Good wine in a turbulent market

The premium wine sector is a port of call for high net worth individuals looking for hedging.

© Shutterstock | The world’s top wines have steadily appreciated in value despite troubled economic conditions.

The global economy is on an upset stomach roller coaster this year, with higher-than-expected inflation, rising interest rates and in the world’s three major economies: the US, China and the eurozone.

No wonder stocks are falling too: The S&P 500 is down 17.02 percent, the Dow Jones Industrial Average is down 13.29 percent, the S&P MidCap 400 is down 14.46 percent, and the S&P SmallCap600 is down 15.53 percent year-to-date in late August.

In many sectors of the economy – real estate, housewares, electronics, personal care and appliances – sales are stagnant. But interestingly, not only is good wine in high demand, some experts say investing in good wine is an excellent hedge against the kind of turmoil we’re experiencing.

Read here how good wine is developing and why now could be the ideal time for an investment.

The price of wine, on average, is currently remarkably stable given what is happening in other sectors of the economy.

Unlike, for example, the price of fuel (which, according to the consumer price index, is up more than 106 percent year-on-year at certain points this year), air fares (up more than 37 percent) or men’s outerwear (up more than 22 percent), the price of wine is falling overall even.

According to data from the US Bureau of Labor Statistics, the average price of table wine in July 2022 ($13.33) was 2.1 percent below its peak in April 2021 ($13.62).

Increase in premium sales

While overall wine prices remain relatively stable, the best-selling wines end up at the more expensive end of the scale.

Consider the Direct-to-Consumer Wine Shipping Report, which combines data from SOVOS ShipCompliant and Wines Vines Analytics: Revenue is down 9 percent overall, but value is up 3 percent year-on-year to $1.95 billion . Sales of bottles of wine priced at $100 or more increased 34.2 percent in value and 36.1 percent in volume, while sales of wine priced at $30 or less fell 9.4 percent in volume and 8 percent in value .

Wine lovers have certainly been sumptuous when it comes to Oregon and Napa wines. In Oregon, the value of DTC shipments increased 18.7 percent, with a volume increase of just 12.9 percent and an average price per bottle averaging 11.8 percent. In Napa, DTC shipments increased 18.8 percent in value and just 4.1 percent in volume, meaning the price per bottle was significantly higher year-over-year, according to SOVOS.

According to Enolytics and Wine Direct’s second quarter 2022 DTC report, luxury wines priced at $90 and above saw a 32 percent increase in sales, while bottles priced at $20 and under fell 1 percent.

“The more expensive the wines, the greater the proportion of male Boomer consumers,” says Chris Huyghe, co-founder and principal analyst at wine data aggregation service Enolytics. “Many of them tend to be collectors and are less influenced by economic factors. The lower-priced wineries have a larger customer base of millennials and women who have lower disposable incomes, which are therefore more influenced by economic factors.”

Individual, small-volume wineries, such as the 1,000-case Wentworth Vineyard and Ranch in the Anderson Valley, have enjoyed a 240 percent annual increase in sales.

“The demand for the wines I make is greater than ever,” says co-founder Mark Wentworth. “Admittedly, my business is relatively young and there are many factors driving growth, among which the most notable wines that I think are very good are our organic farming and support for conservation work.”

Wentworth, whose wines retail for $52 to $114, notes that DTC and wholesale channels through distributors are seeing the strongest growth.

For the 8400 case Seña, a collaboration between Eduardo Chadwick and Robert Mondavi in ​​Aconcagua Valley, Chile, sales are up 25 percent year-on-year. Seña is offering a wine – the Seña 2020 priced at $150 per bottle.

“We are seeing a very positive trend in the US and Asia,” says Michel Couttolenc, Vice President of Señas Sales and Marketing. “We firmly believe that the US premium market has great potential for us and we are just beginning to unlock it.”

luxury expenses

The typical person who chooses a nice bottle of niche wine on a random Tuesday arguably has more spending power than ever.

The gap between the ultra-rich and everyone else widened during the pandemic, with the world’s 10 richest men doubling their wealth from $700 billion to $1.5 trillion in the first two years of the pandemic, a report by Oxfam International reveals. (That accounts for an accumulation rate of about $15,000 per second).

Consumption habits are likely to continue despite the bleak economic outlook. Sales of luxury goods, from high-end watches to bottles of Château Mouton-Rothschild, are expected to rise 5 percent this year, consultancy Bain predicts.

As well as buying delicious bottles from the DRC, the ultra-rich are now looking to wine to balance their portfolio of possessions. (Ultra-high net worth investors, or those with over $30 million, have an average of about 50 percent of their wealth invested in alternative investments like art, precious metals, real estate, and wine).

Investors looking to avoid some of the stock market turmoil have been looking for alternative investments. Cryptocurrencies were obsolete, but interest in collectibles – like art and wine – is on the rise.

© Baghera Wines | The 2009 La Tache from the DRC has appreciated significantly in value over the last ten years.

Wine offers consistent returns on investment grade wine with low correlation to overall market performance.

“When the stock market goes up, rare wines tend to go up more, and when stocks fall, rare wines can fall a little, but not nearly as dramatically,” notes David Parker, founder of rare wine buyer and seller, Benchmark Wine Group based in Napa.

Liv-Ex, the world’s largest wine exchange, has returned an annualized 13.6 percent over the past 15 years, compared to an annualized return of 7.8 percent for the Dow Jones and 8.58 percent for the S&P 500. The LX1000, the broadest index, is up 22.9 percent over the past 12 months and 47.4 percent over the past five years.

There are several ways to invest in wine, Parker explains: through wine stocks or ETFs like LVMH, through wine mutual funds like Vinovest, or through the individual purchase of top wines.

“Which of course you want to buy by the case,” notes Parker.

And for many, the interest in investing in wine goes beyond their bottom line.

“The majority of fine wine buyers view their collections as both consumable and collectible,” something that is increasingly appealing to investors looking for cash to park somewhere,” said Justin Gibbs, vice chairman and stock exchange director at Liv-ex. “ Firstly, because they are enthusiastic about the glass and like to drink it, secondly, because they see it as a store of value. Its relative scarcity (which has only increased over the years) and its tangibility make it a real alternative to, for example, stocks and bonds. It is therefore considered an instrument for portfolio diversification. Its tangibility becomes particularly attractive in times of inflation, when paper money depreciates over time.”

Exchange Rate Bonus$

For high net worth individuals in the US and Asia, now is a good time to start or complete an investment quality wine collection.

“Sterling’s weakness against the dollar means that prices for fine wines are becoming more affordable for American and Asian buyers,” says Gibbs. “The dollar has gained strength against the pound sterling. In a year, the GBP:USD exchange rate has fallen from $1.38 to $1.16. This decline is reflected in the prices for fine wines. In sterling terms, the wines listed on the stock exchange are currently 15.9 percent cheaper for dollar buyers than they were in December last year.”

During the summer, the dollar and the euro also reached par for the first time in two decades.

If you’re thinking about investing in a wine collection, Asher Rubinstein offers some guidelines. Rubinstein is a trust and probate attorney at Gallet Dreyer & Berkey in New York, advising high net worth individuals on, among other things, their wine collection.

“Not every wine will increase in value,” emphasizes Rubinstein. “You want to make sure you’re investing in top quality wines: Burgundies like Domaine de la Romanée-Conti, Champagnes like Cristal, Tuscans like Biondi Santi Brunello di Montalcino, Bordeaux First Growths like Latour, and unclassified Right Banks like Petrus. Some of them Napa, like Harlan and Screaming Eagle.”

They want to buy multiple cases, have a tight planned time horizon—typically five to 20 years—and plan to sell them within their drinking window. Allocate funds for insurance, appropriate storage conditions, ideally not in your own home, ensure there is a chain of guarantees of origin and paperwork from your storage facility explaining temperature and humidity levels. If you’re selling, likely through an auction house, make sure you report your earnings when filing taxes, he adds.

Rubinstein says he’s seen his clients’ investments yield well over 20 percent returns, even after factoring in the costs and the taxes you pay on capital gains.

“Investing in wine is slow and steady while the stock market has so many ups and downs,” notes Rubinstein. “It offers diversification to your portfolio, but it’s also more interesting. I think investing in fine wine attracts a whole new type of investor because it incorporates history, geography, climate change and the aristocracy. And you can drink it when all else fails!” “

But. Good luck finding multiple cases of Screaming Eagle and DRC.

“Scarcity is part of the inherent value of a good wine,” Rubinstein admits. “Most blue chips have waiting lists.”

However, working with rare wine retailers like Benchmark is an option.

“We have the largest inventory of investment-grade wines in the country,” says Parker. “We have around 16,000 SKUs and high case availability. We work directly with the producers and can buy from brokers for rare wines. We also have sales people who can advise high net worth individuals on purchasing decisions and stocking.”

As with any investment, fabulous returns are often the result of an unpredictable combination of intelligent foresight, educated guesswork, market conditions, and foolish luck.

But the fine wine’s consistent outperformance of the stock market is hard to ignore. So is the stunning 10-year return of 888 percent on unicorn investments like Democratic Republic of Congo’s La Tache, which was purchased for $693 a bottle in 2009 and sold for $6,851 in 2020.

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