Friday, February 8, 2008

"Bordeaux Pricing Immoral"

Interesting Decanter article today. Cost of a bottle of First Growth Bordeaux is supposedly only about $17 (Euro 12), which means en primeur price is about 80x cost. Wow, talk about inflation! This far exceeds even the typical mark-up on luxury goods such as a Cartier watch or a Prada bag, which is said to be about 17x cost.

1 comment:

  1. The twelve euro cost could only include production costs and materials, i.e. viticulture, vinification, barrels, packaging (bottle, cork, label, capsule, crate), etc. The article states luxury goods sell for 17x’s cost. But luxury goods makers are really more like négociants than Chateaux. They source their materials and either contract out the manufacturing or do it themselves. A Chateau is a raw material supplier and a manufacturer.
    The manufacturers can source materials, leather for example, on a competitive market out of China or anywhere else in the world for that matter. There is no AOC. In order to brand their products, made in Italy, they would just need to be manufactured in Italy. That could be in Fruili or Sicily. They don’t need even need to own the factories where the products are made; they could simply contract it out. First Growth Bordeaux has one source for materials, their own vineyards. There is no competitive market. Further, they must source their materials from the same source regardless of quality.
    Despite this, let’s look at the 17x’s cost scenario. Assuming the first wine sells for 500 euros and the second wine 100 euros with a 70/30 split you have an average bottle price of 380 euros. At 380 euros average bottle price, with a price at 17x’s cost for a luxury good, we should have a cost per bottle of roughly 22 euros. If we back out the manufacturing cost of 12 euros, we get a return on the vineyard of 10 euros a bottle or roughly 120 euros a case. At an average yield of 35 hectoliters/hectare, we can produce roughly 390 cases a hectare or 158 cases per acre. So, our return on the vineyard is 18,860 euros per acre. Assuming a very modest return of 1-2% on assets, that vineyard would be valued at 1-2 million euros per acre.
    I believe the price LVMH paid for Chateau d’Yquem would exceed 1 million euros per acre today. So it seems that the 17x cost model could hold true for First Growths as well.
    Wines like these are more comparable in some ways to diamonds or gold than to luxury goods like handbags. There is an endless and flexible supply of leather, labor and factories. There is a very fixed supply of fruit to make Chateau Margaux and one Chateau where they can make it. The reality is that wine price is market driven by supply and demand. Supply is fixed, so as demand increases so does price. If price were kept artificially low, the wine would be less available to the average consumer. It would get allocated and the real value would get transferred to someone other than the producer. You can readily see this with the top growths of Burgundy. If the First Growths consistently price higher than the market can bear, the market will shake that out. They will accumulate excess inventories and cash flow will be reduced. It is not sustainable.
    The sad fact for the average guy is that demand is increasing, which means he may not be able to afford these wines in the future. The good news is that even despite the drop in the dollar, there is an endless supply of great, affordable French wine available on the market. Just ask Alex.

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