BORDEAUX 2016:

A NEW DAWN FOR EN PRIMEUR?

En Primeur in its current form is a relatively new system, but Bordeaux wines have been traded prior to delivery for centuries. This continues to represent a significant opportunity for producers, merchants and buyers. En Primeur can help producers to improve their cash flow and reduce their risk profile, while offering buyers the opportunity to acquire stock at favourable prices. It is the one time each year that all eyes in the trade are on Bordeaux and remains a highly effective global marketing and distribution mechanism.

Transparency presents an opportunity

One of the most significant changes in the fine wine market in the past decade has been improved price transparency, facilitated by the internet. Now, merchants and their customers can instantly access current and historic prices for fine wines to inform their purchasing decisions. The market has also become increasingly global and accessible, meaning that buyers have easy access to older vintages, and hence more choice.

The problem with opacity

While the rest of the market has become increasingly transparent, En Primeur prices continue to be determined - or ‘discovered’ - via private negotiations between chateaux, courtiers and negociants. It is often unclear how prices are set. This has two key disadvantages.

First, buyers have little or no insight into how prices are agreed. This has resulted in criticism of the En Primeur system amongst buyers and, as this report shows, falling sales. Second, the system runs the risk of mispricing releases. This report uses the term ‘mispriced’ to mean pricing that was inconsistent with prices in the secondary market at that time. In the last decade, releases have been as much as 30% over or under priced, potentially costing the industry hundreds of millions of Euros.

A new consensus on pricing is needed

This report introduces Liv-ex’s ‘fair value’ methodology, which harnesses the transparency of the secondary market, to allow for a more scientific evaluation of En Primeur prices. The trade and their customers can use ‘fair value’ during En Primeur to help identify wines which offer the greatest value and avoid those which offer the least. It may also contribute to a new consensus around pricing En Primeur and help Bordeaux reinvent itself in the internet age.

A new dawn for En Primeur

The 2016 vintage is being released at an interesting time for the Bordeaux market. After several difficult years, the Bordeaux 500 index has gained 22% in the past 12 months. Official figures suggest that 2016 was the largest harvest in over a decade, and expectations for the quality of the wines are high. Put simply, if the price is right, 2016 represents a significant opportunity for the whole market.

En Primeur is worth keeping

There is much scepticism around En Primeur among the trade, press and consumers. Chateau Latour has withdrawn from the system completely. There has been a commensurate fall in demand too since the heady days of 2010 and 2011. Despite this, the system is worth keeping. At its best, En Primeur is the wine industry’s most effective global marketing and distribution machine and can be accessed at relatively low costs.

En Primeur has existed and evolved in Bordeaux, in one form or another, for centuries. Historically, producers sought to improve their cash flow and reduce their risk profile by forward-selling a portion of their output. In return for parting with their cash early and sharing risk with producers, buyers were able to acquire stock at favourable prices.

The cash flow benefits of En Primeur can be particularly important for smaller producers whose financial position is often less robust than the larger ones. The most powerful chateaux typically boast much stronger balance sheets. Ultra-low interest rates also allow these producers to finance working capital cheaply. However, as interest rates rise again, so too will the working capital benefits of En Primeur.

Overall, a well-functioning En Primeur market brings considerable benefits to both buyers and sellers. Unfortunately, it is not functioning as well as it could. In the post-Parker era, a new consensus needs to be found if the system is to be rejuvenated.

The price mechanism does not work as well as it could

En Primeur prices are determined via negotiations between chateaux, courtiers and negociants. The wines are often released in several tranches in order to test the market and aid price discovery. The system has two major disadvantages:

1. Price discovery is opaque. Negotiations over prices are held behind closed doors. Buyers therefore have little, or no, insight into how any particular price is determined.

2. The system is inefficient and often results in prices being set either too high or too low. Negociants often see little alternative to accepting overpriced En Primeur for fear of losing their allocation in the future.

If the price of En Primeur is set too high then producers or their agents may be left with excess stock. If the price is too low then producers are effectively handing a slice of their profits to buyers. For example, our analysis suggests that the 2008 En Primeur campaign was nearly 30% underpriced, handing a windfall of nearly €300 million to the supply chain (assuming En Primeur sales of up to €1 billion in 2009).

Inefficiency and lack of transparency have eroded confidence. The chart below shows that En Primeur activity on Liv-ex remains well below historic levels. A number of Liv-ex members report similar falls in activity in the market overall. 

How might En Primeur evolve?

The internet has brought much greater transparency to fine wine prices and to trading in the secondary market. Efficient secondary market pricing for fine wine - or any other financial market - essentially takes into consideration all available information about present and potential future events.

The secondary market in fine wine is not as liquid as other markets such as equities, foreign exchange or commodities. There is also a significant difference between the liquidity of wines such as the First Growths and smaller producers whose wine trades less frequently. However, the secondary market is already a more transparent and efficient mechanism for pricing fine wine than the private negotiations held at En Primeur.

Fine wine shares many of the characteristics of commodities. Different producers and vintages represent different commodities. For example, a tonne of copper traded on the London Metal Exchange (LME) is identical to any other tonne of copper traded on the LME. This is because the LME maintains strict physical specifications for the copper traded.

Similarly, a case of Lafite Rothshild 2010 traded on Liv-ex is identical to any other case of Lafite Rothshild 2010 traded on Liv-ex. This is because Liv-ex’s Standard in Bond (SIB) contract ensures that any wine traded on the platform is in excellent condition, has never left Europe, is stored under bond and can be delivered within 14 days to a Liv-ex warehouse.

The evolution of pricing in other markets is likely to provide some guidance for En Primeur. In fact, the transition from opaque, negotiation-led prices to transparent, market-based prices is a well-trodden path.

For example, the negotiation-led ‘benchmark’ system for annual iron ore prices collapsed in 2010 as an increasingly liquid spot market took its place. Similar changes in other commodity markets such as oil occurred long before.

En Primeur can also be compared to primary share issues in equity markets. Let’s consider a listed company such as Apple that issues new shares. These new shares cannot typically be priced higher than the price of Apple’s existing shares in the secondary market. This is because investors would simply buy Apple shares in the secondary market rather than participate in the new share offering.

This should also be true for En Primeur. After all, why should investors buy riskier En Primeur if they could buy physical back vintages in the secondary market for a lower price?

Of course, the key issue with the Apple analogy is that new shares in Apple are identical to ‘old’ shares in Apple. Therefore, comparing prices is easy. However, variations in critic score, vintage quality and age mean that each vintage of a particular wine is different. Therefore, comparing prices is not so easy. This is where Liv-ex’s ‘fair value’ methodology can help. 

Conclusion

The En Primeur market has the opportunity to embrace a step-change in transparency and efficiency brought about by the internet. This would add considerable value to buyers and sellers, just as it has across other markets.

The secondary market is already the most efficient pricing mechanism for fine wine, particularly for wines which enjoy the greatest liquidity. Liv-ex’s ‘fair value’ methodology harnesses the power of the secondary market to help price En Primeur.

The trade and their clients can use ‘fair value’ to help identify wines which offer the greatest value En Primeur and to avoid those which offer the least. In recent years, En Primeur has been mispriced relative to prices in the secondary market, sometimes by as much as 30%. Therefore the decision to buy En Primeur can have a significant impact on both margins and returns.

High expectations for the vintage, a recovery in fine wine prices and the opportunity to increase transparency and efficiency bode particularly well for En Primeur in 2016. The opportunity for a successful campaign is there – for those ready to take it.