Is there still a viable market for luxury wines?  For most, the simple answer is, “who cares?”  But for collectors, investors, and wine lovers who have their heart set on spectacular anniversary or birth year wines, there is always a market.  With the economy on its back, prices for many elite wines have tumbled 30 to 50%.  The market is at once bereft of buyers and full of wines of outstanding pedigree at prices not seen for several years.  So, the more relevant question is, at what price?  A recent trip to Napa prompted thoughts of the upcoming harvest, and fall offerings for heavyweight Cabernets.  In about a month, the offering of 2007 vintage of Harlan Estate comes to select mail boxes around the world.  Will Bill Harlan continue his unbroken string of seeing and raising the pot, or will he blink in the face of the recession and a flattened luxury wine market?

Harlan Estate - Moving Beyond Cult Status

It is time we drop the “cult” moniker when referring to Harlan Estate. That was the term on the Tra Vigne wine list in Napa when I tasted Harlan for the first time, as part of a “cult flight” in 2002.  A $100 bill bought a small taste of an impressive 1997 trio:  Harlan, Araujo and Dalla Valle Maya.  I had never paid $100 for a bottle. Today that same flight might cost $500, if you could find anyone to pour all three at once.  After that taste, and a few inquiries at local retailers for pricing on back vintages of these stunning wines, I had to learn more, and I signed up for the Harlan mailing list.  The next year, I received my first mailer -- offering the opportunity purchase exactly zero bottles, but thanking me for the interest and better luck next year.  That’s how you create a cult!  The word has stuck, and correctly describes the loyal following Harlan has earned in creating a First-Growth California winery, in the style of the top chateaux from Bordeaux. 

I say it’s time to codify success.  After all, Harlan celebrates its 25th year in Napa this year.  Let’s ask the Heir to Napoleon III (circa Bordeaux 1855), to declare Harlan as the first of the California First Growths, along with Caymus, Dalla Valle, and we can debate the rest.

Harlan’s customer communication last year indicates the effort is “a work well begun yet (we) acknowledge that it takes generations of continuous improvement as well as an avid and loyal audience to become truly established”.  A real estate developer and part owner of Meadowood Resort, Mr. Harlan has assembled a 240 acre rocky, oak-studded parcel on the Mayacamas mountain range, overlooking the heart of the Napa Valley.  About 40 acres of beautifully contoured, manicured vineyards in the Oakville AVA are planted -- roughly two thirds allocated to Cabernet Sauvignon, the rest divided between Cabernet Franc, Merlot and Petit Verdot.  From these estate grown grapes, Harlan restricted yields to produce “the best wine the land will allow us to make.”  Harlan offers both a first (Proprietary Red) and a very fine second wine (The Maiden).  The first commercial vintage debuted in 1990.  Robert Parker rated the $65 1991 vintage an outstanding score of 98 points, one of a handful of Napa wines rated so highly in the history of Parker scores at the time.  Since then, Harlan has earned four perfect 100 ratings from Parker, more than any other wine made in the USA.

Release and Auction Prices Converge

All wines from Harlan Estate are sold as futures, with delivery well after payment. This is very much in keeping with the Bordeaux First Growth model, with one notable exception -- the estate sells and ships about 60% of the annual 2,000 case production directly to consumers via an oversubscribed mailing list, in very small lots. Harlan allocates about 25-30% of remaining production to the trade, targeting select wine lists and wine shops.  Don Weaver, director of the Estate, states, “Each year we offer 90% of our total production to the mailing list and the marketplace, the remaining 10% being divided between charitable donations and a very modest library reserve.”  And, with his direct-to-consumer model, Mr. Harlan has achieved what some in Bordeaux would love to emulate -- Harlan has assumed the risk of the middle man for the bulk of his portfolio, and reaped a very substantial reward for the effort.  He drives the pricing and, in recent years, has worked to retain an ever-increasing share of the total cash flow his wines generate, before and after release.  And while his wines have achieved spectacular auction price levels, that secondary market seems to have leveled out for the past few vintages.  As he raised his prices from $150 to $500 over the past 8 years, the auction market cooled, with back vintages retreating about 15-30% since 2007.  Some of this pricing compression is doubtless tied to the drop in fine wine prices in the past year.  And it remains to be seen whether Harlan wines will rebound to the same extent as Bordeaux First Growths when the economy picks up.  But there is no mistaking the intent -- Bill Harlan wants to capture the full value (“Fair value”, per Mr. Weaver) the market bestows on his wines.  And deservedly so.  The graph and the table below illustrate this conversion of Release and Auction prices in recent years.

Charted, the convergence is readily seen.

Upon reviewing the data, Mr. Weaver suggested that the table graphically illustrates the consistent value Harlan has been able to deliver to their customers willing to invest their faith and dollars on a pre-release basis. I infer this to mean that Harlan Estate is intimately aware that many customers do seek investment returns in addition to a quality bottle of wine.  How this segment will continue to value Harlan is perhaps the central question in the entire chain. 

The data does suggest that purchasers who value Harlan’s vintages for investment purposes will have to think longer and harder now than 5-10 years ago.  Last year, Bill Harlan raised the price of his Proprietary Blend for the fifteenth consecutive year, to $500 for the 2006 (which ships next Spring), and did so into the teeth of severe economic headwinds.  But the vintage does not appear on its way to a top score from Robert Parker if his early tasting notes are any indication.  Indeed, on August 5, Wine Spectator’s Jim Laube rated the 2006 vintage 94 points.  Fifteen elite Napa Cabernets were rated with the Harlan, and while it was by far the most expensive, it was mid-pack in terms of critical acclaim. Thus, in relation to other top wines at compelling prices (Schrader Cellars comes to mind), value-based comparisons are easily made.  Suddenly, the 2006 seems out of place, and paying $500 per bottle seems no longer an aspiration. Indeed, it may be a boat anchor.  Demand has softened.  Allocations on the mailing list were passed.  And back vintages have slowly given up lofty premiums in the face of a glutted elite wine market. Three vintages scoring 97 or better are available auction last week on WineBid.com, well below $500.  Only the 100 point bottles break above that mark.

The other major hurdle comes from Bordeaux itself, and the prices for the newly offered 2008 vintage.  Chateau Lafite Rothschild and the other Firsts released 2008  at prices near $200 (retail) in April, to a surprised cadre of negociant buyers.  The initial allocation Lafite promptly sold out, and prices escalated, separating itself from the pack.  Liv-ex.com currently indicates the 2008 Lafite is priced at $450 on the auction market (as futures, the wine does not ship until late 2010).  And Lafite produces ten times the wine of Harlan’s Proprietary Red.  

The Tipping Point

Will Harlan push his price level beyond $500 in 2009?  I must say no.  And like Vito Corleone, I will give you my reasons.  First, it’s doubtful that the market is seeking more newly released $500+ wines at the moment, judging from the falling prices on WineBid.com and the continued availability of amazing back vintages at ever lower prices from top tier retailers. Yes, in recent weeks the market may be firming (the S&P 500 closed above 1,000 for the first time since November 4, 2008 - the day Obama was elected President), and liv-ex.com’s most recent report indicates a general firming for elite Bordeaux wines, driven primarily by Lafite. 

Certainly, Harlan’s oversubscribed mailing list does restrict the new vintage allocation to a fixed group, and so the auction markets bring Harlan wines to a greater audience.  But pricing new releases above spectacular back vintages with higher ratings and more scarce quantities will put Mr. Harlan in the difficult position of competing with himself among a select group of collectors.

Do changing consumer tastes play a role?  I am in the camp that believes the fine wine market pendulum is swinging back to wines of complexity over concentration, finesse over power, and balance over opulence.  To be sure, the fruit must be perfectly ripe, and at these prices, that should never a problem, particularly in Napa.  But the appeal of over-the-top ripeness that yields soft, higher alcoholic fruit bombs is running its course.  Those wines do impress at first glass, but over time they prove to be more difficult to pair beyond the obvious grilled steak.  In my experience, these wines generate palate fatigue, and do not hold interest.  It also remains to be seen how well they hold up over time in the cellar.  At these prices, the more a wine can speak to a sense of place, of origin, the better.  And in uncertain times, authenticity is a valuable asset.  When dollars are scarce, purchases and investments are made with more scrutiny.  Frankly, this plays into Harlan’s profile more than it does, say, Plumpjack Reserve, which at $200+ seems redundant to many excellent options at lower prices.  Discriminating Napa wine lovers will not eliminate Harlan from contention for any reason related to style, authenticity or trends.

So, will Harlan retreat to $250?  That’s roughly on par with First Growths in 2008.  Doubtful.  Even if Harlan Estate is as desirable as Lafite, its relative scarcity and allocation process is an effective defense against such a dramatic gesture.  However, what has changed in the past 5 years is the number of substitutes -- wines of incredible quality and critical acclaim eclipsing even Harlan’s own ratings.  This is not to suggest that Mr. Harlan pays any attention to Parker scores.  But a $250 price level might undermine his back vintages, which need to demonstrate an ability to bottom, if not regain some of that premium vs current release price levels.

Mr. Harlan is more philosophical on the matter, focusing on the very long term, a time horizon to match that of the First Growth Bordeaux Chateaux, whose reputations were established in the late 1700’s, and codified in 1855.  For Harlan to endure over a similar span of centuries, and maintain the quality and consistency at a “first growth” level, he must do the things the Premier Crus do with 10 percent the production and at much higher costs per case, otherwise it is his belief that within 50 to 100 years Harlan will go the way of most of the brands that have come and gone.  For Harlan, this is an investment of time, money, passion and perseverance.  And like any business built for the long term, it is all about meeting and exceeding customer expectations.

With that said, the fact remains that Mr. Harlan has never dropped price before, despite the database on WineSpectator.com indicating a higher price on the 1997 than 1998 (the Release Prices in the table above have been verified by Harlan Estate).  And today, every vintage has bids well above $300.  It is possible that Harlan will overshoot, as it appears the 2006 is on the verge of doing in this economy.  Time will tell.  This would be an unnecessary mistake in this market, in my judgment.  When a wine, or any product, gets ahead of itself in terms of pricing, it is difficult to win back customers who “were there from the beginning” and helped build the franchise.  Their voices are louder these days, and no luxury product can afford to take its existing franchise for granted.  Customers who have endured the tripling of prices of Harlan Estate now have many other credible choices in the market.  And “cult” wines are so 90’s.  Finally, $500 wines in this climate are just plain vulgar.  Bill Harlan doesn’t strike me as the vulgar type.  But he is an astute reader of the market, and has a clear vision of where he wants to go. 

I think he’s already there.

$350.

That’s my unsolicited recommendation, Mr. Harlan.  But my prediction is $400.

It is hard to believe that such lofty price point is supportable today, but I think sub-$350 will in fact surprise, delight and maintain his mailing list, just as the $200 level did for Lafite and Latour this Spring. 

Miguel Lecuona is a graduate student at the Bordeaux International Wine Institute and a marketing consultant to the fine wine industry.