All Things Consumed: 2009 Epicurean Highlights, From A to Z
Vineyard pruning 2010, and a chance to fill in missing vines

Bubble, Bubble: Bordeaux in Trouble (Again)

By Robert Haas

While I am no longer working as an importer, I have been following with interest the ongoing price correction in the Bordeaux markets. I thought that one of the best articles was Mitch Frank’s recent Diageo Dumps Bordeaux in the February 28th issue of the Wine Spectator. It seems to me that the issues that this market correction raises are of sufficiently broad application that it might interest readers of the blog to learn some history from my own wine business experience.

This correction is not the first in the modern Bordeaux market, nor should it be a surprise. A similar dumping event occurred in the 1970s after competing importers paid exorbitant prices for the mediocre 1972 vintage to “stay in the game” and found that they could not sell it. An inflated supply bubble had burst in a period of economic recession, and too few buyers wanted either the 1972s or other over-priced vintages that had built up in their inventories.

The result: several of the large buyers closed out all of their stocks and departed the imported wine business permanently, while others simply sold their accumulated inventories at losses but hung around for more. At the time, having left Barton Brands wine division and before starting Vineyard Brands, I was hired as a consultant by two of these importers to extricate them from the market. The largest and most influential of the importers that stayed in became Seagram’s Château and Estates division. When Seagram broke up, Diageo acquired it.

Seagram’s and other en primeur speculators became the Bordeaux bankers by making what were in effect collateralized no-interest loans and profited from the continued inflation of prices, with just a few bumps on the way, until this year. The party ended when the bean counters of Diageo came to the conclusion that they were heavily invested in inventory that had no market at the prices they had paid, and that future purchases would exacerbate the problem. So, they’re now selling their accumulated inventory at fifty to seventy-five percent of what they paid, putting enormous downward pressure on the market and forcing other inventory holders to make the unpleasant choice between selling at a significant loss or holding inventory for perhaps years for the market to recover. Does this sequence recall a certain other bubble that has burst recently?

The conditions that brought about this and other dumping go back to the end of World War II. Prior to the war, the Bordeaux négociants: Cruse, Calvet, Eschenauer, Delor, Ginestet, Barton & Guestier, and many others were the bankers for the Bordeaux château owners as well as for the small growers who sold their wines in bulk as Médoc, St. Julien, St.Emilion, or simply Bordeaux. These generic appellation wines were bottled and marketed immediately under the négociant’s brand and sold to their local and foreign agents to provide cash flow. The négociants used this cash to finance the châteaux’ crops -- at severely negotiated prices -- and then kept the wines until they were bottled, either in their cellars or at the châteaux. The négociants then sold the wines at higher prices after bottling. Because of their financial importance, the négociants had power in the marketplace both over their exclusive agents/importers and over the châteaux.

The châteaux had no marketing organizations and the proprietors had little idea into which channels the wine was resold, or whether it was even resold at all or instead sitting in an agent's warehouse.

However, Bordeaux price deflation destroyed this system in the 1950s. By 1950, prices on Bordeaux châteaux were actually lower than they were in 1935 -- so low that the generic market melted away. This market is still suffering badly today despite the significant rise of the châteaux prices because the négociants no longer have the capital or the distribution agencies either at home or abroad to brand and sell generic appellation wines effectively.

In order to try to keep their place in the distribution system in the 1950s, the Bordeaux négociants, no longer having the ability to finance the châteaux and hold the wines, relinquished their banking marketplace function and started to sell the châteaux wines en primeur at small margins. It did not take long for well-capitalized buyers to realize that although the system required that they buy from négociants, they could squeeze the négociants margins even further. The traditional system became dysfunctional. The châteaux then began to sell their wines en primeur in a sort of auction to the highest bidder through a favored négociant, who in turn resold it at a tiny margin to an importer.

Well-financed organizations jumped into the game: Austin-Nichols, Nestlé, Seagram C & E, and finally Diageo. In order to stay in it, however, they had to buy all vintages, no matter what the reputation or salability. The power had shifted to the châteaux, who took advantage of a ready supply of eager buyers to steadily raise prices: somewhat even in mediocre vintages and dramatically in the better ones.

Of course, the châteaux still had no idea where the wine went or if it was still sitting in the buyer’s stock.

Over time, it became evident to the financial managers of these enterprises that long-term profits were elusive. Much of their purchases, especially the lesser vintages, ended up having to be sold at less than cost or stored in long-term inventory. Austin-Nichols and Nestlé sold off their inventory and exited the market in the 1970s.

The strange separation of Bordeaux châteaux proprietors from the market realities of their business has its roots in the 17th century, when Dutch engineers began filling in the swampland on the left bank of the Gironde that is known as the Médoc today. Noble and a few rich bourgeois families established châteaux there and in the Graves area, south of Bordeaux, and the port of Bordeaux took over leadership in the wine business from the port of Libourne (on the right bank with St. Emilion and Pomerol).

The bourgeois and noble families considered it unseemly to engage in business dealings, so they sold their wines in barrels through bourgeois middlemen known as courtiers, who acted as intermediaries between châteaux managers, known as régisseurs, and Bordeaux négociants. Although their role has been reduced, all Bordeaux château-bottled wines are still sold through courtiers today!

Where to now? In my opinion the players in the Bordeaux market, including Bordeaux châteaux -- large and small -- and importers of Bordeaux, will eventually have to come to some sort of exclusive arrangements or suffer these constant price bubbles and dumping cycles. Châteaux are going to have find ways to market their individual properties in the marketplace. Giving exclusivity to one importer who can then be held responsible for distribution is one good way. And it seems inevitable to me that many châteaux will have to lower their prices to the point where their wines are intended for drinking -- rather than collecting – in order to re-establish restaurant and retail distribution and the consumption that is necessary to deplete each vintage and prepare the market for the next.