Bordeaux en primeur – Nothing will change

I wrote the following assignment as an exercise for the WSET diploma. Researching the net I found that this is a fairly common essay, see this one by Mike Supple or this one by Joelle Thomson (who, by the way, was one of my teachers when I was studying WSET Level 3 in New Zealand).

To make it more readable I uploaded it on Issuu and embedded it on wordpress. It’s not perfect, but the feedback was fairly good.

EDIT: it seems that some browsers have problems loading the issuu plugin. I am posting the whole thing as HTML. For a complete version with notes and reference look here.

Introduction

“En primeur” is an expression commonly used to indicate the sale of unfinished wine by the producers, particularly in Bordeaux. While the birth of modern Bordeaux en primeur took place in the 20th century, selling wine before it was bottled or stored in cask is a very old practice. We can find one of the earliest precursor of the system in the 17th century: François-Auguste de Pontac, owner of “The sign of Pontac Head” tavern in London, was the son of Arnaud III de Pontac, then owner of Chȃteau Haut-Brion, and served only the wine made by his father. Its quality and success made customers ask for future allocations, which the winery granted by mediation of the restaurant.

En primeur as it is conceived today began to slowly form since 1924, when Chȃteau Mouton-Rothschild started bottling its own wine, a work that had been traditionally left to the négociants. Particularly after the Second World War, with a smaller wine market, the producers often struggled to make ends meet: buying en primeur was a way to finance them. Négociants had much more strength in determining prices, save the first growths, and the producers, on their part, were happy to have some cash in advance. Until the end of the 1960s grapes were also often sold “sur souche” (before being picked), another prototype of en primeur sale, but this practice ended with the disastrous 1969 vintage, when the scarce harvest could not cover all the reserved allocations.

In 1969 bottling at the property became law for all the St. Émillion properties, followed by the classed growth of Medoc three years later. The start of the modern en primeur can be traced back to this period: the successful 1970 vintage attracted the attention of the American consumers, then in a very strong financial position, who bought large amounts of wines as futures, causing prices to rise (and then abruptly fall 3 years later).

The history of en primeur has since lived through periods of euphoria and depression, swelling and bursting: 1982 saw the beginning of a new speculative phase, a vintage today considered legendary but then despised by many critics, which made the fortune of those who invested in it. 1997 marked a new period of crisis, while frenzy came back in 2008 and 2009, only to be again replaced by another crunch in recent years.

How the en primeur system works

To talk about the en primeur system we should first briefly describe how Bordeaux trade works. The expression “La Place de Bordeaux” commonly refers to a three-tier system. This is composed as follows.

• The producers, private or cooperatives, a total of circa 9500 growers.
• The négociants, who buy the wines from the châteaux and sells them to the public. They also have a role in storing and ageing the wine, since only 50% of the region produce is châteaux bottled. There are around 400 négociants operating in Bordeaux, with about 100 of them involved in the trade of classed growths.
• The courtiers, acting as brokers between the other two. Their tasks include discovering new producers and knowing where to find rare classified growths and vintages that the négociants may need. Registered courtiers are around 130, but no more than 20 of them work with the top estates .

The system originated in the seventeenth centuries when demand for wine from specific communes started to grow, especially in England, and it has shown to be convenient for the producers, saving them the hassle of selling and marketing the wine by themselves, as well as for the négociants and courtiers, who marks up the wine accordingly.

But not all the wines is traded through the négociant: merchants handle about 70% of the total Bordeaux production (5,7 million liters in 2009), while the rest is sold directly by the producers.

Their business is divided between bottled wines (vin livrables) and en primeur. The former is self-explaining, while the latter is a form of transaction where the wines are sold as “futures”, that is up to two years before finishing their making process and being bottled.

En primeur today is a very structured event: every April representatives of the trade and the media will swarm to Bordeaux and take part to the tastings organized by the Union des Grands Cru or by the single châteaux. They will taste the wines made from the last harvest, which will have barely completed malolactic fermentation and will still be quite tannic and acidic, and try to guess how the vintage is going to develop, if it will be great, mediocre or just good.

The producers normally will wait until May or June to establish their price (prix de sortie). This will be influenced by:

• The reaction of the press. Higher marks mean higher prices. In the last decades the word of Robert Parker has been particularly important in the process, constituting an essential reference for both the trade and the public. In 2015 the famous critic has left the helm of en primeur tasting to Neal Martin. For Gary Boom, managing director at the London Merchant Bordeaux Index, this change will lead to lower prices, though there are different views on the issue. Not every château waits for judgements, for example Pontet-Canet has been used to reveal its prices well in advance of the en primeur week tastings.
• Pricing of rival and neighbouring châteaux, for a very low price could be interpreted as a sign of vulnerability and lack of confidence.
• Current market expectations, that is how fine Bordeaux wine market is expected to develop. En primeur market is highly speculative and while there have been calls to use the event for personal pleasure (buying good or rare wines to be enjoyed later at a lower price), this wine is still largely seen as an investment and expected to return revenues.
• The foreign exchange market and particularly the strength of the euro.
• Last but not least, the quality of the vintage as it is judged by the makers themselves.

Once the prices have been established, the négociants, through the courtiers (representing producers interest), will receive allocations from the châteaux. Allocation size will depend from many factors, like négociant reputation, financial solidity, history in the en primeur trade and the producer strategy. A négociant in a difficult year can renounce to his share, but this is not a simple decision, as the producer could reduce his future allocations. Only merchants based in Bordeaux can buy through this system.

A château may choose to release its wine in tranches, at different stages, regulating the price according to market reaction. This is particularly true for First Growths, while lesser growths will have each their own strategy and use this system to cope with the conditions of the market: Lynch-Bages did it with the 2013 vintage, when he went against its custom policy of selling almost all of its stock in one slice and released a very small first tranche at a competitive price.

As soon as the merchants have confirmed their allocations, they will offer the wines to their partners, both in France and in the rest of the World. After two years the finished wine will be delivered to the merchants and the customer will decide whether to take it or to store it at the négociant facilities (for an annual fee). If he takes it, he will have to pay for VAT, delivery and custom taxes where applicable.

En primeur does not involve all of Bordeaux producers: in 2005, out of nearly 10.000 growers only 430 sold en primeur, with the number further declining to 332 in 2008.

Also, en primeur is not a Bordeaux exclusive: similar futures sales are hold for Burgundy, Rhône and Port wine. The U.S. wine industry is considering the possibility of introducing the system, while some single wineries, like Harlan Estate, have already implemented it (selling directly to the consumers). It must be said that these “en primeurs” are less structured and organic than in Bordeaux and attract much less attention.

Advantages and disadvantages of en primeur

The en primeur system has been alive for decades because in the right conditions it repays very well all its participants.

Advantages for producers are easy to understand.

• Cash flow. The main reason behind the birth of en primeur: being able to capitalize on a wine 2 years before its bottling is economically very important, even though the price is lower. This is especially true for lesser châteaux.
• Efficient marketing. Having the world of wine trade and media coming to your doorstep every April is extremely convenient and saves time and money. Furthermore, the system is integrated with the Place of Bordeaux, meaning that the négociants will take care of marketing and sell the wines to consumers and merchants around the world.

On the other hand consumers and négociants can have the following benefits.

• Lower prices. In an ideal world, prices of an en primeur wine would be lower than those of a bottled one, for its unfinished nature. This has been true in the past, but recent speculation has challenged this point.
• Availability. Wines that are made in limited quantities could be impossible to find when released. Moreover, customers needing particular bottling format (magnums, jéroboam and so on) should seriously think about buying en primeur, since these will be very difficult to find at a later stage.
• Cost spreading. Tax (VAT and customs where applicable) and shipping will be paid when the wine is delivered. For final consumers this could effectively spread the cost of purchase.

However the system works if all the ring of the chains benefit from it. Lately this has not been the case and en primeur has come under criticism.

Merchants and consumers interested in en primeur must consider the following risks.

• Commercial risks in the chain of distribution. Though the consumer has already paid, his wine does not still exist. If one of the rings in the chain of production and distribution becomes unable to honour its contract (a négociant or producer going bankrupt for example), nothing will be delivered. Getting refund is difficult and could not be worth the time and pain involved. The transaction is not based on a physical object, but just on an intention to purchase the wine when it will be finally bottled, thus normal mechanisms of customer protection are not in place: a receipt does not prove ownership, for there is still nothing to be owned.
  Recently EU has stated that en primeur buyers do not even have the right to cancel their purchase and ask for their money back. Luckily some merchants offer “cooling off” periods to their customer, but length and conditions vary.
• Unrepaid investment. Purchasing to resell later at a higher price is very common with en primeur wine, but in late years much money has been lost in the game: since 2005 vintage revenues have been low and unreasonably priced 2008 and 2009 vintages even led to losses, with prices at release lower than those en primeur. For consumers this means economic loss, for négociants unsold stock.
• Problems in quality assessment. It is difficult to evaluate an unfinished wine and predict its evolution, but merchants and journalists are asked exactly to do that, while customers have to trust their judgement. There is much space for error, with initially praised vintages revealing lower in quality than expected and prices decreasing accordingly. Furthermore, en primeur samples may not accurately reflect the final wine: different barrels develops at different speeds and producers are eager to show the best they can offer, which at this point could still be far from the eventual blend. There has also been much rumor about a “Parker barrel”, an en primeur blend specifically produced to please the taste of Robert Parker and to get favourable scores. As it is, the system is subject to abuse.

Being a seller’s market, at least since the 1980s, producers are less subject to the downsides of en primeur in the short term: in a way Bordeaux châteaux form an oligopoly and as such they behave. However they must be aware of some disadvantages.

• Loss of credibility and reputation. The producers cannot entirely be blamed for trying to capitalize on world thirst for fine wine, but their perceived complacency and arrogance are undermining their reputation: in the last campaign (2014 vintage) merchant have started to lose patience and Max Lalondrelle of Berry Bros & Rudd has warned unreasonably pricing producers that he would not offer their wines or steer possible purchaser towards more conveniently priced options. This could lead to weaker demand in future years.
• Costs of la Place de Bordeaux. While having its advantages, the existence of a three-tier system increases costs and spreads revenues.
• No control over distribution. Once the wine is sold to the négociants, châteaux cannot control where it is distributed and how much. This is an issue of the entire system of la Place but it applies to en primeur as well.

Alternatives to en primeur

Speculation has made en primeur wine more a commodity to be traded by professionals than a drink to be enjoyed by enthusiasts, but the last vintages, particularly the tough 2011-2014 campaigns, are questioning the effectiveness of the system, while the press and the trade are wondering about possible alternatives for selling fine Bordeaux.

Châteaux Latour and Châteaux d’Yquem have found their own way to cope with en primeur: the former has quit the system in 2012, stating its intention to release future vintages only when ready to drink, the latter has adopted a more flexible approach and makes the decision on a yearly basis, taking into consideration vintage quality and trading conditions. It must be noted that a producer needs to be in very good financial health for taking such a step, since it means renouncing to early cash. Furthermore, négociants may not be pleased by châteaux menacing the status quo, as happened with Millésima boycotting Châteaux Latour. While unorthodox, both Yquem and Latour policies do not question the role of La Place de Bordeaux, but Bordeaux châteaux could take inspiration from the Harlan Estate model: the Californian producer operates its own en primeur, but sells directly to the customer at 600$ at bottle, retaining all the earnings. This would of course pose a number of practical issues, since sale and marketing would have to be managed entirely by the producer, not an easy challenge for smaller estates.

A less radical change in the system could be more viable: Tim Atkin MW suggests postponing en primeur tasting by a year, which could allow for more reliable quality judgement. Tasting samples should also be verified by the Conseil Interprofessionel du Vin de Bordeaux (CIVB) to make them as near to the final blends as possible. Blind tasting could help eliminating subjection towards top châteaux. London International Vintners Exchange (Liv-ex) also identifies a problem in the allocation system, hoping for a less political way of distribution.

Conclusion

In time of crisis it is normal to question the suitability of a system and to ponder alternatives. After the poor 2011-2013 vintages performances, interest in en primeur has dwindled and last April campaign, while a step forward, has generally failed to wake investor’s interest.

That said, en primeur is unlikely to end anytime soon. The system has been under strain several times in the past: in 1973, during the oil crisis, in 1998, when a overpriced 1997 vintage led to another bubble burst, and in 2007, following the high prices of 2005 and 2006. And yet it has survived. Jancis Robinson, citing Edmund Penning-Roswell, stresses that the châteaux were already speculating in 1970s, offering prices unrelated to quality, production costs or the depth of consumer’s pockets. 40 years have passed and nothing has changed.

A major shock, implying négociants going bankrupt and tons of wine remaining unsold, could eventually lead to lower prices, giving en primeur back to the world of wine enthusiasts for a while. However the centuries-old charm of Bordeaux would likely hit once again, new merchants would rise and history would repeat once again. The cycle could be definitively broken only devoiding Bordeaux of its allure, but this would imply the rise of a similar en primeur system in another wine region, one capable of attracting the same attention by the trade and the press. At present none of the en primeurs taking place in the Rhone or in Burgundy has this strength, challengers are nowhere to be seen.

Surely the mechanism would at least benefit from some minor changes, in the allocation system or in the way and timing the tasting samples are presented: the wines are tasted too early and there is no guarantee that they will reflect the final blend. However self-regulation by the producers would be impossible to enforce and legal restraints, in such a litigious region, would lead to a “civil war” of legal actions. After all “the bordelais are greedy” and we can only trust the good faith of the single producers.

But in the end no one has to be part of this circus: we can watch stellar prices unfolding every year under our eyes, while sipping a premium Chilean wine or a relatively affordable Barolo or Super-Tuscan. In this golden age of wine, where good quality is widely available, alternatives are everywhere. I think we can survive.