Wine as a financial asset: rewarding, fascinating and ripe for enhancement — Kay Rieck
While there are fireworks in other markets, the wine sector has quietly spent the last two decades going about its business, delivering enjoyment and impressively solid market returns. It’s a sector that faces significant challenges, but there are also considerable rewards available for people that are willing to put the effort in. And the great news is that the amount of effort that you need to put in could be in the process of becoming considerably less.
There is archaeological evidence that shows that humanity has been producing wine for around 8,000 years. It is probably safe to say that there wasn’t investment market back then, but grave goods prove that wine has been a prized possession for at least two millennia.
Wine straddles the line between sensible investment asset and passion product. People invest for a variety of reasons: because it can offer solid, consistent returns and opportunities, but also invest wine is full of memories, associations, stories and romance.
Over the last couple of hundred years this means that the market for wine has matured into an exceptionally stable market, with a bottle’s quality and authenticity proved by an established, stable system of provenance that supports merchants and collectors around the world.
The most romantic asset
It is an irony that wine has traditionally tended to be illiquid, at least when it comes to financial assets. The importance and heritage of the provenance system has meant that the market has continued to rely on paper long after most sectors have digitised themselves. There are several reasons for this, but the most important is that the global provenance system has been in place for far longer than most normal financial instruments have existed, making the process of changing the system exceptionally complex.
There is also the fact that every vintage put out by every vineyard is unique. In foreign exchange, while exchange fees vary, every euro is worth a euro, every dollar a dollar, and when a situation changes and the market moves, it moves in the same way for every euro and every dollar.
With whiskey, a product that has a similar heritage to wine and elicits similar levels of passion, a distillery develops a product, puts a label on it and will repeat the process with pretty much the same outcome for as long as it is economically viable to sell that whiskey. Yes, there is a difference between whiskey that has been matured for five, 10 or 25 years, but that difference is fairly consistent whether the whiskey was bottled in 1996, 2011 or 2016. The five-year-old will taste like a five-year-old irrespective of the year it was bottled, the same for the 10 and the 25.
With wine, every vintage is different, influenced by the interplay of weather, the terrior and the wine maker’s skill.
As a result of this, each vintage has a unique price, which massively complicates the process of trading wine.
The benefits of wine
In some ways this is a shame because there are several reasons why wine has carved out a niche for itself as a superb investment product.
Primarily, as an investment asset, wine physically exists. Whether you keep it in your own cellar or leave it in managed warehouses, when you buy a bottle of wine and trust its provenance, you have an asset that you can hold. The same can be said for many other assets such as watches or cars of course, but there’s a universality to wine that transcends most comparable luxury assets.
Wine is also a superb way to diversity a portfolio. Markets rise and fall but over the last two decades, wine has provided stable, consistent returns that provide the foundation of many investment portfolios. Given the rising number of wine consumers around the world, demand continues to grow and so it is reasonable to hope that the price of wine will continue to thrive over the next few years.
The need for modernisation
Wine is a traditional, conservative, product with a market that has remained broadly unchanged for the last couple of centuries. There have been innovations of course, but underneath it all, the market has remained driven by paper and a comprehensive bureaucracy that has protected the provenance and as a result the value of wine.
This has created a couple of challenges, however. As an asset class it is something that in the main you perhaps need to be born into. It is difficult to build the knowledge that you need to become a credible wine trader without putting in many years of work, and that is most easily done if you have access to both funds and networks. The downside of this is that as the people at the top of the sector get older, there is little incentive for younger people with new ideas to come through.
And because the wine trading process is very manual, it is also relatively expensive, particularly when brokers become involved. The generation that is emerging are used to being able to trade assets quickly, whether it is FX or second-hand clothes, and balk at the concept of paying significant third-party trading fees. As a result, they tend to look to other markets and wine misses out on a growing pool of liquidity.
The challenge of funding
This is happening at a point where wine producers are finding it more and more difficult to get funding to expand their activities, even when they are producing well regarded wine. If the sector modernized, the associated financial markets could become more flexible and more responsive to the fact that there is a very long period between growing a grape and selling a bottle, or more importantly growing a grape, producing a bottle and confirming its quality. The wide variation in value between a poor, average and exceptional vintage is one of the things that makes wine very difficult to price for the financial markets. It is less of a problem if you are one of the handful of global wine producers, but it is a very real challenge for the vast majority of smaller producers.
So there’s a paradox: on the one hand you have a product with a proven, growing global market of consumers and has offered consistent financial returns for the last two decades. But at the same time, this is the same market where vineyards are struggling to get appropriate financing even when their products are demonstrably good.
Some vineyards could potentially even find themselves in a position where they have to choose between taking their time and nurturing their wine but run the very real risk of going out of business, or compromising the way that they produce wine in order to make a quick sale.
Neither approach is ideal.
The challenges for smaller, specialist wine producers have also been exacerbated by the pandemic. Smaller producers tend not to have the consistency or production volume to tap into existing global wine trade networks. Instead, they rely on sales to local restaurants or to tourists visiting the vineyard. Both of these routes to market were blocked during 2020 and have continued to be challenging as 2021 has progressed.
It could be that introducing more modern, technology-based approaches to both financing and trading wine will offer a way to move the industry forward. There are several interesting projects being discussed, but none have yet reached the level of traction that would be necessary to deliver the support the industry needs.
Ultimately, though, wine is a sector that is ripe for change. It is a superb investment opportunity, there is a growing market of consumers and an untapped pool of potential investors and it is an asset that has heritage and romance that is fun to be involved with. It could be on the cusp of significant change.
About the author
Kay Rieck has been an investor for more than two decades. He was a financial advisor and stockbroker on the New York Stock Exchange (NYSE) for many years.
Kay Rieck is a wine lover. He discovered his love for wine by chance at a tasting, like many wine lovers before him.
He then met Karl, with whom a wonderful friendship developed.
Karl is an accomplished sommelier with a refined but sharp palate. For several years they bought exceptional wines and built bottle by bottle, neck by neck an extraordinary cellar of Bordeaux, Burgundies, Italian wines and some Champagnes together.