Sterling Wine Auctions Australia

Making a good financial return from virtually any 1990 or 1991 wines bought at retail has been dead easy. In the cellar for five or so years and out they come for a 100% to 200% return. The prices for these wines are now peaking out. They can not grow in value for ever, and many are now approaching their drinking best. What's more, it is only a matter of time before the spot light moves to a younger and easier to deal with "special vintage" year. My money is on 1994 taking over from 1990! The reception the 1994 Penfolds Grange receives on launch next year will be the decider.

Where to from here? The 1992 and 1993 wines coming onto the Auction market are just not performing compared to the magic of 90 and 91.

If you are interested in three investment models to keep in mind when buying stock, read on But remember, if you want reliable investments see your financial planner;

Lets reconsider the basics

Don't put more money into wine than you would spend on drinking in, say the next five years.

Only invest in wines that you love.

Cellaring is everything if you can't store below 20degC look at a cellar service.

Only buy recognised good /great vintages.

There are bargains out there. A lesser vintage at a rock bottom price is still good buying.

Buying at auction is not the only way of acquiring good investment stock. Buying at retail on release offers many advantages.

Firstly lets look at retail pricing strategy and how it effects possible investment returns.

Penfolds Bin 389 is a great example. There are many quality high volume wines that are equally promising. Penfolds Bin 389 1994 and 1995 vintages have retailed at between $18 and $25 dollars a bottle. Quality back vintages 1982, 1986 and 1990 are selling at auction between $40 and $50. The lower current vintage price will act as a safety valve keeping a ceiling on back vintage prices. Why would you pay $100 for 1990 Bin 389 when the 1995 is currently in the shops for around $25??

There is no great surprise in this. Bin 389 is a high volume mass market wine. Pushing the retail price point up will have a negative effect on total sales volumes.

This predictable pattern can be used to advantage by investors.

Now look at super premium wines market. Grange, Hill of Grace, Armagh, Mesasch, Leeuwin and Mount Mary probably all qualify. The relationship between retail price and auction price here is very different. Various pressures have make the two prices almost inseparable.

A 1990 Jim Barry Armagh sells at auction for around $160. The current vintage 1994 retails for around $130. Lets even look at the extremes. Wines that have become legends like 1990 Penfolds Grange sells at auction for $400, the 1993 retails for $300. The other legend, 1990 Henschke Hill of Grace, realises up to $300 at auction and current vintage 1993 retails for $200.

Do your own research on the relationship between the premium / super premium back vintage auction prices and current vintage retail prices.

What does all this mean?

Buy current vintage Bin 389 at $25 and in three years, selling at auction for $35 to $45 should be readily achievable.

Supplies of this product are virtually unlimited, demand is very strong in this price range.

The potential for huge growth is ruled out as long as current vintage retail prices are kept low. Predicability and negotiability are more than adequate offsets.

This scenario shows a before cost return on investment of between 40% and 80%.

Now look at buying current vintage premiums. First problem buying quantities is almost impossible.

Lets assume that you were lucky enough to find a dozen bottles of Jim Barry Armagh 1995 at $130 a bottle. In three years, $150 to $200 at auction might be achievable.

You are in uncharted territory There is only room in Australia for a very small number of super premiums in the $150 to $300 range. If there are five spots for acknowledged super premiums, two are taken and the competition for the rest is fierce.

This theory tests out. How many great wines of the world have back vintages that consistently sell for over $150US? Ten ... Fifteen??? After listing the five first growth Bordeaux chateaus, add Chateau de Yquem, a handful of Romini Conti's, Penfolds Grange maybe Sassicaia and Martha's Vineyard from the US. Its tough going putting together 20. Send me in your list.

How many super luxury cars can the market accommodate Five ... Ten??.

The Jim Barry Armagh deserves a top ranking and super exclusive status. There again, so did Masarati and where are they today.

This scenario shows a before cost return on investment of between 15% and 50%.

The likelihood of Super premium prices holding static into the future is a strong possibility. The further up the price scale, the slower and more unpredictable trading is. In years to come Jim Barry Armagh could be the toast of the London Auction scene, or just a memory.

Please don't confuse the above observations with judgement of the poor value of expensive wines. Or recommendation not to buy them. On the contrary. I am very proud to have 1987 and 1989 Jim Barry Armagh cellared to celebrate the birth years of my children. I bought them to drink when my young ones hit 18, not to on-sell.

There is another group of wines that should be looked at when considering investment. Lets call them Mavericks.

Who will be the Hill of Grace of the future, rising from the pack to stardom in just a few short years? When it happens, and it will happen, we will all kick ourselves for not having backed such an obvious contender from the start.

Rockford, Wendouree, Vasse Felix, Coldstream Hills, Leconfield, Parkers, Lakes Folly and Brokenwood are all contenders. Any of these wines could well move up a price bracket without much trouble and quantities are still available. (If you work at it)

The potential returns from the Mavericks very great. Doubling, tripling or quadrupling money over the next few years is possible.

But, as with all risk reward equations, potential high rewards are always counter balanced by increased risks. That increase risk translates into the prospect of very poor performance on investment. Wineries can lose their way, brand names disappear and dynamic organisations can become institutionalised by corporate take overs.

Current retail pricing plays a big part when considering investing in Mavericks. Think of the price point brackets in the current retail wine market. Below $20, $20 to $30, $40 to $60, $60 to $100 and blue sky over $100.

Simply, if a wine in the $60 plus bracket makes a big move, breaking the $100 barrier is very tough. If the ton is broken that is still only a 40% change in value.

Another wine in the $20-30 range could double in price and still have some room to appreciate. That's 100-150% change.

The more expensive the wine, or the higher the buy in point, the harder it will be to make a reasonable return on resale.

A cheaper mass market wine will never rise to stardom but potential returns are reliable and by most comparisons very respectable.

Buying limited release, high priced premiums makes for an enviable cellar but the potential for prices to rise over certain psychological hurdles or ceilings is very small.

Wine is a food product after all. How many $300 bottles will be served at dinner in Australia tonight? One hundred?

How many $30 -50 bottles Tens of thousands??

Investment considerations must be objective and unemotional. Buy investment wine because you are happy to drink it all and on the side maybe make a few dollars from some conservative price change estimations.

If you are buying to compete with your mates collection or to satisfy a life long ambition to own a full set of Para ports, don't call it an investment and enjoy your collection for what it is.

Finally there is no shame in buying a wine with the intention of selling all or part of the dozen for profit. A number of sanctimonious editorials have begun to appear in the tabloids criticising the wine investor. Apparently going to cellar door and astutely buying a rare and in demand wine for short term profit is a new deadly sin. What a lot of nonsense! Wine collectors / investors have made the Australian wine industry what it is today. If every bottle of wine purchased was drunk within a few days, or all the cellars containing quantities of old wine stayed locked, there would be no back vintage market. With no back vintage market and the influence it carries, the Australian wine industry would go back ten years. Just think about it, most of Australia's wineries would not be able to afford to make premium product and a whole lot more Aussies would still be drinking beer! The criticism of "speculators" must be driven by secret envy. Talk of wineries keeping black lists of speculators who will not be included in future vintage offerings also demonstrates a huge departure from reality. I wonder how many wineries buy their own stock back from auction to replace their supplies of museum stock, or for resale at substantial profit. Long live free enterprise and the right to choose to buy cask wine or Chateau Petrus, for no other reason you just wanted to!!

June 2006