Bordeaux City Bond

First published in Wine Business International, February 2010

With the announcement in January 2010 that the single best performing asset in the previous decade was Chateau Lafite Rothschild, fine wine seems to have proved its worth even after the difficult financial conditions of the past 18 months. According to Liv-ex, the internet-based platform for fine wine trading, a 12-bottle case of 1982 Lafite Rothschild increased in price by 857% over the last ten years, from £2,613 to £25,000. The best-performing equity on the London Stock Exchange was British American Tobacco, and that increased in price 454% over the same period, while gold prices moved up a relatively paltry 297%.

No doubt this has brought collective sighs of relief in many Bordeaux chateaux after a number of difficult en primeur campaigns, and potentially disastrous moves such as Diageo (Chateaux & Estates) pulling out of the Bordeaux market in the US. But that sense of relief will have been shared by others further down the sales pipeline, as it is older stocks of wine that provide the majority of trades on the secondary market, and these are most frequently found outside of Bordeaux.

The structure of the en primeur system – where chateaux sell their wines before they are even bottled, and ship them out first to negociants and then onwards to other markets as soon as possible – has ensured that this lucrative secondary market has been controlled, historically at least, by English merchants, who have bought, stored and sold the wines around the world. Of the Bordeaux wine that ends up in Asia, more than half comes through London rather than direct from Bordeaux.

‘The relevance of the UK market is not going to diminish, because the traders there have fantastic relationships that go back for decades, even centuries, and if you want big allocations, you still often have to go through UK merchants,’ says Nick Pegna, managing director of Berry Bros Hong Kong. ‘Couple that with the current weak pound, and the UK is enjoying a honeymoon period for trading, because its current landed stocks are cheap. But once those stocks are depleted, replenishing will be much more expensive, and the honeymoon period may come to an end.’

The UK has another advantage that it has leveraged for years, and that is a sense of reliability and trust. For successful trades of older vintages (increasingly so as the sums involved head upwards) you need to assure both provenance and storage. The UK buys its en primeur direct from Bordeaux negociants, and then stores the wines either in their own facilities, as with Berry Bros, or in world-class facilities such as Octavian Vaults in Wiltshire. Housed 100 feet underground in 30 acres of disused limestone mines, this storage facility contains over 10,000 collections of fine wine from over 39 countries worldwide – around 750,000 cases in total, valued at an estimated £1bn. The majority of stored wine belongs to traders such as Farrs Vintners (who have their own entire vault), or to private clients of the trader, or individual customers who go direct to Octavian.

In successful vintages, the worth of such storage facilities becomes particularly evident. Octavian received 135,000 cases of Bordeaux 2005, compared to a normal en primeur campaign when it typically receives around 30,000 cases. This facility – and competitors such as Oxford Exhibition Services, that has vaults deep inside a range of hills near Salisbury, in an ex-Ministry of Defense storage facility – plays a significant role in ensuring that the UK remains a relevant and safe place for the lucrative wine trading market.

Hong Kong has quickly moved to establish similar facilities of its own, most particularly with Crown Cellars, in an old military installation in the hills behind Deep Water Bay, that was established in 2001 in partnership with the Hong Kong government, and since its opening in 2003 has become the important storage facility in Asia.

Until recently, Bordeaux had been prevented from offering these types of storage facilities because of structural issues not just in the region, but in the country itself. French customs rules stated, until 2009, that no wine could be stored in a commercial warehouse for longer than two years (with one year’s grace period). 

But with a recent change in the law – following years of intensive lobbying by groups including the Bordeaux Chamber of Commerce – has seen the appearance of a number of companies which could potentially mean fine wine is not just made, but also stored, in its place of origin. Does this have the potential to disrupt the UK merchants?

The company with first mover advantage is Bordeaux City Bond (BCB), which opened in September 2009. A private independent company, the main investors are the Bordeaux Chamber of Commerce (with 41% of shares), and Vinexpo (with 10%). The other 49% is shared between 12 negociant companies including Maison Sichel and Yvon Mau, and four supply chain companies. The company is headed up by Philippe Dunoguier and Jean Claude Lasserre, the former head of customs in Bordeaux, and has seen an initial investment of 6 million euros for the warehouse building, with a further 100,000 euros for business set up costs. They hope to be profitable from 2011.

That may be a stretch – as of January 2010, they had 12 clients, mostly from Asia, with around 10,000 cases in the warehouse (in contrast, currently around 25-30% of Octavian's 1,800 private clients are from Asia, storing around 40,000 cases of fine wine). Almost all their clients are wine companies based in Asia, storing wine for themselves.

BCB’s target for 2010 is 80,000 cases, mainly from Asia, with the UK as the second largest customer base. This reflects the changing nature of en primeur buyers – although the UK remains key, increasing numbers of sales head directly to Hong Kong, and this is set to increase still further with the 2009 en primeur campaign, running from April 2010. Already with the 2008 campaign, Berry Bros for the first time sold more en primeur from its Hong Kong office than its London one.

‘The single biggest advantage that we have here in Bordeaux is of course provenance and the feeling that wines have not travelled far,’ says Philippe Dunoguier, director of BCB. ‘But we also have the key asset of confidentiality. All cases are unmarked except by numbers, and even the board of directors don’t know who the clients are.’

However, BCB may have trouble establishing itself as a serious alternative to existing offers. Bordeaux City Bond is an above-ground warehouse, which means maintaining a constant temperature will inevitably consume vastly more energy than the underground storage offered by Octavian and Crown Cellars. Visually, its approach doesn’t exactly inspire confidence – located just off the main ring-road of Bordeaux, on the edge of an industrial estate behind electronically-operated gates that swing open without a password. Contrast this with Octavian, where you are met at the heavily-guarded entrance by a security guard who issues reflective waistcoats for the trip down to the cellar, and checks off your name, takes your photograph and records the number plate of your car. Operations director Laurie Greer, said, ‘I don’t know of any more secure site. You can access the cellars only by foot, down 157 steps, and there is no other way to get in or out.’

Dunoguier counters, ‘We are working in partnership with La Logistique du Vin, a storage company which won our exacting tender because they have such skill and experience in security as well as storage. They do the check in of the goods, they take photos if there is any doubt of the status of the cases. They match all preliminary documents against the wine they have received, then take apart the palates and check every case, and if any problems exist, they take photos, send them to clients, and decide together what to do. They then do all the operations for storage, but under our quality control charter. We have a commercial contract ensuring that they maintain the temperature within + or - 2 degrees at all time of 15 degrees, to ensure optimum conditions for the wine.’

However, BCB does offer some significant advantages to wine lovers – not least that the insurance value is tagged to the value given on the Place de Bordeaux, which is invariably at least 10% higher than the same wine valued by Liv-ex exchange in London. And travelling such short distances from chateaux to storage means investors avoid the worry of vast temperature variation that can cause serious damage to wine quality.

The site is also due to become an official partner of the Hong Kong government, ensuring that wines intended for sale in Hong Kong auctions are kept pristine, close to the chateaux, before they head over to the Territory for sale. Dunoguier has been invited to be a security advisor to the Hong Kong Quality Assurance Agency, mandated by the HK SAR government. ‘We hope to set up an international standard for the storage of wine, with common technical requirements, and expect to begin work on this over the course of 2010. This would mean that clients could store their wine here in Bordeaux, and then move it over to Hong Kong, and feel assured that it would be kept in exactly the same conditions.’

Currently Dunogier has been asked to consult in a personal capacity, but the Bordeaux Chamber of Commerce has an agreement with the Hong Kong government to create actions around wine (including to date exporting Vinexpo, Fete le Vin and the Ecole du Vin wine school to Asia) and it would be a logical next step to have Bordeaux City Bond as an official partner.

‘We have no plans to open a branch of BCB in Hong Kong, because our main advantage is that we are so close to the chateaux. The idea is to put Bordeaux back as an essential part of trade at every stage of the cycle, because if we have stocks of older wines that are here in Bordeaux, we have the ability to keep trading.’

BCB is joined by two or three others in Bordeaux, most notably by wine merchant’s Joanne, that has launched Provenance in Bond. Joanne is one of the investors in Bordeaux City Bond but has also decided to set up its own version. The company already has extensive (above ground) warehouse facilities at their offices, so clearly decided that they would be missing a trick if they didn't make the most of them. The warehouse for the new project is 3,500m2, has three different systems of security, and like Bordeaux City Bond will cost 6 euros per case per annum to store wine, plus insurance (which again will be set at the price on the Place de Bordeaux).

The fact that there are now two very good alternatives for storing wine tax-free in Bordeaux (with surely plenty more on the way), is sure to change the dynamics of Bordeaux, and make it less of an archaic place for purely trading en primeur wines. In theory, it should make it a viable world-wide centre now for not only trading but storing and therefore re-selling wines over a longer period of time. And in a bonded warehouse where wine gets delivered with perfect traceability straight from the chateau, with no carbon footprint.

‘Having competition by price is pointless, because someone can always go cheaper, and our real competition is international,’ says Dugonier. ‘But the natural place for these wines to be stored is Bordeaux, and we hope to make this choice self-evident.’

BOX: Prices

BCB: For over 1000 cases; 6 euros per case per year
Have a flat rate for entry, warehousing and delivery of 80c per case.
The lowest you can put in is 100 cases.