Dear Bordeaux -- with respect, it must be said.  You are making a big mistake.  At a time when you can least afford one.  The Wine World is changing.  Do you not see it? 

There are two essential truths about selling.  First, the most valuable customer is a repeat customer.  Second, the biggest expense is replacing a lost customer. 

The pricing strategy of the Bordeaux Futures 2009 campaign flies in the face of these two truths. 

Jane Anson and Panos Kakaviatios, in a Decanter article of June 11, have put their finger on the issue that has been on my mind of late regarding the 2009 Futures Campaign, and a point I made in January on my preliminary vintage highlight summary for the vintages of the last decade, including 2009.  It was well over two months ago that the three of us crossed paths in Bordeaux, trying barrel samples of the vaunted 2009 vintage, blind and unblind.  Having participated in Harvest and tasted barrel samples in 08 and now 2009, I am enthusiastic about the wines, particularly on the Left Bank, and among the best vineyards in all areas of Bordeaux.  But what we are seeing from the spreadsheets of the pricing directors of Bordeaux is quickly burying the promise of this historic vintage.  Rather than restoring the purpose of Primeurs, the 2009 campaign is adding to the recent storyline that Bordeaux is out of touch with its customers and the markets.  This overreach in price not only hardens existing problems that many have with Bordeaux. It pushes away opportunities that should easily accrue to this finest of fine wine regions.  At a time when it is producing wines of breathtaking quality, Bordeaux is vulnerable to competitive inroads and customer abandonment like never before.

Wine Futures Explained

The Bordeaux.com website, run by the Conseil Interprofessionnel du Vin de Bordeaux (CIVB), describes Futures as “a very old custom dating back to the 18th century... a special type of advance sale of wine from the latest harvest” from the top 200-300 wineries in the region.  The idea originated during a time when chateaux did not actually bottle their wines, but rather sold them by the barrel to merchants. Merchants, certain of their future stock, would then make a market among collectors in Europe (and later, a fledgling experiment in democratic governance called Les États-Unis d'Amérique), selling wine about 2 years in advance of delivery.  This tradition has remained firmly in place ever since, even when Chateaux began bottling wines themselves in the 1920’s. 

Why buy Futures?  As the 2009 campaign hits full stride this week, I can see many reasons NOT to buy, frankly, but before we can answer this question, we have to address the underlying premise, which is, “Why does Bordeaux continue to sell Futures?”  The answer lies at the very heart of the identity of this historic wine region.  When you look at the staffing chart for most chateaux, you will not see a sales group.  In some cases, you will not even see a single person devoted to the task.  For centuries, Chateaux have relied on their bottling merchants (predominately from the United Kingdom) to market and sell their wines, leaving directors to concentrate on the product, oblivious to the travails of the market.  That is changing.  With a great effort underway to develop export markets all over the world, Chateau Directors are often their own Research, PR, Marketing and Sales Directors. 

There are significant benefits accruing to the Chateaux for maintaining the Futures market, cited at various times by Directors in Bordeaux in discussions on the topic:

1. •Cash Flow. The Chateaux gets paid in advance for wines not yet delivered.  The terms can vary.  In the United States, most customers pay 100% full price when the wines are offered for sale through a retailer.  In Europe, it is often 50% now, and 50% upon delivery, with the 20% Value Added Tax paid at the end.  Regardless, the Chateaux is paid well in advance for delivering the product, as are retailers who successfully market the Futures campaign.
   

2. •Price Levels and Tranches.  Chateaux can often test the market’s acceptance by offering a small quantity at first, then boosting quantities in subsequent offers, presumably at higher and higher prices as the campaign goes on. 
   

3. •Focus on Wine Making, not Selling.  Moving 100% of your product in a single day means you don’t have to pay a sales force, develop a major marketing campaign, or manage  calendar of promotions and multiple sales channels. 
   

4. •The Discreet Courtier.  There is one additional link between Chateau and Merchant.  The Courtier is literally a go-between, in theory helping to allocate inventory between merchants and markets.  Receiving 2% of the ex-cellar price, Courtiers are one of the most secretive, and coveted, roles in the distribution chain, and unique to Bordeaux.  They continue to exert a quiet, but forceful influence on continued participation by Chateaux in the Futures program.
   

Every year brings a new Vintage to market, with Chateaux offering barrel samples to journalists and the trade in April.  Pricing and first offers follow in May and June, along with a considerable hype machine through the trade as merchants jockey for influence and position among key markets.  Chateaux control the pricing decisions, and selecting the right price requires a combination of research and guile.  Key inputs include scores from wine critic Robert Parker, historic price levels from prior vintages of similar quality, potential sales in new markets like China, and a certain amount of competitive gamesmanship.  And overlaying all of this is the economic health of each market, and even valuation levels between Euros, Dollars, Pound Sterling, and other national currencies. 

What’s in it for me?

For the paying customer, there are two main benefits, in theory, for buying Futures.  The first, per the Bordeaux.com site, is price.  Both the retailer and the individual customer “can buy these wines at a cost lower than market prices and purchase the volumes they will need in the future.”  In other words, if you are willing to pay two years in advance, you will receive your wines at a discount against the retail price two years later.  There is no guarantee that this benefit is ever realized.  In recent years, in fact, many Bordeaux collectors have done quite well simply waiting for the wines to come to the retail shelf rather than paying upfront for delivery two years down the road.

The problem with waiting is that your favorite wine might not be available, which brings us to the second reason to selectively consider Bordeaux Futures: availability. Some wines are truly small production, and are highly allocated.  Wines from Pomerol, St. Emilion, and many of the finest Grand Cru wines have demand exceeding supply, particularly in the finest vintages.  Many sell their entire production in the first week of the Futures campaign, and don’t even make it to the retail shelf or the wine list. 

In summary, a properly functioning Futures market, historically, has been an efficient way to allocate a scarce product in high demand across an increasingly complex world wide wine market. 

But despite these foundational strengths, the Futures market is in trouble, and the drivers of the market - the Chateaux themselves - are making it worse.  Here’s why.

2009 - Great Vintage, Volatile Economy, Clogged Pipeline, Manipulative Process

Make no mistake, the wines this year are superb on the Left Bank, good to great on the Right, and, when sourced from the greatest vineyards and Chateaux of the region, among the finest ever  made.  Unfortunately, the volatility of the global economy and the state of the wine distribution networks are not aligned to leverage the quality of this year’s campaign, as they were with the 2005 vintage.  The Liv-ex.com website, tracking 2009 release prices, shows the average Bordeaux 2009 Futures price is nearly double the 2008, and +29% vs 2005, the last universally acclaimed Vintage of the Century.  But it has to be said, based on what I am hearing from many would-be buyers, +20 to 30% and more for BDX09 vs 2005 is, frankly, shocking and disheartening.

I understand major increases vs 2008, a vintage that was priced at the nadir of the financial crisis.  I personally love the 2008s on the Right Bank, and found exceptional quality in Pomerol and St Emilion to rival the many of the acclaimed vintages of the past.  Indeed, the 2008 prices have already moved up significantly from their introductory levels.  And that is as it should be for a Futures campaign -- provide value to the customer for the risk of funding early purchases, and let them profit and share in the rewarding returns in their cellars.

But this year, the economy, financial stability, and currency valuations have NOT moved up in concert with the overall quality of the 2009 harvest among the Great Growths.  If anything, the uncertainties pose even greater questions now than last year (hello Greece, hello Spain, hello Euro will you be with us in 2012, hello US Debt). Despite this, many of the 2009 vintages are pressing forward, pricing their new wines well ahead of all prior releases, directly in the face of these risks. 

Compounding the situation is the state of the distribution networks charged with the task of placing these wines throughout the global market.  Diageo Chateau and Estates, for years the dominant distributor of Bordeaux in the USA, bowed out of the Bordeaux business a couple of years ago, and has been selling its massive stock of fine vintage Bordeaux to retailers, putting great wines into the market, often at values that defy the logic of current vintage price levels.  The 2006 and 2007 campaigns were not successful.  And, with retailers cutting prices on 2006 to make way for the even less-desired 2007s due to arrive this fall, there is ample supply of wines considered by many to be somewhat overpriced at the register and somewhat underwhelming on the table.  The 2008 presents a small reprieve, with a substantial price cut and a tiny production level overall.  Still, the cash flow picture does not favor a distributor charged with paying for inventory that is slow to move for the past several years, and who now must find a way to participate in a truly exceptional vintage, priced for a new definition of perfection.  This is a challenge to their wallets, and their bankers, to see the wisdom of this program if the wines don’t sell through. To be sure, many retailers are putting on a brave game face, and seeing success among some names like Pontet Canet.  But from what I can see, many classic Bordeaux are pricing themselves out of contention by their existing customers (watch that link and see which wines disappear from inventory).  And long sought as a solution, perhaps 2009 will be the year that Asia will offset all of this risk with ease. The Bordealaise made a special effort to participate in Hong Kong this year -- during VinExpo, timed with record-setting auctions by Acker-Merrill, and with prestigious events with heavy participation from the Chateaux themselves.  The big bet is that China will buy. That remains to be seen. The evidence so far is inconclusive.

And if this backdrop is not challenging enough, consider the plight of the consumer who, despite all of these risks and issues, still wants to buy Bordeaux.   The very process of the Futures Campaign is highly managed, some would say manipulated, by the Chateaux themselves.  Chateau Lafite Rothschild is the example often cited to show how the system works.  A first tranche price is announced at an eye-popping €450 per bottle, ex cellar (from Chateaux to merchant).  While this astonishing price for a bottle of red wine seems ludicrous, it is actually in line with, or below the current auction levels of previous vintages of high regard (a case of 1996 Lafite drew a winning bid of $14,000 in New York in May).  This first-tranche price will be offered with a tiny allocation, and will quickly be replaced by a larger second tranche, probably at the €700 level.  The initial price point will probably never even reach the market, with merchants deciding to blend several allocations and set a price well above the now-publicized price point to which Lafite will gain credit, even if it is not a real price that anyone will pay.

Grand Cru Bordeaux - Beyond Wine to Luxury

Not every chateau has the power to manipulate the market like a diamond seller, but allocating small tranches and pushing the price up with subsequent offers is a tried-and-true method of distributing a scarce good.  And it is particularly aligned with the goals and objectives of brands appealing to the Luxury market.  It can be credibly argued that Bordeaux Grand Crus priced above $100 increasingly see themselves as luxury goods, and less as agricultural commodities.  Certainly, it can be a very positive, lucrative development for a Chateaux whose brand is valued in the same circles as the elite brands in fashion, dining, travel and leisure.  In addition to families historically participating in Bordeaux over the centuries, global companies like Chanel, AXA, Louis Vuitton, and Suntory own Grand Cru Chateaux in Bordeaux. The economics probably work in much the same manner as a pro sports franchise.  You are buying a hard asset (land), investing in the property, developing and marketing a brand, and reinvesting the cash flow into the business.  Over time, 20, 50 or 100 years, the asset should increase in value while the yearly expenses are more than offset by yearly revenues.  Thus, corporate investments will continue, as will the pressure to raise price and profile. 

For the truly elite First Growths and top Right Bank wines, whose price levels have been well into luxury status for decades, this is de rigueur.  Their brands can actually increase demand by raising price.  But for many brands aspiring to match this sort of performance, the risks of overreaching are much greater. Happily, there is another way. 

The Missed Opportunity

The historic reputation of Bordeaux among fine wine collectors and retailers does place Bordeaux in a lofty position in many hearts and minds.  But a look at fine wine lists shows pressure from other regions in France, including Burgundy and the Rhone, as well as a continued surge from Italy, and to varying degrees, Spain, California and South America.  A recent article by Eric Asimov in the New York Times sparked a great discussion across the internet, essentially postulating that that Bordeaux is not highly regarded, if at all, by young American wine lovers, and that it is possible sit at a fine wine bar and review a wine list that lacks even a single Bordeaux Grand Cru.  Where does it say that the road to success requires a product to double in price every few years, and for customers to be forced to pay, or abandon their favorite brand and seek out substitutes? Apparently for some Chateaux, it is Page One of the old Bordeaux Marketing playbook.  This is a consistent and reasonable criticism I hear from collectors and retailers, and one that appears to fall on deaf ears to many in the Gironde Department.

These are alarm bells the Bordelaise would do well to recognize.  When a brand adopts a strategy that pushes price to ever increasing levels, any product will become vulnerable to new entrants that produce quality and exploit the now-vacant price level valued by a wide swath of customers.  Lexus did it to Mercedes Benz, and now Hyundai is doing it to Toyota, to cite but one example.

Bordeaux should understand, like any product, that the future of the franchise requires that it respect and keep the good will of current customers, earning their business each year, while at the same time attracting new clients, through market expansion, product development, and in particular exploiting quality gains.  The irony is that this view of the future is completely understood in vineyard management practices, where decisions and investments are routinely made with payoffs and returns coming decades later.  Yet, when it comes to the business of selling, there are blinders and other forces at work.  One can perhaps commend the role played by second wines of chateaux, in theory they lead the pricing effort in new markets.  But this internal substitution and price-leader option goes only so far.  The crux of it is among the Grands Vins themselves.  And, the 2009 vintage represents a huge opportunity in this regard.  Unfortunately, it appears to be missed by many Chateaux who are focused on advancing a pricing relationship tied to group increases, peer pressure and history. one that pushes current customers to question their own loyalty.  Never before have so many markets been offered so many wines of this quality.  Consider how different it would be for Bordeaux to capture an entire generation of new wine lovers with this incredible vintage by pricing it at levels in keeping with, or dare we even say it, below historic norms.  Let the markets scramble to find the brands.  Allow the merchants to place the wines in more hands.  Broaden the acceptance of the brands around the world with more accessibility, not elitism.  A few chateaux understand this, as the liv-ex chart shows, and are pricing to gain share. But far too many are ignoring this major opportunity, seemingly hitting the "05 + 25%" button on Excel. They risk not only their existing customer base, but also the chance to introduce and earn the business of new wine lovers. 

Finally, it must be said that, with regard to Robert Parker bestowing 100 point potential scores on 20+ wines, the cachet of points is not what it used to be. How will the Chateaux adjust to the dilution of RP points on the consumer, and the continued rise of the CellarTracker community for critical evaluation? That time is coming, and at these prices, perhaps sooner rather than later.

The psychology of elite wines is changing. The occasional $300-1000+ cult wine or old vintage created a sensation, and some aspirational pull from those curious to learn "can they really be that much better?" But now, when we will see, what -- a dozen? 15? 20 or more? - wines from this vintage above $300? With release quantities deliberately designed to force scarcity on the market despite production counts in the thousands of cases, this is no longer sales and marketing.  This is now, purely, an exercise in power. Customers will notice.

And as I publish this, La Mission Haut-Brion just announced their 2009 at €540 p/b ex-negociant: an increase of +391% on 2008 (€110), +272% on 2005 (€145). Breathtaking.