area become really depressed. Including vineyards, tanks, pumps, wineries, etc. The cycles tend to be long enough that people panic. On a trip to Australia earlier this year, I visited a $35 million winery has been sold for about $5 million.

The cycles are hard, but there is lots of money made during the good years and one of the challenges of the long term players is to average out their returns and make sure that they have the cash to weather the inevitable downturns.

Bordeaux is different however. Firstly, it is important to understand how huge it is. There are about 80% as many grapes planted in this little corner of France as all of California There are 12,000 wineries, 160,000 ha of grapes. It is steeped in history, which makes for great marketing stories, but also weighs producers down under old conventions and 19th century thinking.

There is a sea of wine in Bordeaux that is unsold. However, the price has now been regulated by Institut National des Appellations d’Origine (a growers organization), such that AOC Bordeaux cannot be sold below E1,000 per tonneau (about E1.10/litre). This price is self imposed by the growers in charge. So no matter how desperate any seller is, they cannot sell at a market price, if it is lower that the set price.

This effectively prohibits the Bordeaux producers from doing what the Californians and Australians do, that is, when wine is in surplus, lowest, higheset volume and cash generating part of the market. Instead, growers have opted to distil wine. There can never be a Bordeaux “Two Buck Chuck”. The Australians and South Americans now own the low end of the market in the UK, despite the fact that there are additional EU taxes levied on non-EU imports.

The arrogance of price controls is that the growers believe that consumers actually need their wine and will, therefore pay an above market price for the privilege. It doesn’t help things.

Bordeaux is partially in crisis because the more affordable wines have been really poor for a long, long time. But they once owned the premium wine market along with their Burgundian counterparts. However, by ignoring changing tastes, they failed to see that much better wines that were being made by all sorts of talented people in the New World and other parts of France. Today, they are suffering from generations of complacency.

In the midst of all this desperation where the ‘have nots’ are marching ever closer to precipice, there exists a small group of ‘haves’ that are reaping great rewards.

It is an amazing dichotomy and a stark contrast. The have-nots are marching in the streets and the haves are racing to the country club in their Ferraris. In some cases, only a few hectares separate them.

More about this later.

Elsewhere.

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