Insider information on the French, Bordeaux market
21 November 2016
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Welcome to Old Mutual Live Wine Edition, on mobile, on digital, on demand and thanks for listening. I’m Jenny Crwys–Williams . We had a conversation recently about the prices of South African wines and how in many instances they do need to rise. But I was going through a wine list from Reciprocal the other day and a lot of the wines are from Bordeaux.
I was amazed at how reasonable some of the international French wines actually are. For instance, there’s a Chateau Margaux, I’m presuming that it’s bottom of the range, but nonetheless, R495 a bottle. Michael Fridjhon, take us through some of these bargains. How the heck do they come into South Africa at such a reasonable price in the first place?
Michael Fridjhon: Well, the Margaux is not a Chateau Margaux, it’s a Chateau from Margaux. Chateaux Margaux in fact, is the only first growth whose name is also the appellation. So there isn’t a Chateau Pauillac or a Chateau SanJulian, and so that’s how that confusion arises. But let’s just talk about how pricing works in Europe because it’s quite an interesting model which we can look at and compare for South Africa.
How pricing works in Europe
You can get some pretty smart wines in Europe, I mean you can get some extraordinary bargains out of Spain where €2 to €3 a bottle is the export price, and I assume that a portion of that comes out of EU subsidies. You know when you’re getting decent wine at R30 to R40 a bottle export price. Even if it’s all mechanically harvested, that’s pretty attractive, and if it’s leaving Europe for R30 or R40 a bottle, it’s available in this country under R100 retail. So for all the add-ons, you can see where that value lies.
But the Bordeaux market is a particularly interesting market. It’s dominated by 60 or so classed growth of the Medoc and any number from Saint-Émilion and Pomerol and the Graves. But if you look at the Medoc model, that is the famous class growths of the Medoc, which include the first growths, the second growths and so on, classified in 1855. Each and every one of those Chateaux’s announces with now, one or two exceptions who have gone out of this game, they have an en primeur pricing policy.
The harvest is completed in September or October of the year and come April of the following year cask samples of the harvest wines are made available to the journalists, the critics and to the brokers and buyers who deal in class growth wines. In great vintages such as 2015, these guys swarm around trying to get the wines and those prices get bumped up pretty much before they’re even announced. In weaker vintages their problem is that they don’t want to give back too much of the pricing that has been gained from the great vintages. So they reduce the amount of wine that they release onto the market.
Good vs “small” vintages
Michelle Bretan once famously said “These days there’s no such thing as a bad vintage, just a very small vintage” and they are small for a number of reasons. They will finally chuck out a lot of the rotten fruit, they will declassify a lot of what they make. But what they’re left with is the best of the crop and the best of a bad crop is nevertheless pretty good. But it’s very small and great vintages. You can use most of the grapes and if you can use most of the grapes then you have a very big crop to sell. Both of those situations provide opportunities for people who know and understand the trade.
A few years back when we deal with a broker whose family has been in the business for two centuries, they’re a major brokerage. But they also owned a class, both Chateau’s so he is a colleague amongst colleagues when it comes to the logistics and the finances of the Chateau business. The dirty little secret of the Bordeaux trade is that they also price in terms of public perception. So when you have a good vintage like 2009, 2010, 2015, they are more or less compelled strategically to push up their prices in line with the comparable Chateau’s in the same class of that classification.
So if the prices go up 20%, that’s what they have to announce the increase at the time of the en primeur sales. They might put a smallish parcel onto the market, that’s called the first tranche, the first slice. It might be subscribed to immediately in which case they then put out a second tranche and lift the price and this is a game of ego.
You should put a very small tranche out first so that you’ve got a justification to be seen to be raising the price on the second tranche. So that everybody says “Chateau X is doing very well. Look they announced a second tranche within ten days of the first tranche and the price has gone up 20%”.
All of these are coded messages within the trade of how well you’re doing, how well your wines are recognised, how good business is. But the problem with this little cosmetic exercise is supposing you’re not really selling all that much wine. You’re now sitting with 50% of your crop unsold in your cellar. You’ve sold 50% at a fabulous price and in that sense you’ve banked the income.
But now you’re sitting with 50% of pretty much comparable wine that doesn’t have a home and probably can’t go out into the market under the Chateau label. Because once you sell en primeur you have to continue to sell through the avenues that the en primeur chain determines.
The problem with the strategy
So the guys who bought at 200, don’t want you coming to them in two years’ time saying “Listen, I’ve got a whole lot of leftover stock I couldn’t sell, would you like it at 120?” So you’re finally painted into your own corner in the wine cellar. You’ve sold what you can at the prices which strategically you are compelled to play as part of the game and you have a portion of leftover wine. Some of that wine you’ll bottle and keep yourself. Because the longer you keep it, the more valuable it will become.
If your cash flow is good, if you are well financed, if your revenue stream from the portion that you sold en primeur, where you get paid in advance against delivery of the wine, your cash flow looks lovely. You say “Listen, I did pretty well on the en primeurs, I sold 50% or 60%, I’ll bottle 30%. I can afford the dry goods, I can afford the holding costs, I can afford the corks” and you put it into your cellar and you keep it. But there will be a portion and in fairness it’s also qualitatively determined.
There’s stuff that will never make it into your Grand Vin, most of the class growth Chateaus now have a second label which will, so Chateau Margaux has the Pavillon Rouge of Chateau Margaux. They have a name that still lets you know it’s come from the Chateau, but that it has been declassified to a point. Lafite Rothschild has Carruades de Lafite. Every one of these second labels means that they can still get pretty good money because they’re trading off the main label of the class growth Chateau.
So they segment even before the en primeurs between the barrels that they know will go into the Grand Vin. The barrels that they know will go into the second label and barrels of indeterminate quality which will still be pretty smart. Because everything that has been done to that fruit is the same as what was done to the fruit for the Grand Vin or the second vin. Unless they knew from the outset that it was a young vineyard and that they couldn’t really incorporate its fruit in the Grand Vin or the Chateau.
How ‘declassified wine’ heads South
What’s left in the cellar is the unsold portion of the Grand Vin, the unsold portion of the second label wine, a bit of reject wine. They’ve got to do something with it and they can’t tell anybody because it’s their dirty little secret. So they go to a guy like the broker we deal with who is one of them. His family owns a third growth Chateaux and they say “Can you manage the disposal of this for us?” Because his other business is a negotiante, he’s a brokerage he bottles it under a regional reserve label. In all the cases except one because his Chateau is implicated, it’s from a single Chateau.
So when we get his San Julian 2009 and he can’t tell me which Chateau it comes from because that’s his deal with the Chateau. I do know it’s come from a class growth Chateau. On more than one occasion he has said to me “Look, I can tell you but you can’t tell your customers”. On others it sometimes comes with a Chateau branded cork in the bottle. In other words, he’s bought it as bottled wine that they couldn’t sell. We sell it with the label that says Pessac-Léognan, or San Julian, or Pauillac and we can say if we know for sure when you pull the cork from the bottle it will say Lavette au Prion or it will say Du Creux Bijoux or it won’t.
What we do know is that we’ve bought surplus from a Chateau and that, that surplus has been part of a disposal where it doesn’t really matter if they don’t recover the full cost of production. So that’s how that Bordeaux system operates and it offers fabulous value to consumers all over the world who can access what we call loosely ‘declassified wine’.
As a writer and a note of caution, in Burgundy of course, where they also limit the amount you can produce. In other words, how many hectolitres per hectare are entitled to the appellation. There is a little bit of a racket where the growers say “This is a little bit of a declassified wine, because they limited the amount as 55 litres per hectare. I got 65 hectolitres per hectare, so I’ve got ten hectolitres per hectare that I cannot sell under the appellation, so it is unlabelled. Often those guys are crooks deluxe.
They know that everyone is expecting that there will be a bargain and this is usually business they do with their Parisian customers. So they often go down the road to the neighbour who does have surplus, buy his wine, blend it and say this is my surplus, I can’t label it with the appellation. But I can tell you now it’s great Burgundy and they have customers who like to believe this.
I often land up in French homes where people say “This doesn’t say that it is a bottle of Vin Volinais Premier Cru, but I can tell you because my cousin bought it from the grower who gave it to him confidentially because it is the surplus from his property. It’s a great racket and sometimes caveat emptor is an important message.
JCW: So I’m thinking Christmas right now, because it’s Christmas and I want to treat myself to something from this list which I know will be old by then. But there would be new lists coming up from the Reciprocal Wine Trading Company. I am actually quite relaxed and quite chilled when I look at some of these wines that we’ve been speaking about and the price is R445 a bottle.
MF: Well, there still is and I’m not sure if there will be by Christmas time some San Julian 2009, which is on the list at R345 a bottle. I can tell you it comes from a second growth Chateau in San Julian, one of the top three in the appellation. If you want to come to my cellar and see how much of it I’ve stashed away, you’ll understand that I know that it’s a bargain and I drink it as such.
JCW: Michael Fridjhon, thank you very, very much indeed and join us again for another episode of Old Mutual Live Wine Edition on mobile, on digital, on demand.