How the History of Wine Investing Affects US Buyers

posted by Karen Orlandi on June 24, 2010 in Investing in wine

Investing in wine is by no means a new phenomenon, although most US consumers are unaware of modern wine investing opportunities. This brief history should provide context and confidence to potential US investors to look to wine investing as a viable, lucrative and mainstream investment option.

Individuals and companies in Europe have been investing in wine on a grand scale for decades. And more ancient forms of wine investing go back thousands of years, long before Romans brought grape vines to France. Investing, or speculating about a wine's future value, has allowed growers to finance their crops, merchants to identify price points, and collectors to make a profit.

No doubt, however, it is the fine wine from Bordeaux that has captured investor attention for centuries. Superior terroir, advancements in bottling and the rise in global trade made the Bordeaux wines prime for fine wine demand. In fact ships were once measured by the tons of wine they could carry. Given the capital and space required to bring wines to maturity, however, wine investment was limited to European aristocracy.

In 1855 Napoleon III aided the wine investment market tremendously when he classified Bordeaux wines based on historical quality and prices and instituted a series of laws to ensure long-term value. Aside from Château Mouton-Rothschild's upgrade in classification, the original classifications and laws remain unchanged today. Novices and bourgeoisie, who typically could not afford to sample fine wine personally, suddenly had the tools to feel comfortable ing wines for investment. Prices also became steadier as wines were now identified in tiers.

The largest exporter, and consequently the largest speculator, of Bordeaux wine for the past 900 years has been the UK. So it isn't surprising that the UK has the most advanced systems for wine investing. A "Fine Wine Index" was started in 1982 by Liv-Ex, which can be traded on Bloomberg systems, by banks and is commonly used for hedge funds and private investment data and trading. In fact, wine investing is so popular that private collectors in the UK hold more than $2B worth of fine wine in bonded warehouses.

For several reasons the US never followed the UK's lead in wine investing. Unlike European history, the US's relationship with alcohol has been severely tainted, thus stalling the adoption of wine investment practices. Prohibition, and its historical legacy, still permeates US laws. Intrastate and interstate shipping, the three-tier selling model, holding and selling of alcohol is all regulated, which adds hurdles (and cost) to buying and selling wine that European investors don't have. But thanks to internet retailers and online auctions buying and selling fine wines is now easy, convenient and affordable.

Increasing global demand has made wine investing more lucrative than ever. In the 1990s demand for the best wines from Bordeaux boomed as Asia joined Europe and North America in pursuit of consuming this liquid luxury. Greater price transparency via the internet and the influence of wine critics has demystified and democratized fine wine, bringing it to the attention of a much larger audience. With only a few clicks of the internet investors can now view the market price range and a series of expert opinions on taste, quality and longevity. As a result, wine prices have risen by approximately 13-15% per year over the past 25 years with quiet periods (e.g. 1998-2002) being more than balanced out by the busy ones (e.g. 2005-2007).

Offsetting the demand growth is a long-term limit on supply. Napoleon effectively fixed supply when he tied the wine classifications to the corresponding parcels of land. New World wines, like those of the US and Australia, have had difficulty with acceptance in the global wine investment arena. They are competing with several centuries, if not millennia, of practice and reputation in Bordeaux. With such a young track record, about 100 years, it is difficult for investors to have as much confidence in their return as they would have with a Bordeaux wine.

Fine wine has long been a part of a European, rich man's portfolio. With the advancements in transparency and availability of online merchants, US investors are primed for investing in wine. And with the fixed supply and the growing demand from emerging economies like China and Russia, wine values can only go up, up, up. If US investors can learn the lessons from more established European markets they will find a lucrative way to diversify their investment portfolio.