US Wine Labels and Hong Kong Wine Auctions: Tale of Two Wine Worlds
While the US domestic wine industry continues its painful recessionary adjustments in response to the $50-plus wine category implosion and the consolidation of its distribution channels, the picture looks very different in Asia where this year’s Sotheby’s and Christie’s Hong Kong wine auction sales will outstrip their own combined New York and London volumes. As North American wine sellers get creative offloading excess inventory benefitting smart and responsive consumers, Asian auctioneers are taking full advantage of repealed tariffs and aggressive new Chinese wealth as they slam hammers on lots that often close at 4X, or more, than suggested prices. The juxtaposition of these two market cycles is striking and has lead to a couple of very specific iconic developments.
Ebbing Wine Market Creates “Camouflage” Brands
Selling quality wine under “camouflaged”, third party wine labels is just one strategy domestic and international wine producers have pursued as they grapple with an ebbing US market. Some names for these new style sellers include 90+ Cellars, Cameron Hughes, and Rubus. They make it easier for a premium producer to offload inventory at rock bottom prices, establishing a new channel for their own excess juice without any lasting threat to their own standing brands or price points. These “camouflage” resellers represent tremendous opportunities for consumers to latch onto good wine, often at one quarter the usual branded price tag.
I have come to know Brett Vankoski who, together with Latitude Beverage Co. President and founder Kevin Mehra, launched 90+ Cellars. I have tasted many of the wines they source, repackage, and sell at $10-$15 and they fulfill their promise; values with quality that outstrips price tag. They are expanding their portfolio to include a $25 price point inventory that steps up quality again and expands their available market. The wines come from all over; Australia, US, France, etc. Brett told me he just acquired some 2009 Cru Beaujolais and offered to enter it into a blind tasting of many of the top ’09 Beaujolais I have organized for early next month. I asked him how things were progressing and how he saw the future of the business:
WZ: What were the market trends that you saw that told you there was an opportunity for 90+ Cellars?
Brett: There are a few trends which created an opportunity for 90+ Cellars
1. Growth in wines sales fell sharply in 2008. Wineries need to sell wine but do not want to discount their label (reducing its value) or don’t have the capacity to create a second label for their wine. Falling demand for high quality wine above $20/bottle created an opportunity to start a wine label like 90+ Cellars, the purpose of which is to offer wines of outstanding value.
2. Consolidation at the distribution level has made it difficult for many wineries to receive adequate attention from salespeople who must work with an ever expanding portfolio.
3. It’s difficult for wineries to invest in developing a wine label (or brand) in a market that is located a great distance from them.
4. Oversupply is a chronic issue for the wine industry. Additionally, advancements in science and technology have enabled growers to increase yields without compromising quality.
5. More and more, American consumers consider wine an everyday beverage and are looking for good values within the $10-15 range. Furthermore, they are willing to try new labels, regions, and grape varieties in order to get what they want.
WZ: Do you think it is a long term strategy or does it capitalize on the oversupply in the channel right now due to the economic downturn?
Brett: The economic downturn and subsequent uptick in oversupply enabled us to launch Ninety+Cellars. Structural inefficiencies in the marketplace will allow us to keep it going.
WZ: How many years have you been around and how has your business grown year over year?
Brett: 90+ Cellars has been around for less than two years. It was started in the Spring/Summer of 2009. While Massachusetts accounts for the majority of our sales, 90+ Cellars is also available in New York, Connecticut, Rhode Island, Vermont, Maine, New Hampshire, Maryland, Delaware, Texas, Illinois, and California. Our growth is intense, but we should wait to talk about any growth trends until we have at least two full years under our belts.
WZ: What are the largest challenges to your business model?
Brett: Launching a new wine label in a overcrowded and competitive marketplace is a difficult thing to do. Walking into a retail store and basically saying, “You don’t know who I am, and have never seen this wine label before, but you should buy it,” is not the easiest pitch. Doing it all with a three-year-old, a five-month-old, and a hard-working wife is another challenge altogether.
WZ: What has been your single largest business success?
Brett: At this point, we’re too young and too motivated to be talking about our biggest success. I believe our biggest success is still ahead of us.
Last week the Washington Post also referenced this “stealth” wine selling approach, and spoke to Rubus founder Fran Kysela, an importer/distributor who said:
Given the economy, the opportunity existed to source excess wine that can no longer be sold at $50 to $150 a bottle. This excess will not remain forever, but is a good one-time opportunity for the consumer.
Under non disclosures from their sources, labels are wrapped around bottles and only the wine hints at its real origin, as $50 wines sell for as little as $15. Costco started selling the Cameron Hughes label, which is offered by a wine broker of the same name buying excess inventory and reselling at steep discounts. As Vankoski mentions, there is more to the model drivers than a troubled economy, so it will be interesting to see how these brands permanently integrate into the marketplace as wine producers come to grips with lower price points and more sensible business plans themselves in response to a more rational US consumer wine market.
China’s Irrational Wine Market Drives Demand and Price
In complete opposition, at least for now, irrationality is the word of the day for Chinese sellers and buyers. When Hong Kong recently erased its rich tariffs on wine imports, it attracted new money from from the Mainland in search of luxury brands to help define their newfound affluent profiles. China’s new millionaires and billionaires swooped in just in time to offset the softness and receding auction prices in Western markets for Bordeaux, Burgundy, and other collectible brands. A striking example of this recently presented itself when three bottles of 1869 Chateau Lafite sold for record breaking US$230K each last month at a Sotheby Hong Kong auction, which was more than 20X the estimated value in the auction catalogue.
A third party wine storage operator in Hong Kong, Crown Wine Cellars, figures that 25% of the global stock of fine or traded wine is now owned by collectors in China, Hong Kong, and Taiwan. It is fashionable as well as a smart investment strategy, since new found fortunes are driving up returns faster than the stock market.
Cultural implications for big Asian wine spenders drive their enthusiasm as much as investment value. In a recent Bloomberg report, one participant in this market frenzy was interviewed:
He Wei Qi, a businessman from eastern China’s Zhejiang province, says he routinely pays more than 30,000 yuan ($4,500) for a bottle of wine to entertain guests. “A price tag of more than a million yuan a bottle — that does more than show off your wealth, it shows you have good taste. We don’t care how outrageously expensive the wines are. Westerners drink wine slowly as a way of enjoying life. Just look around you. Mainland Chinese tilt the glass and pour it straight down the throat.”
This helps explain the frenetic pace contributing to the Hong Kong auction market’s gross sales of US$120M so far this year, already almost double last year’s total. But, it is not just the high end of the market that is seeing unfathomable consumer interest that is driving prices to unreal levels. Bloomberg also interviewed a Shenzhen wine merchant, Liu Xue Biao, who explained that “wine he buys in Hong Kong for about $3 a bottle can be sold in mainland China for 300 yuan, a 1,400 percent mark-up. ‘They are willing to pay just about any price,’ said Mr. Liu.
Isn’t it interesting that two market forces are working in such direct opposition, making fine wine more or less accessible to so many enthusiasts that can appreciate it most? I am just glad not to be an analyst or market forecaster with responsibility for predicting the landing zones for these completely contrasting market dynamics occurring simultaneously in greater China and North American wine markets. With the experience of bursted bubbles all around us right now, and since WineZag is all about SENSIBLE FINE WINE APPRECIATION, I would more easily buy stock in 90+ Cellars than invest in a $200K bottle of Bordeaux. Which way do you lean?