Ditton Wine Traders’ fine wine blog

Diageo Chateau & Estate, for years and years the biggest US importer of Bordeaux Crus Classes, have abandoned Bordeaux alltogether.

AFP, the French news agency, the oldest one in the world and one of the three largest with Associated Press and Reuters, wrote this article a couple of weeks ago (apologies for the delay in posting):

"BORDEAUX, France — Even as Chateau Lafite leads a surge for Bordeaux vintners in Asia, US retail prices for the same wines have skidded below wholesale cost as a major importer dumps stocks worth tens of millions of dollars. US importer Diageo Chateau & Estate Wines (DC&E), a subsidiary of the British drinks giant Diageo, has abandoned Bordeaux wine after 35 years, aggressively liquidating its warehouse stock on an already shaky market.

Speaking to AFP, a source within DC&E, who asked to remain anonymous, blamed "enormous stocks" of unsold Bordeaux for their exodus. "It's all about making money. The margins are getting thinner each year and Americans are trading down."

DC&E's turbulent withdrawal, which has heated up in recent weeks, is having a "huge impact on the market," Chris Adams, chief executive of Manhattan retailer Sherry Lehmann, told AFP.

For many years, DC&E was the largest US buyer of Bordeaux, and amassed a colossal cellar. Now famous labels such as Lafite, Haut Brion and Lynch Bages are being offered to American retailers at discounts of up to 50 percent."I have 5.5 million dollars' worth of First Growths in my warehouse that I cannot sell, because I'll be 50 percent more expensive than Chateau & Estate," said Guillaume Touton, owner of Monsieur Touton Selection, the New York importer with annual sales of over 100 million dollars. "A major Mexican importer sent trucks to New York to pick up inventory, because it was 25-percent cheaper to buy it from Chateau & Estate," he said. "No one else can sell their wine. We don't know how long the scenario will last," said Geoff Labitzke, Corporate V.P. of Fine Wine for Youngs Market Company, a California-based wholesaler with annual revenues topping one billion dollars.

The timing is particularly bad. The economic crisis crippled Bordeaux wine sales and "the exchange rate is killing us," chorused several wine merchants. But Adams came to DC&E's defence. "They're exiting the market – and trying to find the correct market price." He said the discount prices "reflect the level of demand for the 2005 and 2006. "But there is a benefit for wine lovers suffering like consumers in general from the downturn. "In general we are passing a lot of the discounts on to consumers," he said.

Today Sherry Lehmann retails Chateau Lafite 2006 at 495 dollars (334 euros) per bottle. Wholesalers bought the same wine two years ago for 310 euros per bottle, shipping, taxes and broker fees not included. Connoisseurs can pick up "vintage of the century" Lafite 2005 for 9,900 dollars (6,674 euros) a case. Just six weeks ago, a New York Sotheby's auction sold the same wine for 14,520 dollars (9,789 euros) a case.

The pricing problems for Bordeaux are not new, nor entirely the fault of DC&E's defection or the economy. Prices soared between 1982 and 2005 under the combined pressure from Asia, speculators and Robert Parker's faithful legions. The problem was exacerbated according to Labitzke, because Costco and DC&E bought huge allocations and hoarded the wine, creating "an artificial level of implied demand from the US -- the wine estates set their prices based on this perceived demand. "Touton agreed. "Chateaux have admitted to me that they had had steady growth for the last 15-20 years because of (DC&E). DC&E was part banker, part Santa Claus. Well, Santa Claus is gone now. "The bubble burst when vintners badly miscalculated the prices for the 2006 and 2007 vintages. Consumers fled. Wholesalers and retailers cancelled orders. And companies like DC&E were left financing overpriced wine.

Aquitaine Wine Company's Harvard-educated CFO Margaret Calvet likened the situation to the classic business school case study, tulip mania. At the end of 16th century, the world was crazy for tulips. They were coveted as the ultimate luxury good. They were sold on futures. Prices climbed to dizzying heights until buyers would no longer follow. The price no longer had any relation to the flower's intrinsic value. In 1637, tulip prices crashed, never to recover. "There is a price ceiling for every wine on the planet," concurred Labitzke. "Beyond that ceiling, the consumer will not pay."

Bordeaux and its partners are, naturally, hoping to avoid the fate of tulips. Brokers and merchants are pressuring vintners to resist the temptation to raise prices on the excellent 2009 vintage. And some merchants have moved to stench the flow of discounted wine on the market as well as replenish their own stock from someone willing to lose 50 cents on the dollar.

Pierre-Antoine Casteja, CEO of Joanne, a 125-million-euro wine merchant firm with a six-million-bottle cellar, confirmed in an email to AFP that he had bought stock from DC&E. Meanwhile, Adams raised the spectre many vintners fear. "There are a lot of retailers in America where Diageo was their supplier for Bordeaux wine." The retailers will continue to stock their shelves, but will it have Bordeaux on the label? "When you pull a bottle off the shelf, another bottle replaces it. You don't get back that shelf space," said Adams.

Casteja has already moved decisively to fill the distribution void with his recent purchases. "The stock already in NY will remain there to be sold by the organisation we have established there."

In the meantime, Bordeaux and its partners in America are bracing themselves for DC&E's imminent sale of the 2007 vintage. In separate interviews with AFP, four wine executives predicted a "bloodbath." "

I thought you needed to be aware of this. So, C&E are dumping Bordeaux. My estimate is that it will be primarily 2006/2007 and to a lesser extent 2005. They are one of the bigger stockholders and as such, one can expect this sell-off to have some effect on the global market. For bargain hunters who don't mind US strip labels (the majority of my customers do mind) this might be a good opportunity to buy cheap.

More importantly, how will this effect the market? I think there will be an effect on the market as a whole, although limited. I have no idea how much stock C&E have been offloading, but let's say it's twice the amount of the biggest UK stockholder, so roughly GBP 30m (50m US$). The total, worldwide turnover of these types of wines is GBP 3 bln. Again, not sure about this figure but let's presume stockturn (turnover : average stock held) equals 2. In other words: every case of investable fine wine changes hands twice a year. Especially for the younger vintages, this number is more likely to be on the low side rather than on the high side.

If these assumptions are correct, C&E's stock would represent 2% of worldwide stock. Enough to cause a ripple for sure if all dumped at once at mentioned discounts and certainly worrying for US wholesalers, who are in direct competition with DC&E. It will likely even spill over to other continents. I suspect the recent lull in demand for UK stock of Lafite 2006 might stem from this.

This effect will be temporary. Until the prop has left the pipeline. And we might be near to that point as the offloading has been going on for a while – we ourselves got offered big parcels of Lafite, from the same source, about 2 months ago.

What might be more lasting is that C&E won't be buying again. And if, as the article suggests, C&E were inflating the US market by buying for stock, we will see an even further diminished demand for en primeur coming from the US. I'm sure other countries won't mind – more allocations in sight of what promises to be a super vintage!

As an aside, why on earth would C&E hold such a firesale? Surely, dripfeeding it into the market would get a far better return. I find it hard to believe that Diageo, an extremely well run company, financially very sound and highly professional, would enter into such a messy situation. Surely it wasn't a financial necessity to dump so aggressively?