Greg Sherwood MW: Fight or flee? – how to approach the fine wine market in an economic downturn…

It’s a day I won’t forget easily. On 15 September 2008, Lehman Brothers filed for bankruptcy and thousands of bankers dressed in the finest business suits were expelled from the company’s various offices one by one, clutching their possessions in a single brown collapsible cardboard box. It was a sombre reminder that nothing is forever, even in the highbrow, high flying world of some of the wealthiest global bankers and investment analysts. In December 2022, Price Waterhouse Coopers stated that just the winding up costs for the London-based arm of Lehman Brothers had already reached over £1.1 billion pounds and over 3.1-million-man hours over 14 years since the calamitous collapse in 2008, and that an additional three years would still be required to finalise the unwinding process.

Lehman Brothers was the fourth-largest investment bank in the USA when it collapsed in one of the biggest corporate bankruptcies on record. On the upside, over £43 billion pounds in assets have since been recovered by PwC for creditors over the past years. But of course, for fine wine lovers the world over, the Lehmans crash had a significant impact on the whole market, particularly for investment-grade wines, which, compared to many of the world’s other commodity markets, fine wine investment and trading was still in its relative infancy. Much like the Tulip phenomena during the Dutch golden age of the 1600s, where prices reached extraordinarily high levels and then dramatically collapsed, the lack of pricing data in the early years of wine trading and wine investment ensured that the fine wine markets frequently saw cycles of boom and bust, and the post-Lehmans period was little different.

But we should remember that all these tumultuous events did take time to filter down into the general fabric of day-to-day society. Thinking back to September 2008, I do of course recall receiving endless phone calls from investment bankers who had decided to “dabble” in fine wine as a pet investment project, and now that they had lost their jobs and their proverbial shirt off their backs, many of them were desperate to liquidate their wine portfolios rapidly, which undoubtedly meant taking a significant “haircut” in banking parlance. Many cash-flush merchants made a killing, preying on the desperation of the fallen. At the fine wine merchant I was working for at the time, we decided not to enter the feeding frenzy, and instead opted to help buy back wines some of our regular customers had bought but wouldn’t be able to realistically afford to keep anymore. But beyond that, we actively tried not to add to the general fine wine market hysteria.

Through the mid- to late-1990s, perhaps by design of its core members, or by simple virtue of its traditionally slow to change participants, fine wine for the most part remained a European pursuit though some large private collectors were beginning to emerge in the USA. Soon after the turn of the millennium this changed greatly with the introduction of China and the USA to the marketplace. This considerably deepened the buying pool creating a vibrant secondary market. While speculation has undoubtedly played some part in traders and collectors buying strategies since the 1990s, this market evolution brought with it for the first time, outright speculation… of course to the disgust of true fine wine lovers, drinkers and collectors.

The real impact of the Lehmans crash, unless you were actually one of the investment bankers that had lost their job, only really started to be felt in day-to-day life in around 2011 and 2012, when businesses started to close due to restricted consumer spending and high streets around the UK started to resemble rundown wild west towns with tumble week blowing down the high streets. General business lending became impossible, mortgages for buying properties became incredibly sticky, and the broader service economy was slowly but surely grinding to a halt. Unfortunately, not everyone in the fine wine market got the memo, with the Bordeaux 2010 vintage being offered for sale in 2011 at record breaking prices, testing the overall market’s strength as well as the true resilience of the Chinese market that had undergone countless rounds of economic stimulus programmes since 2008.

But no market was immune from the broader economic fallout and in July 2012, China announced their famous crackdown on gift giving of luxury goods among government officials. But by July 2014, the fine wine market had hit its lowest point since before the China-led boom. Highlighting the troughs as well as peaks over the last decade demonstrates that the fine wine market is a financial investment market like any other, where extreme expertise is required to navigating the macro-economic factors that shape the future direction of the market. So where do we stand at the moment… in August 2023? Should fine wine collectors and investors be running scared again and selling off accrued stocks or should they boldly be standing their ground, awaiting the inflation-led commodity price boom to settle down and recede?

Normally, looking at two of the key barometers of the fine wine market – Burgundy and Bordeaux – helps cast a little more light on the current state of affairs of the fine wine market. Unfortunately, Burgundy 2021 En-primeur was one of the most skewed campaigns on record, because despite the excellent quality, quantities made available for sale were down between 30% and 80% depending on the specific appellation, due to widespread frost damage and related critical weather events, which inevitably led to a frenzied market of price increases and restricted allocations.

Bordeaux En-primeur 2022 on the other hand saw an incomprehensible bullishness and hubris return to the market, with new wines released at between 20% and 35% price increases at a time when the broader European market, the UK market and the US market were all experiencing a brutal cost of living crisis. Sound familiar? Well, you could be mistaken for feeling a bit of deja vu, recalling the timing of the 2010 Bordeaux price increases in 2011, at a time when the markets were equally fragile and volatile. But as they say, the more things change, the more they stay the same… and this old adage always seems to resonate particularly loudly in the context of the Bordeaux market.

As merely another investment commodity class, perhaps fine wine merchants should not be surprised by all these price increases? Inflation is rampant and wine is not immune. Undoubtedly, the cynic within me understands that every time Bordeaux raises prices in such a blatant and brutal fashion, they do so with a full understanding that these brash price increases will inevitably lead to a fresh flurry of investment and broader consumer buying of cheaper but equally exceptional physical Bordeaux back-vintages like 2016 and 2019, making welcome space in the inventories of big global wine merchants and negociants who the chateaux rely so heavily on to move the majority of their production. So in reality, any vintage sale, newer or older, can surely be considered a win-win situation for the majority of chateaux.

As for South Africa’s many new impending releases, most of which will be allocated in September and October in the UK, demand has never been stronger and the growing clamour for the 2022 releases from Sadie Family, Alheit, Savage, Naudé, Kanonkop, Van Loggerenberg, Sakkie Mouton and the like, will undoubtedly cause many allocation headaches for fine wine merchants facing greater demand than supply.

Despite these good news headlines, some smaller wineries on the sidelines will begin to experience a tightening sales market where consumers are becoming increasing discerning on what they spend their money on, while producers are simultaneously compelled to raise prices reluctantly due to rampant global inflation. Lots of rocks and a lot of hard places lie ahead. But to use the slightly hollow words of British prime minister Rishi Sunak, now is the time to hold your nerve. For the majority of South African producers, what other choice do they have but to vasbyt?

• Greg Sherwood was born in Pretoria, South Africa, and as the son of a career diplomat, spent his first 21 years traveling the globe with his parents. With a Business Management and Marketing degree from Webster University, St. Louis, Missouri, USA, Sherwood began his working career as a commodity trader. In 2000, he decided to make more of a long-held interest in wine taking a position at Handford Wines in South Kensington, London, working his way up to the position of Senior Wine Buyer. Earlier this year, he moved across to South African specialist merchant Museum Wines to become the Fine Wine Director. He qualified as a Master of Wine in 2007.