US Bordeaux wine prices at risk

Even as Chateau Lafite leads a surge for Bordeaux vintners in Asia, US retail prices for the same wines have skidded below wholesale cost as a major importer dumps stocks worth tens of millions of dollars.

US importer Diageo Chateau Estate Wines (DCE), a subsidiary of the British drinks giant Diageo, has abandoned Bordeaux wine after 35 years, aggressively liquidating its warehouse stock on an already shaky market.

Speaking to AFP, a source within DCE, who asked to remain anonymous, blamed 'enormous stocks' of unsold Bordeaux for their exodus. 'It's all about making money. The margins are getting thinner each year and Americans are trading down.'

DCE's turbulent withdrawal, which has heated up in recent weeks, is having a 'huge impact on the market,' Chris Adams, chief executive of Manhattan retailer Sherry Lehmann, told AFP.

For many years, DCE was the largest US buyer of Bordeaux, and amassed a colossal cellar. Now famous labels such as Lafite, Haut Brion and Lynch Bages are being offered to American retailers at discounts of up to 50 per cent.

'I have 5.5 million dollars' worth of First Growths in my warehouse that I cannot sell, because I'll be 50 per cent more expensive than Chateau Estate,' said Guillaume Touton, owner of Monsieur Touton Selection, the New York importer with annual sales of over 100 million dollars.

'A major Mexican importer sent trucks to New York to pick up inventory, because it was 25-per cent cheaper to buy it from Chateau Estate,' he said

'No one else can sell their wine. We don't know how long the scenario will last,' said Geoff Labitzke, Corporate V.P. of Fine Wine for Youngs Market Company, a California-based wholesaler with annual revenues topping one billion dollars.

The timing is particularly bad.

The economic crisis crippled Bordeaux wine sales and 'the exchange rate is killing us,' chorused several wine merchants.

But Adams came to DCE's defence. 'They're exiting the market - and trying to find the correct market price.' He said the discount prices 'reflect the level of demand for the 2005 and 2006.'

But there is a benefit for wine lovers suffering like consumers in general from the downturn. 'In general we are passing a lot of the discounts on to consumers,' he said.

Today Sherry Lehmann retails Chateau Lafite 2006 at $US495 ($A543) per bottle. Wholesalers bought the same wine two years ago for 310 ($A506) per bottle, shipping, taxes and broker fees not included. Connoisseurs can pick up 'vintage of the century' Lafite 2005 for $US9,900 ($A10,863) a case. Just six weeks ago, a New York Sotheby's auction sold the same wine for $US14,520 ($A15,933) a case.

The pricing problems for Bordeaux are not new, nor entirely the fault of DCE's defection or the economy. Prices soared between 1982 and 2005 under the combined pressure from Asia, speculators and Robert Parker's faithful legions.

The problem was exacerbated according to Labitzke, because Costco and DCE bought huge allocations and hoarded the wine, creating 'an artificial level of implied demand from the US -- the wine estates set their prices based on this perceived demand.'

Touton agreed. 'Chateaux have admitted to me that they had had steady growth for the last 15-20 years because of (DCE). DCE was part banker, part Santa Claus. Well, Santa Claus is gone now.'

The bubble burst when vintners badly miscalculated the prices for the 2006 and 2007 vintages. Consumers fled. Wholesalers and retailers cancelled orders. And companies like DCE were left financing overpriced wine.

Aquitaine Wine Company's Harvard-educated CFO Margaret Calvet likened the situation to the classic business school case study, tulip mania.

At the end of 16th century, the world was crazy for tulips. They were coveted as the ultimate luxury good. They were sold on futures. Prices climbed to dizzying heights until buyers would no longer follow. The price no longer had any relation to the flower's intrinsic value. In 1637, tulip prices crashed, never to recover.

'There is a price ceiling for every wine on the planet,' concurred Labitzke. 'Beyond that ceiling, the consumer will not pay.'

Bordeaux and its partners are, naturally, hoping to avoid the fate of tulips.