Burgundy – Reds outperform whites

Liv-ex Report

A growing worldwide interest in Burgundy’s wines has seen the region’s market share increase from 1% to 12.3% by value since 2010. At the same time the Burgundy 150, which measures the most active Burgundy wines in the secondary market, has climbed a staggering 108%. In this short report we consider the development of the market, the state of prices for Burgundy’s top wines as well as some of the main drivers of these prices. 

The market is broader and deeper than ever before 

The majority of trade in the market is taken up by high value reds from the Cote de Nuits and high value whites from the Cote de Beaune. In this respect little has changed since 2010. However, the market now has a very broad base, one which is growing each year. In 2017, 1572 unique wines (LWIN11s) traded from Burgundy, a 539% increase on the number that traded in 2010. As the market has broadened it has also deepened, total exposure – the total value of bids and offers - has grown from £3million to £9million in three years, with rapid growth occurring in 2017. Nevertheless, price discovery remains relatively inefficient compared to the market’s largest region by traded value, Bordeaux. 

Prices are rising 

Both En Primeur prices and market prices have been rising for the last two years. Burgundy release prices are rising in line with the market, as well as out of the necessity caused by smaller harvests. Market prices are up but movements are far from even across the spectrum of wines that trade. Instead price movements and market activity have been focused on a small coterie of vignerons, rather than a preference for specific appellations and climats. 

The supply and demand equation 

A succession of smaller harvests has resulted in fewer cases coming to market, while at the same time global wealth is increasing. Burgundy's most highly regarded and expensive wines are produced in very limited quantities; scarcity is an inherent and important component of their value. In general, there is a trend that less scarce wines have not performed as well. Pressure on price is amplified by low stock levels of older vintages in the market, meaning that any wine which experiences a sharp increase in demand can see its price rise very rapidly in the short term. 

What happens next? 

There are some mixed signals at the start of 2018. Early signs suggest that the Burgundy 2016 En Primeur campaign has been well received. On the other hand, the Burgundy 150 has fallen in the past two months. Our indicator of relative value between the highest echelons of Bordeaux and Burgundy, the DRC to First Growth ratio, has suggested that DRC prices have been overstretched for quite some time, yet they have continued rising regardless. As the year progresses, and the market focus returns back to Bordeaux in Q2 and Q3, a more complete picture will emerge over whether or not Burgundy can maintain the same momentum that it had in 2017.

The Burgundy 150 has shown a compound annual growth rate of 11.2% since inception. Various events that were pivotal in turning the Bordeaux market, such as the collapse of Lehman Brothers in 2008, the Chinese government’s monetary stimulus package in 2009 and the Chinese anti-graft campaign from 2011, had much more limited impact on the Burgundy 150’s movements. The only year the index failed to rise was 2013 when a broad bear market slowed price growth. 

Brexit and beyond 

Over the last two years the Burgundy 150 has outperformed all other Liv-ex indices. Like all of the Liv-ex indices, it received a significant boost from sterling’s devaluation after the Brexit referendum. However, whereas the market growth rate of all other regions slowed in 2017, the Burgundy 150 marched on, rising 19.3%. This suggests sustained demand rather than a more temporary phenomenon boosted by weak sterling. 

Other market barometers, such as the second highest ever average sale price per barrel (€17,262) at November 2017’s Hospices de Beaune auction, corroborate evidence from Liv-ex’s index. Burgundy has never seen such high levels of demand.

Reds outperform whites 

Removing DRC’s wines and splitting the Burgundy 150 into its red and white components shows that the price growth of red wines and white wines has been almost identical until the start of this year. 

The spike in 2017 has been led by a sharp rise in demand for specific wines in the index such as Armand Rousseau, alongside a more general preference for fine red wines in the influential Asian market. The red index rose and fell sharply between October and December last year. This demonstrates how prices can rise and fall with short sharp demand and a relative lack of liquidity. Prices for white burgundy face the additional constraint applied by worries over premature oxidation in older vintages, limiting the amount collectors are willing to pay. 

Nevertheless, even though the total return of the white burgundy index lags behind the red, it has shown a positive annual return since inception. In this sense it has performed in a similar way to the Champagne 50. On the other hand, the prices of top red burgundies have shown greater susceptibility to price volatility, falling in both 2013 and 2014.

Conclusion 

Burgundy’s secondary market has been building over the past decade. In this period, it has become increasingly diverse and broad, though the top reds continue to dominate. The next stage of development will see market liquidity increasing, as the market deepens with more participants. However the relative scarcity of many of Burgundy’s top wines means that the market will always lag behind Bordeaux in terms of liquidity and speed of price discovery. 

Burgundy prices are not correlated to vintage quality. Instead, they loosely follow broader market movements and are guided by the economic needs of growers. Price rises for some Burgundy wines in the market have been staggering. Recently, reds have outperformed whites with labels such as DRC and Rousseau leading the way. Although other brands have performed well, price moves are far from consistent across the region; they follow the winemaker, not the wine. 

So what drives price in Burgundy? There are a number of factors at play here. At a high level, a simple supply/demand equation helps to explain what is going on. As this report demonstrates, supply is tight at the best of times both in terms of production and availability in the market. At the same time, more money – particularly from Asia – is competing for this reduced number of bottles. 

But this alone does not tell the full story, particularly where inconsistent price movements are concerned. It seems that where supply is particularly limited, as with the wines of DRC, even a small increase in demand can send prices into the stratosphere. This brings us back to an earlier thought: owners of rare bottles can quickly become price setters, and price discovery as demonstrated by wide market spreads, remains relatively inefficient. Critic influence is important, but at a brand or producer level rather than for individual wines. 

In recent years we have questioned whether Burgundy prices can keep on rising, yet they continue to climb. In this context outside investors have purchased famous domaines such as Clos de Tart, Domaine des Lambrays and Bonneau du Martray with prices per hectare in the tens of millions of euros, presumably based on the assumption they can make their money back through higher bottle prices in the coming years. 

This assumption is sound as long as the fundamentals for price rises - tight supply, increased demand and falling yields - remain in place. Not all of these are certain indefinitely. 

An important facet of the market that prevents indefinite price rises is that it is always seeking value. As we suggested earlier this is why Echezeaux was the best performing DRC brand: it was initially the cheapest entry point. A similar phenomenon has been observed in the Power 100: over the years, Burgundy brands have flowed in and out of the rankings as buyers have sought better value in the region. 

As we suggested by the example of our DRC: First Growths ratio, an important component of wine’s value is scarcity. The quicker the paper value of a wine rises - especially when the wine is still in its infancy - the less likely it is to be consumed, resulting in greater availability of the wine in the market. Consequently, price rises will slow down and eventually reverse as the number of sellers overtakes the number of buyers. This could happen at any point, but historically market turns like this have been triggered by macroeconomic events which are notoriously difficult to predict.