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

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?

In this latest piece we look at the emergence of new actors in fine wine markets, by way of wine funds and the increased prominence of fine wine auctions.

 

 

In a series of questions and answers Ella Lister, the Auctions and Secondary Market Correspondent for the World of Fine Wine Magazine (WFW) provides critical insight.

 

 

New routes to market for the collector and investor

Until James Miles, Director of Liv-ex (the London International Vintners Exchange), put a figure to it at the Hong Kong International Wine & Spirits fair, estimates of the value of the world-wide fine wine market saw swings by as much as 100%. The figure Miles arrived to was $4 billion and one that has been referred to since. As Miles pointed out, this is composed of merchants (90%) and auction houses (10%), but not other actors, such as wine funds or financial entities holding wine as an investment.

Importantly, private collectors and investors, with whom most stock resides and who may freely sell or broker their wines independently, are not included within this figure. Thus, the real value of the fine and rare wine market must be significantly higher.

 

In the 10 years since the trading platform began, the fine wine market has changed dramatically, to the point where fine wine is well on the way to being accepted as a credible alternative investment. The 2008 decision by the Hong Kong government to go from a closed to open market, by reducing its 50% tariff on wine to zero overnight, ushered in startling expansion and is the most disruptive event since the entrance of the US market in the 1970s or the arrival of the internet and transparency.

The historic fine wine trade structure – centred on the traditional merchant, collectors and auction houses – has changed too. London fine wine merchants successfully established broking divisions in the expansive environment of the early to mid-1990s, which saw Asian buyers enter for the first time. Trading platforms, led by Liv-ex, and price tools like wine-searcher.com followed and have brought transparency to a hitherto remarkably opaque market place.

We may not have given it due attention at the time, but this marked the first meaningful step in the little-by-little sophistication of fine wine markets. New actors – professionally managed wine funds and a freshly dynamic auction scene among them – mean there are now new routes to enter and exit the market for the private collector and investor.

A common feature of fast-growing, but immature markets is that a rush of new money can push up value beyond the line supported by the fundamentals. Moreover, where will this new capital go in the event of a stabilisation of stock markets; will it remain in fine wine or will it return to the traditional fold?

How important are these newly empowered actors to today’s fine wine markets?

Certainly, hammer prices and fund headlines suggest increasingly so. The former is a leading indicator of sentiment, albeit for the irrational luxury market, so important to that essential ingredient of economic prosperity, confidence. The latter? Well, we don’t know exactly. A large part of the challenge with wine funds is that, behind the headlines, facts would seem to be hard to come by. Yet, understanding the role of these new actors matters. Accurate and transparent figures, traceability and the human face are a pre-condition to the fine wine market taking the next step and becoming a mature and accepted form of investment as well as pleasure.

 

 

 

Wine funds and fine wine auctions – behind the headlines with Ella Lister

DWT How important are fine wine auctions and wine funds to today’s fine wine market?

EL The wine auction market steals the headlines but represents no more than ten per cent of global fine wine revenues, at almost $400 million annually in 2010. Similarly, wine funds are on everybody’s lips, but total assets under management are no more than $400 million, and probably nearer to $300 million.

 

DWT Are fine wine auctions a good route to market for the private collector/investor?

EL They can be very lucrative, but the seller has less control over the final price, as you have to commit stock months before the actual sale, and auction houses will restrict the reserve price you can apply. Hence some wine funds steer clear of this riskier route to market.

 

 

DWT What is the current growth trend among auction houses and what is their regional spread?

EL The auction market is growing fast, but probably not considerably faster than the overall fine wine market. Revenue in the first three quarters of 2011 was up 44 per cent on the same period in 2010. Hong Kong now represents just over 50 per cent of global wine auction revenues.

 

DWT There has been a lot of talk about new funds being set up. Is this true or exaggerated? What is their impact and is this sustainable?

EL There has certainly been a flurry of announcements in 2010 and 2011, but the actual level of success is so far unclear. For example, Société Générale and Bordeaux Index have both announced funds that have yet to materialise. Despite bold aims to raise RMB 1 billion in its original statement in August, the much talked-about DeRouge fund has made no further noise. We don’t know whether it has succeeded in raising its initial target tranche of RMB 200 million.

 

DWT Do wine funds buy en primeur?

EL Some do; some don’t – see my series on funds in the WFW.

 

DWT Would buying into a fund outperform purchasing a basket as represented by the Liv-ex Investable index?

EL It’s likely to be a similar basket! You would like to think that the fund manager’s expertise and careful ongoing analysis would yield higher returns, but this is not always the case.

 

DWT Fast forward five years: what are your predictions?

EL Wine funds will continue to play a key role in the fine wine industry, as investors look increasingly to tangible assets. However, the limited size of the fine wine market means that it’s hard to imagine fine wine becoming a major investable commodity on a par with gold or even fine art. After all, the most expensive case of wine is nothing compared to the most expensive painting. The market will continue to become more sophisticated and transparent, but in five, or even ten years’ time, it still won’t be ready for large-scale investments or complex financial products. It is a niche investment product, best kept in the realm of the tangible.

 

The final instalment of Ella Lister’s three-part work, examining the pros and cons of funds vs. DIY wine investment, is in issue 34 of the World of Fine Wine Magazine, out now.

 

Robert M. Parker, Jr., the world's foremost wine guru, makes 12 bold predictions about seismic changes that will influence how we'll shop, what we'll buy and how much we'll pay.

Posted on www.winefuture.hk , a high profile event to be held in Hong Kong next month, this might have some effect on the likes of Conti Conti, DRC La Tache and indeed the top Bordeaux wines. Good news than for wine investment?

But please note – something we were not aware of at first – that he made these predictions in 2004... All the same, it makes for interesting reading. And since Wine Future HK put it on their website, it attracts new attention. 

By Robert M. Parker, Jr.

Predictions are often carelessly thrown together lists, since few people remember them 10 years later. Who is going to call the author after a decade and complain about his boneheaded observations? Still, I confess to having given the following 12 predictions considerable thought. Moreover, I am confident that they will come true sooner rather than later.

1 Distribution will be revolutionized
I predict the total collapse of the convoluted three-tiered system of wine distribution in the United States. The current process, a legacy of Prohibition, mandates that all foreign wines must be brought into the country by an importer, who sells them to a wholesaler, who sells them again to a retailer. Most U.S. wineries sell to a distributor, who in turn sells the wines to a retailer. It is an absurdly inefficient system that costs the consumer big bucks. This narrowly restricted approach (blame all the lobbyists funded by powerful liquor and wine wholesalers) is coming to a dramatic end—hastened in part by the comparative ease of ordering wine over the Internet. Differing federal court opinions over the last decade have insured that eventually the Supreme Court will have to rule on whether wineries can sell directly to whomever they wish, whether it is a wholesaler, retailer or consumer. Imagine, if you can, a great Bordeaux château, a tiny estate in Piedmont or a small, artisanal winery in California selling 100 percent of its production directly to restaurants, retailers and consumers. I believe it will be possible by 2015.

2 The wine Web will go mainstream
Internet message boards, Web sites tailored for wine geeks and state-of-the-art winery sites all instantaneously disseminate information about new wines and new producers. Today the realm of cyberspace junkies and hardcore Internet users, these sites will become mainstream in 10 years. A much more democratic, open range of experts, consultants, specialists, advisors and chatty wine nerds will assume the role of today's wine publications.

3 World bidding wars will begin for top wines
Competition for the world's greatest wines will increase exponentially: The most limited production wines will become even more expensive and more difficult to obtain. The burgeoning interest in fine wine in Asia, South America, Central and Eastern Europe and Russia will make things even worse. There will be bidding wars at auctions for the few cases of highly praised, limited production wines. No matter how high prices appear today for wines from the most hallowed vineyards, they represent only a fraction of what these wines will fetch in a decade. Americans may scream bloody murder when looking at the future prices for the 2003 first growth Bordeaux (an average of $4,000 a case), but if my instincts are correct, 10 years from now a great vintage of these first growths will cost over $10,000 a case...at the minimum. It is simple: The quantity of these great wines is finite, and the demand for them will become at least 10 times greater.

4 France will feel a squeeze
The globalization of wine will mean many things, most of it bad news for the country historically known for producing the world's greatest wines: France. The French caste system will become even more stratified; the top five percent of the estates will turn out the most compelling wines and receive increasingly astronomical prices for them. However, France's obsession with tradition and maintaining the status quo will result in the bankruptcy and collapse of many producers who refuse to recognize the competitive nature of the global wine market.

5 Corks will come out
I believe wines bottled with corks will be in the minority by 2015. The cork industry has not invested in techniques that will prevent "corked" wines afflicted with the musty, moldy, wet-basement smell that ruins up to 15 percent of all wine bottles. The consequences of this laissez-faire attitude will be dramatic. More and more state-of-the-art wineries are moving to screw caps for wines that need to be consumed within 3 to 4 years of the vintage (about 95 percent of the world's wines). Look for this trend to accelerate. Stelvin, the screw cap of choice, will become the standard for the majority of the world's wines. The one exception will be great wines meant to age for 20 to 30 years that will still be primarily cork finished—although even the makers of these wines may experience consumer backlash if the cork industry does not solve the problem of defective corks. Synthetic corks, by the way, are not the solution. They do not work and can't compete with the Stelvin screw caps.

6 Spain will be the star
Look for Spain to continue to soar. Today it is emerging as a leader in wine quality and creativity, combining the finest characteristics of tradition with a modern and progressive winemaking philosophy. Spain, just coming out of a long period of cooperative winemaking that valued quantity over quality, has begun to recognize that it possesses many old-vine vineyards with almost unlimited potential. Spanish wineries recognize that they are trapped neither by history nor by the need to maintain the status quo that currently frustrates and inhibits so many French producers. By 2015, those areas that have traditionally produced Spain's finest wines (Ribera del Duero and Rioja) will have assumed second place behind such up-and-coming regions as Toro, Jumilla and Priorat.

7 Malbec will make it big
By the year 2015, the greatness of Argentinean wines made from the Malbec grape will be understood as a given. This French varietal, which failed so miserably on its home soil in Bordeaux, has reached startling heights of quality in Argentina. Both inexpensive, delicious Malbecs and majestic, profoundly complex ones from high-elevation vineyards are already being produced, and by 2015 this long-ignored grape's place in the pantheon of noble wines will be guaranteed.

8 California's Central Coast will rule America
Look for wines from California's Central Coast (an enormous region that runs from Contra Costa down to Santa Barbara) to take their place alongside the hallowed bottlings of Napa and Sonoma valleys. No viticultural region in America has demonstrated as much progress in quality and potential for greatness as the Central Coast, with its Rhône varietals, and the Santa Barbara region, where the Burgundian varietals Chardonnay and Pinot Noir are planted in its cooler climates.

9 Southern Italy will ascend
While few consumers will be able to afford Piedmont's profound Barolos and Barbarescos (which will be subject to fanatical worldwide demand 10 times what we see today), once-backwater Italian viticultural areas such as Umbria, Campania, Basilicata and the islands of Sicily and Sardinia will become household names by 2015. The winemaking revolution currently under way in Italy will continue, and its rewards will become increasingly apparent over the next decade.

10 Unoaked wine will find a wider audience
Given the increasingly diverse style of foods we eat as well as the abundant array of tastes on our plates, there will be more and more wines that offer strikingly pure bouquets and flavors unmarked by wood aging. Crisp, lively whites and fruity, savory and sensual reds will be in greater demand in 2015 than they are in 2004. Wood will still have importance for the greatest varietals as well as for wines that benefit from aging, but those wines will make up only a tiny part of the market.

11 Value will be valued
Despite my doom-and-gloom prediction about the prohibitive cost of the world's greatest wines, there will be more high-quality, low-priced wines than ever before. This trend will be led primarily by European countries, although Australia will still play a huge role. Australia has perfected industrial farming: No other country appears capable of producing an $8 wine as well as it does. However, too many of those wines are simple, fruity and somewhat soulless. Australia will need to improve its game and create accessible wines with more character and interest to compete in the world market 10 years from now.

12 Diversity will be the word
By 2015 the world of wine will have grown even more diverse. We will see quality wines from unexpected places like Bulgaria, Romania, Russia, Mexico, China, Japan, Lebanon, Turkey and perhaps even India. But I believe that even with all these new producers, the saturation point will not be reached, since ever greater numbers of the world's population will demand wine as their alcoholic drink of choice.

Robert M. Parker, Jr., editor and publisher of The Wine Advocate and a contributing editor to F&W, has been predicting (and influencing) wine trends around the world for over 25 years.

 

 

There's a new wine blog. And this one is different.

 

12x75 centers around interviews with well known people in the wine world, people who the owner of the blog admires. Under the motto "taking the stuffiness out the Fine Wine Market", 12x75 has a light and often humorous approach. I can highly recommend it. So far, Stephen Browett (Farr Vintners), Doug Rumsam (Bordeaux Index) and Adon Kumar (Wine-Searcher) feature. Knowing the author, rest assured you'll see more big names being interviewed. 

 Well, mostly big names as the latest interview is with yours truly.