Liv-ex Director James Miles discusses Liv-ex and the fine wine market with Jeff Leve from The Wine Cellar Insider. You can read the interview in full here.
For people not familiar with Liv-ex, what is your core business?
Liv-ex is an acronym for the London International Vintners Exchange. I guess everything you need to know is in the name. People often find it hard to get their head around what an exchange does.
What is the business model for Liv-ex?
Our business is about information. Our unique selling point is our price data. Merchants come to us to find out the current transaction price, where their competitors are actually trading. They can’t get this from anywhere else. They also come for liquidity.
Where does Liv-ex earn its income from?
65% of our income comes from transactions, 30% from data and subscriptions and the balance from storage, settlement and transport.
What was the inspiration behind starting Liv-ex?
At the time we were stockbrokers. We were struck by the similarities between stocks and wine. We had bought and sold a small amount of fine wine in the traditional way and became fascinated by the market. Our observation was that it was both opaque and inefficient. We had a hunch the Internet had the potential to change this and revolutionize the way fine wine was traded.
Were either of you involved at all in the wine trade? Or was your primary experience in trading stocks?
We weren’t qualified for much. We knew little about wine and even less about the market. But we understood how markets worked. Justin was an equity salesman. I was an equity analyst. If we had been better informed, we would never have attempted it. Not being from the trade also helped us to establish our independence early on, which was vital.
What was your next step in putting together Liv-ex?
Our idea was to build a wine exchange for merchants along stock exchange lines. Most people felt the Internet provided the opportunity to cut out the middle man. Our thinking was that an exchange would work along Business to Business lines.
With that spark of an idea, what did you do?
We saw the opportunity, not in terms of removing unnecessary middlemen, but in terms of cost. By driving down the cost of distributing information to almost nothing, the Internet opened a gap in the market for our ideas. Our vision was to make trading wine more transparent, efficient and safe.
You make a big issue of transparency. Is transparency more important than price?
They are related. Transparency gives buyers confidence in the price.
Is wine a personal passion for you?
We love wine. But we were drawn to the trade by the business idea rather than a passion for the product. This makes us pretty stupid I know!
What wines do you purchase for your own your personal cellar?
I tend to only buy to drink, although there is stuff in my cellar like Carruades and Duhart Milon, which has got too expensive for me. I tend to only buy less expensive wines in the great vintages. I have a lot of lesser 2009s in magnum. I also have a smattering of Fourrier, Chateauneuf du Pape from Clos des Papes and Boillot. I don’t tend to pay more than £500 per case for anything. My cellar is heavily concentrated in second and third tier Bordeaux like Lynch Bages, Leoville Barton and Pontet Canet.
What is your guess as to the value of fine wine traded today on an annual basis?
In 2011 it was about £4bn, but 2012 was down 30-40%.
How much of that is Bordeaux wine?
In 2011 94% of Liv-ex trade was Bordeaux wine. In 2012 it was 85%.
How much of that is devoted to the First Growths?
Currently about 30%, by value. But that is lower than normal.
Do you think the current system of selling Bordeaux wine En Primeur will continue in its present form?
Yes. It is a brilliant system for the producers. I don’t see the structure changing in my lifetime. However, it could be more transparent, efficient and safe than it is currently.
Where is the fine wine market headed these days?
The underlying themes are unchanged and positive. More people are drinking wine and the rich are getting richer, particularly in emerging markets. Prices got way ahead of themselves, particularly those wines that were sought after in China, like Lafite Rothschild. The correction has been tough. But it is cyclical and not structural. The underlying demand and interest in fine wine hasn’t gone away.
How have things changed for you at Liv-ex, since you first got started?
The Internet has made the market much more transparent and information travels much faster. This has made the
market more accessible and opened a multitude of new opportunities making it much larger.
Why did you create the initial Liv-ex 100 in 2004?
We publish a monthly market report for subscribers to our Cellar Watch, which is a cellar management tool for collectors. We first did it for fun to demonstrate a point in one of our reports. It caught the imagination of the press. Bloomberg and Reuters called asking if they could list our index on their platform! Since then the 100 has become the benchmark for the industry which was a huge coup!
How much has the 100 Index changed since its inception?
The 100 index is weighted by multiplying price by production and scarcity. We depreciate supply as the wine ages, to reflect the fact that wine gets scarcer as it gets older. So there is a natural bias to young wines with high production and big prices. This means the index is heavily weighted towards recent vintages of the First Growths. This reflects the reality in the market. Lafite Rothschild from Pauillac makes 25,000 cases at £5-10,000 per case. Clearly it is always going to be more important than a top Rhone, Burgundy or a garage wine in California, where prices are high but quantities are tiny. The vintages have changed, but the brands that matter have not.
Are you still focused on business to business transactions exclusively?
Yes. We have no interest in trading with consumers or producers. Our members do this very well. Our job is to facilitate trade among our members, not to put them out of business. If they do well, we do well.
How many members are currently part of the exchange?
We have 420 merchants in 35 countries!
Which countries are the most active?
UK and France. London and Bordeaux is still home to 9 out of 10 of the biggest players in the world. The biggest wine merchants in Europe are also the biggest in China.
Aren’t consumers better off purchasing wines at auction, than through traditional merchants?
Definitely not! Outside of the US and possibly Asia for the time being, auctions are an irrelevance. It is much cheaper and more convenient to trade with a merchant. That is why the merchant market is 10 times larger.
What is your opinion regarding the decision by Chateau Latour to no longer offer their wines for
sale as future?
The decision is impossible to fathom. Not because it is bad for the market and the consumer, which it is, but because it makes no sense for the owners. When you can sell your wine for 500 Euros per bottle in a single phone call to a courtier, with minimal distribution or marketing cost, at gross margins of 98% and hold no stock, why would you want to change a thing? It is a high risk, low return strategy.
What wines should consumers looking to invest in?
Well stored older drinking Bordeaux wine represents great value for drinkers and investors relative to recent vintages.
What do you think will happen to the Bordeaux market when Robert Parker retires?
People will pay more attention to the consensus. I think this will be healthy.
How pervasive is the problem of counterfeit wines today?
Thankfully the chateaux are starting to take the problem more seriously. Technology like proof tag is making a big difference! It is not a large problem for us currently. Most of our business is in young wines and the chain is easily tracked back to the producer. But it is important that we all remain vigilant.
How strong is the Asian market place today?
It is very tough particularly in Greater China which includes Hong Kong, Singapore and Taiwan. These markets are at the heart of the slow-down and there are far too many players there currently. There is going to be a shakeout, which will be painful but necessary.
With that as a starting point, what is your view of the Chinese market today, and for the foreseeable future?
It is an exciting new market for the wine trade. There are early signs of some restocking in China which is positive and didn’t happen last year. We expect a gradual recovery. The market is going to be more sophisticated and discerning as it matures. But the interest in wine is real and enduring.
Where are prices for Bordeaux wine and
other collectible wines headed?
The picture is more mixed than the headline numbers suggest. Away from the First Growths, mature and third and fourth tier Bordeaux wine continue doing well. Right Bank wine like Angelus and Pavie, which were just promoted in the recent St. Emilion Classification are at all-time highs. Champagne, Burgundy and Rhone have been relatively untouched. High quality wines at sensible prices will do well.
With wines being purchased solely for investment, obviously excessive shipping is a costly endeavour. What are your plans to lessen the need for movement in transactions?
That is a very big question! The reason stock moves around is that legally, an entity can only prove ownership of a wine if it is actually in their warehouse account.
How would Liv-ex change that?
Our idea is to build and manage a central depository of ownership which would basically be a database of owners above a certified network of warehouses that all perform to the same standards with regards to storage conditions, verification process etc. In this scenario, transferring ownership would become a simple book entry or database transfer. Actual goods would not need to be moved unless physical delivery was a necessity.
On the surface, for investors that do not plan on drinking the wine, not paying for shipping and maintaining provenance seems like a good idea for all parties involved.
If you were to build a supply chain for fine wine today, you wouldn’t build the current one. There is too much movement within the current system. The vast majority of trade is in wines that are too young to drink. 90% of Liv-ex’s trade is in the last 10 vintages. As a result, most of our business is transacted between one storage account and another, even if it is travelling half way around the world in the process.
What are your plans for the future at Liv-ex?
We will continue to obsess about making trading wine more efficient, transparent and safe for the benefit of wine lovers everywhere.
What does the future hold for wine investing?
Wine and speculation in wine have been strange bedfellows since the beginning of time. As long as there is wine, there will be speculation. Both have a great future.