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The Impact of Credit Crunch on the Asian Fine Wine Market

erobertparker by Lisa Perrotti-Brown MW12/12/2008  

Hong Kong

The enormous growth in wine consumption across Asia throughout the last two decades has had a considerable impact on the world's fine wine market.  Few would dispute that the recent global increase in demand for the wine world's blue chips is due largely to Asia's burgeoning collection of collectors.  Global wine price indexes such as Livex post numbers that can attest to the affect on value of limited supply vs. increased demand.  So, like it or not, when we consider fine wine as a commodity as much as it is a lifestyle, we can no longer rely solely on Western sources to call the market.  And while a tally of recent auction house results in NYC, London and Hong Kong is a valid barometer of the global wine market's weather following the credit crunch, this doesn't necessarily tell just how much damage the storm is doing or what the aftermath is likely to be.

As the fine wine world globalises, many current release top tier wines are now being directly allocated to Asia.  The percentage of blue-chip production divvied out to the Far East varies considerably depending upon the local demand for specific wines and the amount of time and effort spent by the winery on marketing in Asia.  For example, Don Weaver of Harlan Estate quotes a figure of direct allocation to Asia of around 17%, while David Powell of Torbreck in the Barossa estimates he distributes around 20% of his fine wines to the various countries here, and 24% of LVMH's revenue from wines and spirits is reported to come from the Far East.  

These figures suggest somewhat impressive proportions but do not accurately reflect the largely incalculable amount of business done by third party middlemen in the form of brokers, merchants and investment funds.  Aurelien Valance, the business development director for Chateau Margaux, estimates as much as 30% of their current release Grand Vin makes it way to Asia via the Place de Bordeaux or third / fourth tier brokers.  Berry Bros & Rudd, with a parent company in the UK and office in Hong Kong, reports that 30% of their en primeur sales now go to Hong Kong, while 25-30% of the entire company's global business is Asia.  Bordeaux Index, another UK based broker and investment fund manager, claims around 20-25% of their global business is Asia.  And Thomas Percillier, Asia Pacific export director for one of Bordeaux's largest negociants, CVBG, estimates that 10% of his company's sales are now Asia.

The long and the short of it is, along with North America and Europe, there's no denying that Asia is now one of the fine wine market big boys.

As Nicholas Pegna, managing director of Berry Bros & Rudd HK, rightly suggested, "It is difficult to look at Asia as one market because of course it is many markets."  This is a fair point though without doubt the overwhelming majority of fine wine that enters Asia enters through one of the top three wine hubs:  Hong Kong, Singapore and Tokyo.  Thus to obtain a clearer view of the current state of the Asian fine wine market in the midst of global economic turmoil, I spoke with some of Asia's most important wine market-makers residing in these cities.
 

To what degree has the financial crisis had an impact on Asian fine wine sales?

Speaking in November with Yasuhisa Hirose, the president of Japan's largest fine wine retailer Enoteca, it was clear that final quarter wine sales there were definitely starting to feel the affects of the crunch.  Enoteca currently has 31 wine shops in Japan and one that has just opened in Hong Kong.  The wine shops account for 45% of turnover while 40% of the business is wholesale (e.g. restaurant sales) and 15% is internet retailing and growing. 

Most noticeably hit has been the wholesale arm of Enoteca.  "Occupancy in hotels such as the Hyatt and Mandarin are down.  The Japanese are not eating out so much in restaurants and there has been far less banqueting and parties" commented Hirose.  "This has already had a large impact on our wholesale business."  He went on to say, "Retail has not been damaged so much, although people are now buying slightly cheaper wines."  One important point made by Hirose was the recent strength of the yen.  "The yen has gone from 70 yen to the euro to around 119 yen to the euro.  We can now buy from Europe for much less."  And this is being cleverly advertised in their shops as one very good reason for wine lovers in Japan to buy now.

In Hong Kong, Nicholas Pegna remarked that the financial crisis has not affected their sales much.  The bulk of their trade is done with a 12,000+ strong client base and they have a visible up-market retail shop presence in The Lee Gardens at Causeway Bay.  Berry Bros & Rudd HK has only recently launched a wholesale arm to their business based upon their UK model for targeting this sector and it currently accounts for a small proportion of their business.  Pegna concedes, "It (the crisis) has affected the auctions and the on-trade in Hong Kong.  We've seen around 2-5% value decreases on the prices of fine wines but that's all."

Douglas Rumsam of Bordeaux Index in Hong Kong had a very different story to tell.  He remarked, "Yes, the crisis has had a large affect on private client sales.  Demand at the top end is no where near where it used to be and this could become the accepted norm."  Yet he went on to point out, "We don't have a lot of people wanting to sell their wines right now."

In Singapore a spokesperson for Vinum Fine Wines, this country's largest retailer of fine wines, commented, "There has been a significant and substantial reduction in sales since the crisis turned nasty with the collapse of Lehman.  Prior to that the slow-down was noticeable, but measured."  Vinum's core business is in Singapore but they are also big players in the rest of South East Asia with branch offices in Malaysia and Thailand and have recently opened a second "Les Amis" fine dining restaurant in Hong Kong.

What are people buying now?

One thing is clear, whether the crisis has had a large or small impact on the volume turnover of individual businesses in Asia it is undoubtedly shaping what people are drinking.

"All the Bordeaux First Growths are not affordable anymore," Hirose said firmly.  "Our most popular wines used to include Latour but not anymore."  30-35% of Enoteca's business is Bordeaux so while the downward turn in the market may not have affected retail volume sales much for now, it has affected value.  The Japanese are drinking more conservatively and looking to other regions to provide better value at the top end.  "Italy is popular at the moment as is Bourgogne," commented Hirose.

Pegna in Hong Kong echoed Hirose's observation, "People are moving away from big names in Bordeaux.  Below HK$1000 is where the majority of customers are purchasing wines for drinking."

A substantial 70 – 80 % of Bordeaux Index's core business is comprised of Bordeaux.  Rumsam commented that while Lafite continues to be popular in Hong Kong and China, people appear to be moving towards more affordable Chateaux such as Lynch Bages and Angelus.  Second wines like Les Forts de Latour are also popular.

Vinum went on to qualify that their customers in South East Asia are now drinking, "affordable mid-priced (S$100 – 300/ bt) Bordeaux with good ratings and in notable vintages (e.g. 96 Medocs, 98 Right Banks)."  They further commented on the recent popularity of Burgundies from prominent producers (e.g. Rousseau, Meo-Camuzet, etc).

Who is buying fine wine right now in Asia?

"Hard to say, given that the market has only just turned in the last couple of months," Vinum responded.  "There's still buying interest from our regular clientele (albeit less frequent nowadays) however they are more sensitive to prices than before.  Perhaps it's easier by rephrasing the question to, ‘Who is NOT buying fine wine right now?'  Over the preceding two years, and particularly in 2007, we experienced a tremendous upsurge in business from clients involved in the financial industry.  Particularly those related to the investment field.  Their absence is noticeable these days, and as a group they are the main contributors to the substantive fall in our sales.  However, what is interesting here in Asia is that they have not indicated any interest in selling their (often substantial) holdings, which were accumulated over the past 2-3 years.  And indeed, we know of several whom are still actively consuming the wines purchased and will not entertain the thought of selling."

Berry Bros & Rudd HK has spent ten years since its establishment in 1998 gaining the trust of the local fine wine community.  "Ten years ago 80% of our business was expats," said Pegna.  "Now 90% of our business is Hong Kong Chinese."  He went on to say, "You assume what Hong Kong wants is cheap wine now but what they really want is a relationship with someone they can trust."  Another point made by Pegna is, "There is not a fine wine market in China," which he estimates accounts for 25-30% of their sales by value, "just lots of wealthy people who buy fine wine."

Rumsam provided an insightful observation of the impact of the crisis on Hong Kong's wine spending habits, "It is not good for wealthy individuals to be so publically spending money.  Big buyers are still spending but doing it discreetly, behind closed doors."

The new trend for buying fine wines discreetly was something that Hirose in Japan also pointed out.  Public displays of wealth and extravagance in Japan given the current economic situation are considered in poor taste.  Even the Prime Minister Taro Aso has recently been taken to task by the Japanese press for his perceived lavish spending in bars and nightclubs during these difficult financial times.

Predictions for 2009?

Rumsam in Hong Kong is cautiously optimistic for 2009, "The crisis is likely to be short-term and the market will come back.  We just need to ride the storm."

Hirose too was bullish of the Japanese wine market.  "After the summer (of 2009) things are going to get better."  I asked him if the Japanese will manage to go beyond two litres per capita per annum.  "In the long-run the Japanese will drink more wine," he replied.  "The crisis has stopped people drinking more wine for now.  People have become conservation again.  But the Japanese understand wine better than ever and how to enjoy wine."  Speaking specifically of Bordeaux he warned, "Now is the time for the Chateaux to be realistic.  It is time for them to get back to the traditional customer – the traditional customer has stopped drinking Bordeaux.  If the prices come down, then the customer will come back."

Of the 2008 Bordeaux en primeur campaign, Vinum said, "Much will depend on the Bordelaises' view of the impact of the credit crisis on the wine markets, which consequentially determines the opening prices for the 08's.  One suspects they will be much more sanguine than necessary, which I believe will not bode well for the 08 campaign."

Calling the market:  factors that affect wine demand in 2009

Let's face it, even the world's greatest financial experts are struggling to call the global economic market.  No one seems capable of anticipating what will happen tomorrow let alone next year.  Historic comparisons are thin on the ground since much of what has occurred in the world's largest economies since October is unprecedented.  But there are a few factors to watch which will be important indicators in calling each of the Asian fine wine markets for 2009: 
Jobless figures
Consumer confidence and disposable income
Exchange rate fluctuations
Supply of fine wines (e.g. production volumes) and level of quality (e.g. of vintages being released)
Pricing of new releases
Consumers' pressing need to liquidate their assets

My view?  There's a lot of optimism in the trade and many professionals with vested interests are talking the fine wine market up, but I think when you read between the lines and consider the portents for the six factors above, best to batten down the hatches for 2009.