Opinionista Michael Fridjhon 10 October 2014

Of auctions and the silly end of the wine trade

The wine auction season has come and gone. The 40th annual Nederburg sale was held on 12 and 13 September and the 30th Cape Winemakers Guild auction on 4 October. The combined turnover of these two sales totalled around R18-million – much the same amount as the hammer price of a single lot (admittedly a world record) of 114 bottles at a recent Hong Kong auction. Still, for the South African fine wine market, this is not an insignificant sum. For the producers who prepare special auction releases, or who age wine for these occasions, it seems to justify both their efforts as well as the roadshows which promote them.

Fine wine in South Africa (however you choose to define the category) is very small business. The market for quality bottled wine (i.e. which is not in returnable glass or bag-in-the-box or at the bottom end of the supermarket trade) is certainly less than five million cases annually. Only a tiny percentage retails at over R60 per bottle for white and R80 for reds. The trophy wines, priced at R500 and more per bottle (and which actually sell solidly at these prices), account for less than 0.1% of the wine market. When it comes to not over-valuing wine, South African consumers are amongst the world leaders. We don’t even buy that much premium imported wine. In fact, most of what makes its way here from foreign vineyards is priced to compete with the local industry. I’d be seriously surprised if the total imports of Bordeaux classed growths add up to 100 cases each year.

In fact, given the values which trade at auction internationally, the question is not why punters in South Africa spend R15-million to R20-million on trophy wines at these consecutive sales, but why they don’t spend more. We have one of the world’s biggest Aston Martin dealerships; Louis Vuitton, Mont Blanc and Cartier don’t seem to consider us a backwater. Eastgate, Hyde Park and Sandton City don’t live off bread-and-butter items, and yet we have somehow managed to steer clear of the silly end of the luxury wine trade.

At the 1986 Guild Auction most of the collectable wines of the era went on offer at around R12 to R20 per bottle. Three decades ago the top end of the Nederburg auction – the fabulous 1974 Auction Cabernet – saw pricing into the R30 to R40 per bottle range (you’d have paid the same at the time for a Bordeaux First Growth). In those days R35,000 to R40,000 would have bought you a Five Series BMW, one which today would cost you 20 times the mid-1980s price. If you apply the same multiple to the wine market you will find it works for most of the super-premium Cape reds, but it is way off the mark when it comes to comparable European wines. Current releases from chateaux like Margaux and Latour are now priced at around R9,000 per bottle. In the first half of the 1980s comparable vintages cost R30. This is at least 10 times the multiple that works with cars and Cape wine.

Of course, this may appear to be accounted for in the devaluation of the Rand over the period. But the local price of the BMW is hard currency calibrated (the R800,000 you pay in SA is actually more, at current exchange rates, than the ?38,000 that it presently costs in England). This leaves two obvious conclusions. Firstly, that the deluxe wine market internationally has been through an extraordinary boom in the last three decades and secondly, that Cape wine has enjoyed none of it. A quick glimpse at the top end of the Californian trade confirms that the stratospheric prices have not been limited to the French vineyards (and the same examination of Australian icon wines tells a similar story). In fact, together with the Chileans and the Argentinians, we have pretty much been by-passed by the international wine-drinking fraternity – whom we can hardly condemn, seeing as our own consumers seem to have taken much the same view.

Of course, the real reason our wines have done little more than track domestic inflation is that the number of consumers who want to buy them has hardly increased over the years. What has driven up the prices of the top-end of the international wine market has been the influx of new wine enthusiasts all chasing a finite volume of what they consider to be trophy wines. In this context, they are as keen to buy Grange or Hill of Grace from Australia as they are to secure Screaming Eagle from California or Lafite Rothschild from Bordeaux. They are not flicking their way through magazines and catalogues which praise the virtues of Klein Constantia or Rust en Vrede and saying to themselves, “I must get a case or two of these, no matter what they cost.”

This year’s Nederburg sale showed a solid improvement in prices, building on a recovery which began a year ago. This is partly the result of greater rigour in the process which determines which wines will be accepted on the sale, partly the result of lower volumes. In this sense, price stability/buoyancy is a direct consequence of the same rules of economics which have shaped the European, Californian and Australian wine market in the past couple of decades: make more money chase less stock and watch the prices rise. Based on the 2014 Nederburg Auction result, the strategy is perfect. This year’s sale saw the total volume of wine on offer down to the lowest level in living memory: 11,700 litres. The average price per litre increased by 68.5% to R597. Buyers paid a premium of over 200% on the reserve prices, compared with around 90% in the 2013 sale – a statistic which also suggests that sellers have learnt to tailor their expectations to the economic climate. Every drop of wine on offer was sold

To understand the extent to which this recovery relates to the management of supply and demand it is necessary to look at the trends a few years back. In 2009 almost 39,000 litres of wine were offered for sale. The average price per litre achieved was R122. About 15% of the sale remained unsold. Moreover, as the overall premium (9.1%) on the reserves suggests, a significant percentage traded for not a cent more than the seller’s floor price. Go back to the 2004 Auction and the volume on offer was over 60,000 litres with almost 14% finishing the day unsold.

Managing volumes relative to the market’s ability to absorb premium wine is obviously key to the auction’s success (assuming that your view is that higher prices are better). Ensuring that the wines are desirable, and – in the case of the Nederburg sale – immediately drinkable, is also important. Thinning out the offering is not only about shorting the market; it’s also about the quality of the selection and the place where it can fit into the trade. Here the statistics from Nederburg also require some unpacking. The biggest buyer at the sale was Tsogo Sun – a hotel group many of whose patrons are actually foreign visitors. The fourth biggest buyer was the Singita Group, almost all of whose customers are extremely well-heeled international guests. These are not purchases destined for the local market, for Rand-based shoppers. The Nederburg Auction’s share of export sales may have dropped on paper to under 30% (with most of this stock going into neighbouring states) – but it is clear that an important proportion of what appears to be domestic shopping will by-pass the relatively stagnant domestic premium wine market.

At the Guild sale less than a month later, the same pattern prevailed. Tsogo Sun was the top buyer. Singita was in number three slot. Exports were small (only 10%) and these went mainly to European buyers. There are no aberrations in the overall patterns, just with individual lots where egos and grand-standing can get in the way of the business at hand.

Even with record prices like R1,500 for a bottle of 2012 Boekenhoutskloof Syrah and R1,000 for a Cape Point Reserve White 2013, the Guild Auction may still offer what may one day seem like bargains – as long as you accept the principle that price is determined by rarity (perceived or otherwise) rather than some intrinsic measure of quality. Change the ratio of buyers to lots and the prices could have been higher. One day, if and when such wines are released from the shackles of our rand-based expectations, that R1,500 could become R15,000, just as the Romanee-Contis which used to sell for R25 40 years ago now costs R160,000. After all, very little of this has anything to do with what is in the bottle. DM