Can we expect a boom in Indian fine wine imports?

 

A recent FT article discussed wine in India, for which Ditton Wine Traders provided a lot of the research.  The interpretation of the potential for significant developments for fine wine in India left us and other trade actors, British or India, who contributed their views and analysis a little underwhelmed. We feel important aspects we’re not covered , so we’ve decided to elaborate further here. 

India is developing into an open market economy, though important remnants of the autarkic policies that followed independence remain.  For example, fine wine is constrained by a penal import tariff regime of 150%. 

This could change as the EU and India are in the final stages of negotiating a Free Trade Agreement (FTA), negotiations for which have started in 2007.  

Findings show there is arguably a 50-50 chance of a tariff reduction to be announced at the EU-India Annual Summit, February 10^th.  It may appear to hang in the balance, but Indian officials indicate they are prepared to make concessions within the framework of the EU. It is the single most significant piece of news ever in relation to India and wine, and the only development that could potentially lead to India fulfilling its potential as a mass importer of wine. 

 

Will the EU-India FTA be signed?

India has FTA’s with some 60 countries, yet that on the table with the EU is both its most ambitious and difficult.  The two sides have met some 14 times since initiating talks in 2007 and, it appears, are working towards a significant statement in time for the February summit. 

“The potential (for wine) is tremendous, the ingredients are all there; wine is a cultural pursuit, an intellectual pursuit, India is an old culture, an old culture can better assimilate the traditions of another, it can be imbibed by the Indian population.  The Middle class has grown up on a surfeit of education, it can reach out to,” affirms Sanjay Menon, owner of pioneering fine wine importers, Sansula.

Annual trade between the EU and India stands at $75 billion (£48 billion) (2009/2010), making the EU India’s most important trading partner.  Beyond the trade-off between tariff reduction for EU exports and protection of Indian industries, notably automobiles and India’s fledgling domestic wine market, there are real issues behind the 5-year impasse.  India wants access to EU markets through free movement of its professional émigres, highly sensitive for much of the EU. The EU meanwhile demands stronger implementation of Intellectual Property Protection for its transnational pharmaceutical industry.

Yet, the FTA is seen by both parties as too big to fall, negotiations have already reached the highest political levels before diplomats have had a chance to thrash out the details, a diplomatic blunder placing pressure to agree.  Still, the fact that they are negotiating shows there are no guarantees.

 

What would agreement mean for fine wine markets?

There is no hard data on fine wine in India, as the market is beginning and under the radar (see below for upcoming blog pieces on Indian position towards fine wine and wine investment).  However, analysis by Peter Wilkinson, Director of International Affairs for the Scotch Whisky Association, is instructive.

“If we look at spirits, member-states would not sign-up on the basis of less than a 50% reduction”, observes Wilkinson.  India’s 150,000 9l case market (firm figures remain elusive) in imported wine (compare to China’s 2.5 million case market in Bordeaux alone) is growing at 12% per annum while spirits is around 15%.  “A 50% reduction of the current rate might increase growth to about 20%-25% per annum”, he concludes.

However, continues Wilkinson, “the EU may try to secure a fair bit of front-loading as part of the deal, looking for a significant chunk of the total concession to be given over with immediate effect, with the remainder brought in within an agreed timeframe.” 

Significantly, for fine wines, both the EU and India have indicated progress in the area of staggered tariffs for different quality-price levels of wine.  Leaving the current fiscal position intact for value entry-point wines, while progressively reducing duty on higher-priced ones, the lowest tariff strata would, therefore, be applied to fine wines.  This compromise would protect the development of the nascent and successful domestic Indian Wine industry, yet open the way for fine wines to reach India’s burgeoning middle class – the world’s largest.

 

How would the market respond?

Would we see an explosion in fine wine markets like what occurred with the 2008 decision of the Hong Kong government to reduce tariffs from 50% to 0% overnight?  

Not in ways comparable to Hong Kong. Implementation, to be in line with peer-countries in the EU, Brazil, Russia or China to eventually 20%-25%, would likely be at stages over a period of 5 – 10 years.  In the immediate-term however, the FTA could reduce the special tariff of 150% to 80%-90% for wines and spirits (the maximum standard excise duty within the bounds of the World Trade Organisation).

Yet, the Hong Kong precedent is in some ways comparable, by way of human behaviour.  “The effect of halving the tariff on a society accustomed to 150% would be palpable.  The market would react in ways not previously seen”, asserts Rajiv Singhal, Director Fine Publishing India and Ambassador to Champagne trade body, CIVC.

India will not be in a position to support falling prices or take up slack from over-supplied markets.  Nevertheless, agreement would radically alter the entire outlook and dynamise the wine trade globally.  The moment would be firmly behind India realising its potential as a major actor in the world of wine by entering the global market place.  It would be fascinating and mark the continued expansion of fine wine markets to a new and more global clientele.

We will find out more in just a few weeks.

In upcoming blog pieces we examine the nascent Indian fine wine market and, significantly, culture around fine and rare wines and wine investment, in particular in comparison to China.  Drawing on the experiences of peers and other trade actors – both Indian and British, pioneering a culture of wine in India.

Watch this space and feel free to share views. Follow us on Twitter @DittonWineTrade and join the debate online at #IndiaEUFTA

There has been an avalanche of reports in the media lately, social media included, about falling demand for Bordeaux wine. Often suggesting that China has fallen out of love with Bordeaux, that it would now be all about Burgundy and that Bordeaux wine prices have but one way to go: South.

It seems to be fashionable these days to engage in a bit of “Bordeaux Bashing”. “Bordeaux would be out of fashion. Grossly overpriced. The bubble has burst. Nobody wants overpriced Bordeaux. Burgundy, even Rhone and Italy is what people want. Sell sell sell”.

 

We think those reports are suggestive, onesided, written with headlines in mind and lagging behind the curve. We think it’s sensationalistic reporting, as rightfully pointed out by @DuvaultBlochet. Primarily based on two disappointing auction results and the recent price drops, these reports suggest Bordeaux is dead, done and dusted.

Yes, top Bordeaux wine has had a tough 6 months. Yes, China for the moment is saturated with younger Bordeaux. Yes, prices have dropped. And yes, for a lot of people Bordeaux Chateaux are guilty of over-asking, which has indeed led to a quite widespread feeling of being fed up with Bordeaux Chateaux owners and their wine.

 

But does that warrant all these “Bordeaux bashing” headlines and Doom & Gloom stories? We think not and here’s why:

 

• There have been many times in the history of Bordeaux where customers and the trade felt prices to be out of control. Each time, these people have been proven wrong, although it might have taken a few years.
• It’s old news. Prices have already corrected. In fact, the momentum is swinging back  – the smart money is moving back in, just when all the Doom & Gloom stories get picked up by the crowd.
• These reports fail to mention that Bordeaux prices have increased so much over the last 10 years, that even after the current price drop, return on investment is still 300%.
• Reports would suggest that Bordeaux is no longer fashionable and that it’s all about Burgundy now. True, Bordeaux is not as “hot” as it was, but Burgundy is never going to be a viable alternative. In the few cases where it has a similar pedigree, there just isn’t enough of it and customers will soon get frustrated with the lack of supply.
• Most importantly, Bordeaux produces amazing wines, more than ever actually. Recent vintages have received unprecedented critical acclaim.
• And whether you like it or not, there will always be plenty consumers that want to buy the most famous, most decorated, most historic wines that are being produced by Bordeaux.

 

At the moment, we’re very close to reaching a price level where we were in July 2008 (!!) Before all the madness began. I can tell you from our own experience as fine wine merchants that Bordeaux 1^st Growths at £250 a bottle are being snapped up by our customers. There are plenty consumers that view the recent price drops as a healthy correction, not a bubble burst, and they love the opportunity to buy their most coveted wine at current prices.

Bordeaux is not going to go away, whether you like it or not. Therefore, instead of believing tendentious and lagging behind the curve “news”, you could also view this as a great moment to buy Bordeaux. Hopefully to drink it and enjoy it and if not, for wine investment.

The Financial Times have today published an article on market developments for Fine Wine in India. Ditton Wine Traders, and James Swann in particular, have done extensive research on this, which has been used by the FT for this article. 

As you may know, negotiations are going on between the EU and India to draw up a new Free Trade Agreement (FTA). Apparently, consensus has already been reached on fine wine, one of the industries covered by the FTA. At this stage, we don't know what has been agreed to but it is clear that, if import duties on fine wine in India would be reduced, there could be a massive boost for the fine wine industry.

We will be closely following developments and will post the full insights we have gained through our research here on the blog. Stay tuned.

We are also tweeting about the Free Trade Agreement. Do follow us on @DittonWineTrade with hashtag #IndiaEUFTA.

Below is the FT article in print. You can also download the article here

December was a tough month for the fine wine trade. Signs were starting to point in the right direction and most economists and financial analysts became more optimistic on the Euro surviving. However, there was still too much macro-economic uncertainty for collectors or the trade, to have the confidence to take meaningful positions. With the festive season coming up and most investable wines falling in price, buyers were happy to keep their powder dry.

 

The first week of January is markedly different. In fact, our first 5 trading days in January have generated as much turnover as the whole month of December, with sales equally divided between UK and Asian customers. Importantly, more than half of sales were Bordeaux 1^st Growths, indicating that there is a growing sense that 1^st Growths (still the engine of the fine wine trade) are reaching the point where they are considered worth  buying again. Encouraging signs indeed.

 

There are bargains (relatively speaking that is) to be had. As an example, Latour 2003. This is one of only 10 First Growths post (and including) 1982, that Robert Parker has rewarded with a perfect score of 100 points.

After a drop of 24% since its peak in July 2011, it’s now available at £7,800, which is the same price as it was three and a half years ago. This is not a fad or high risk wine. This is a classic, iconic Bordeaux 1^st Growth, from a chateau that releases notoriously few cases onto the market. You have to go all the way back to 1982 to find another 100-pointer Latour (trading at £16,000). It’s like 1 Hyde Park coming onto the market at a massively discounted price because the oligarchs are having a temporary cold. Mind, I don’t want to plug this wine, I merely want to point out that – in the longer run – this cannot be a bad buy, IMHO.

 

This week also sees 2 new wine investment vehicles being launched in the UK, both benefitting from the generous (personal) tax relief that the UK’s Enterprise Investment Scheme (EIS) offers. Anpero Capital has started to raise £2m to be invested into an EIS qualified fine wine trading fund, whilst Ingenious’ Vindemia 2 fund has started to raise between £4 and £10m. The latter is to be invested into start up wine trading companies, and comes on the back of Vindemia 1, which was successfully launched in February 2011 and is now in full operation.

 

If you want to know more about the potential benefits of the EIS scheme in relation to fine wine investment, do get in touch (it’s far too technical to discuss here).

 

As a final thought, the Liv-ex 50 this last week almost entirely clawed back the rather big drop it suffered in the last (illiquid) trading week of 2011. Is this down to last minute orders from China, hurrying to source in time for the Chinese New Year at the end of January, or is it a sign of things to come? Undoubtedly, we’ll know more next week, when what seems the whole wine world is done with tasting the 2010 Burgundies.

 

In one of our previous articles, “Wine investment, what Warren Buffett would do”, we announced we would elaborate on the prevailing uncertainty in the fine wine market and shed some light on short term demand.

 

We have repeatedly commented on the fundamental health of the fine wine investment market. We believe there are many reasons why fine wine continues to make a good investment. Following, we also think the current lull in prices – caused by short term supply and demand issues and extreme macro-economic uncertainty – presents an opportunity.

 

 

The potential of the current situation in fine wine

Firstly, as covered on the blog, the fundamentals look good.

Secondly, a major reason for the current fall in prices is oversupply in China. It will take time for that to resolve itself, but as demand is still there, this in the end is a temporary factor, not a fundamental one.

Thirdly, war chests are building up. Because the fundamentals are sound, there is a “wall of money” waiting to be employed – as commented on in the previous post. Waiting for the right moment. The people managing this money can see the opportunities coming and they prepare themselves to take advantage of them. Why do we think this is the case?

• The long term average return on fine wine is very compelling, particularly in combination with the relatively low risk.
• The fine wine market is on course to become much more professional and efficient, which will attract more money
• Fine wine has to an important extent become an investment market. Participants – wine funds, collectors and big merchants – will act to make a profit if they see an opportunity.
• Any significant upsurge in demand will lift prices as the fine wine market is small (only £4bn per annum). Potential demand is infinitely bigger than supply.

 

 

Signs of the market turning

In addition, being involved in trading wine every day, we see more and more signs that point towards prices bottoming out:

• There are less good deals to be had – sourcing well is becoming difficult.
• More and more people are predicting when and where the bottom will be
• Indeed: the first players are stepping in. There are wines that are being picked off. There are also large outstanding orders to be filled.
• Not all is going down – Burgundy, Yquem and some Italians being a case in point.

 

So what needs to happen for this money to be put to action? In short, a sense that the bottom of the market can be called. Since fine wine is more and more behaving like financial markets, this has all to do with uncertainty. One major driver of uncertainty is what “our friends” in Europe do.

In “normal” economic circumstances, fine wine is not really correlated to the various economic and financial gauges or asset classes. However, in times of financial stress, all asset classes become very closely correlated. Here’s the point: once the markets find their bearings again, fine wine will become less correlated again and is expected to do well. The wider economy might well languish for a sustained period of time, but that might actually play into the hand of fine wine investment, which after all is an alternative investment.

 

 

On Europe – it’s all about uncertainty

For 2 years now, the Eurozone crisis has been moving towards crunch time/end game. Forget all the talk and even financial market demands. After all is said and done, if you strip it down to the core, the problem is that the euro-zone is made up of countries that are not equally efficient. In producing goods and services, and in running their countries budget. This would be fine if these countries had their own currency as that would act as a stabilizing mechanism. Inefficient countries would still be able to compete, because their currency – vis a vis their more efficient competitors – would depreciate, making their output more affordable and competitive. But they don't, they share the same currency.

Europe, on the 9^th of December, has finally and for the first time, made moves towards a fiscal union. Right from the word go, at the Maastricht treaty 20 years ago to the day, we all knew that was required to make a monetary union (one currency) work. Therefore, the 2 year old crisis seems to have turned a corner. From now on, we’re talking about the real stuff and there’s no hiding.

 

Which makes one think about the next phase. What will happen to the less efficient Eurozone countries? On country level, overspending is no longer an option, they’ll have to live within their means, no short cuts. On company level, how is a Greek battery manufacturer going to compete with its uber-efficient German competitor? Let’s face it, he’s not. There is no way the Greek will be as efficient as the German. With all due respect, it’s just not going to happen. Given they share the same currency, the only escape is to become more competitive, by lower wages and very likely increased unemployment. Which will be painful and quite possibly unsustainable, as that would put the onus back onto the government, who now don’t have a way out anymore.

Were Greece isolated from international capital flows, it could work. But they’re not. Lower wages, in the face of prices of a lot of products being set outside of Greece would lead to real loss of disposable income. Recession would be the likely result. The government would be forced to tighten its belt further, exacerbating the problem. Vicious circle.

It will be a really tough call for the economically weaker countries (the PIIGS, or Garlic countries – no offence) to do well for themselves within a euro-zone that enforces fiscal austerity. There will be a temptation to escape that harness, possibly by reverting back to their own currency. Or maybe even a “garlic currency”. Whilst this would be a rocky ride for sure, it’s not as bad as an uncontrolled implosion. What matters is that the one and only sustainable step to take for the euro-zone to be resolved and for the euro to survive, is for them to move towards a fiscal union. And we have now embarked on that road, hallelujah. Onwards and upwards.

Whilst very early days, the major fundamental source of uncertainty has finally been addressed. Surely there will be more crises, but at least they will be focused in the right direction and as such move away from full out disaster scenario’s. That is an important ingredient for more confidence and less uncertainty.

 

 

Financial markets are not yet convinced

Whilst most analysts will probably agree with the point we make above, they are more concerned about the short term risk of a bank crisis. In short: the risk of banks running out of money, because they are running out of collateral needed for the ECB to lend them emergency funds. If that happens the banks would probably need to be nationalized. Nationalized by a sovereign that doesn’t have money itself, leading to a worsening of the sovereign debt crisis. Again, a vicious circle.

What would be the solution, the circuit breaker? As BBC’s Robert Peston says: “It's the same as it ever was: mutualisation of all the eurozone's debts, which in practice means that the mighty German sovereign balance sheet would stand behind the enormous liabilities of the rest of the eurozone ….. but that won't happen unless and until there is an all-powerful finance minister (in effect) for the whole of the eurozone, to reassure Germany and the German people they wouldn't be throwing good money after bad.”

Perhaps there are other solutions as well (Peston is always gloomy), which quite likely will involve the ECB. But quite clearly, this is the biggest short term uncertainty that needs to be taken care of.

 

 

Concluding:

If our analysis is correct, this is what will happen. Economic uncertainty will slowly diminish and a sense that we’ve seen the worst will start to prevail. Once that happens, the first Buffett’s will enter the market, which no doubt will be the bigger, professional players in the market. That will stabilize prices and the most sought after wines and vintages will start to go up again. This in turn will encourage other players to step in, including new money that has not previously been employed in fine wine and is attracted by both the fundamentals and the prospect of the fine wine market professionalizing. But what is needed for this to happen is a nascent belief that the European banks will not fail.

When? Not long now… All eyes on Signore Draghi.

 

 

Final thought

A few things. Remember what happened on the financial markets in the Spring of 2009. It doesn’t take a whole lot for an upsurge in demand to lift fine wine prices. Buffett’s quote “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

Wouldn’t it be nice if we can once again focus on wine, rather than finance?