Dynamic changing business : how the "Place de Bordeaux" works

Transcription

1 Dynamic changing business : how the "Place de Bordeaux" works A seminar given by Alexander Van Beek at Chateau du Tertre, Margaux on Tuesday 23rd April 2002 by Tim Marson To an outsider, the dynamics of the Bordeaux marketplace can seem a very strange way to do business. So it seemed to Alexander Van Beek, a Dutch businessman who arrived in 1995 to be manager of Chateau Giscours, and (from 1997) of Chateau du Tertre. The three-tiered system of Chateau - Courtier - Negociant and the en primeur market may well be rooted in a long history, but they are still relevant and effective today, as well as of course being unique to Bordeaux. The first merchants or negociants arrived in Bordeaux from England and the Low Countries in the Middle Ages to purchase wine and ship it to their customers abroad. These were followed in the 18th century by men whose names have become etched into the history of the region : individuals such as Thomas Barton and William Johnston. Now there are about 400 negociants operating in Bordeaux who are responsible for distributing wine to over 160 countries worldwide. They take care of the shipping, taxes and other relevant regulations, enabling the chateaux to focus on production. Many of the smaller properties do not have the capacity to develop such a widespread and diverse customer base, but the negociants can offer them good distribution. Almost all classed growth properties sell exclusively to negociants. They will work with a number of different merchants with contacts in different markets to ensure comprehensive distribution. Courtiers or brokers are the middlemen who guarantee the transaction between producer and negociant and ensure a good business relationship. They provide information on matters of price and the current market before the transaction, negotiate the actual purchase and then give a warranty that the goods are correctly delivered at the agreed price. A courtier brings people together and provides an essential service, particularly when it comes to the sensitive issue of establishing an opening price. For his trouble, the broker gets about a 2% share of the deal. Wine has been sold en primeur to negociants in Bordeaux since the 18th century. The practice presumably arose out of a period of poverty as a means to create cash flow while two years' worth of stock were tied up in the cellar. It also enabled the negociants to acquire wine on attractive terms. Until chateau-bottling became commonplace in the 1950s the wine was sold in bulk. From the early 1970s it also became possible for consumers to purchase wines en primeur, although not direct from the chateaux. This practice is now well-established, with the negociants offering their customers soughtafter wines at reduced prices in return for advance payment. The chateaux commonly release their wines in a series of tranches as a means of assessing the market. Consumers can rest assured that the opening price will almost always be the lowest offered, hence guaranteeing a profitable return. Most chateaux release almost all their production in this way, keeping back only a small proportion for personal use and cellar-door sales.

2 The en primeur system has its disadvantages, but it protects the chateaux if not the negociants. When the 1997 vintage was released into a booming market the prices were markedly higher despite the quality of the wines being inferior to the previous two vintages. The result was that the customers rejected the wines at the prices being asked and a great deal of wine returned to the marketplace. By contrast, there was mayhem when the 2000 vintage was released due to enormous demand and a buoyant American market. The first growth chateaux released as many as five tranches, while the value of the highly-rated Chateau Leoville-Barton tripled in three days. The chateaux are in a position to take advantage of the en primeur market in boom years but it can backfire. The late Michel Delon at Chateau Leoville-Las Cases attracted enormous criticism when he released his 1996 vintage at a higher price than the first growths. In this way it is generally the negociants rather than the chateaux who benefit in boom years by manipulating the market, but also suffer in lesser years as a result of having to sell devalued wines. Perhaps the greatest influence on the market are the opinions of certain journalists who gather in Bordeaux in the early spring to taste the previous vintage's wine. Here, it is the chateaux who can influence the market by providing cask samples that have undergone malolactic fermentation in the barrel (giving the wine a flattering, chocolatey feel) or, in the case of the less honest, an unrepresentative blend of the final wine. For the proprietor of a classed growth chateau the two most important things to bear in mind when releasing wine onto the place de Bordeaux are, firstly, to establish a well-balanced price, based on the advice of the courtier, and, secondly, to maintain a good relationship with the courtiers, negociants, and finally the consumers themselves. The structure of the Bordeaux marketplace and the en primeur system can seem out of touch with today's business world and they have no shortage of critics who would like to have greater ease of access to the wines and see more stable pricing. Nevertheless, the systems do work, and while it is easy for outsiders to criticise, the Bordelais themselves seem happy with the way things are, even the comparative newcomers such as Alexander Van Beek.

3 Dynamic changing business: how the Place de Bordeaux works Alexander Van Beek, Manager at Château du Tertre, Margaux Background to the property and manager Bought in 1997 and reworked in 1998 Exactly the same boundaries as in 1997 Tuesday 23 rd April 2002 by Mark Bedford Alexander has come from Belgium, appointed by the Dutch Albada Jelgersma family, to manage the property. The family have also bought Château Giscours in Margaux. He intended to impose a degree of individuality as to how the property s wines were sold, rather than simply go along with the flow of the place de Bordeaux He now no longer wishes to fight or beat the system. The finely divided world of grower, negoçiant and courtier has its place. It works. It gets the best prices for the chateau s wines and takes away the need to run a specialised marketing department. Alexander had arrived from Bordeaux having been appointed by the Dutch Albada Jelgersma family, who had also bought Château Giscours. As a young, slightly entrepreneurial businessman, he felt he could introduce a don t take the system for granted attitude. However he now has respect, almost admiration, for the historic triumvirate relationship that he has between grower, courtier and négociant. Two of the students suggested that the tidy system had the appearance of being a cartel. This was politely and gently refuted. It allows me to concentrate on making the wine and removes the burden of dealing with the very complicated and temperamental Bordeaux en-primeur market. Generally this simplistic response convinced the largely innocent listeners, none of whom have had any experience from buying en-primeur claret straight from the négociant. Reading Stephen Brook s Bordeaux People, Power, Politics- the Place de Bordeaux doesn t seem as tidy and straightforward as Alexander makes out. The Gironde continues to enjoy the fortunate position of attracting the attention of fine wine drinkers across the world. Despite the vast quantities of claret that are produced by the Cru Classé fraternity there is intense focus on the region every spring as buyers jostle in the queue to buy the best from the vintage. Both the growers and the négociants play an annual game of cat and mouse. Who will declare their prices first? How bold can one be with their opening price? If you think that your wine is better than the property next door then you certainly don t want your price to be the cheaper of the two. The outside world accuses the Bordelais of being greedy, but the history of Bordeaux recites a tale of fortune and success interspersed with periods of disease, disastrous

4 vintages and destitution. The business nature of the region is anxious to secure the best prices from a deservedly good vintage, so that there will be enough fat to see all parts of the Bordeaux community through the leaner years. Making fine wine is not like producing confectionery, where one produce as much as is suitable for the market at the time to whatever quality as is appropriate. The continually fluctuating global economy affects how much certain end consumers will pay. This is far too complicated for the wine producing château to handle without employing the expensive overhead of an export department. Where the system of the place de Bordeaux runs into difficulties is when an interested customer approaches the producing château with a request for its wine, only to find that the sale is entirely in the hands of a third party. The price to the buyer is out of the hands of the person who made the wine. Of course it is in the interest of the négociants to handle the château s wines in a responsible manner so that the long-term commercial relationship is maintained. On reflection Alexander has given the MW class a polished and simplistic exposé of the place de Bordeaux. Many importers seem to be increasingly fearful of the annual struggle to secure the desired allocations at what they regard as fair prices. As the market place has expanded around the world, so the allocations have become less predictable. UK merchants have to go to several négociants to purchase the desired amount of the same wine, because the négociants themselves are receiving smaller allocations. As the place de Bordeaux continues to change, fairplay is not perhaps the buzzword that it used to be. Neither négociants nor importers wish to buy wines that they will struggle to sell, although some are prepared to do so at a loss to secure the precious allocations of those wines that promise good returns.

5 Lecture: 4:30 Tuesday, April 23 by Alexander Van Beck Commercial dynamics of the Crus Classes of the Medoc by: Paula da Rosa, Igor Ryjenkov and Mary Vari. Q) Why is it important that the Classification of 1855 is still used in Medoc? A) The 1855 classification recognizes and codifies the exceptional terroir; a unique combination of gravel and sand which causes roots to reach deep, creating an "adrenoline effect" in the plant which results in quality. The current system has the ability to distribute a relatively small production of individual Chateaux throughout the world. Commercial system: There are about 400 Negociants in Bordeaux at this point who are responsible for marketing the wines. Ch. du Tertre is using 120 of them with 70 getting the highest allocations. The Brokers are the intermediaries between the Chateaux and negociants, know the wines and report to the negociants. Recently, the negociants have been playing the role of both the broker (a.k.a. courtier) and negociant. After an era of poverty in the area - phylloxera et al., the negociants started buying "en primeur" to give advance cash back for the wine producing industry. This allowed for capital improvements and a more stable economy for all. This also put the negociant in the position of great power. Q) Why keep this system? A) As a trained MBA Alexander has given this issue considerable thought. Specialization --- this system allows the winemakers to concentrate their efforts on their area of expertise rather than fragmenting their attention in other areas, such as marketing. Winemakers cannot go flying all over the world and still make wine. The negociant system is the ability to outsource marketing/distribution department. Due to the relativley small production of each estate, economies of scale cannot be realised to bring these responsibilities in-house. The level of expertise required for the vast number of markets that these wines reach is a specialized job. One of the classed growth decided to market their wine themselves in campaign. They bought their stock back and hired agents all over the world. The cost of this exercise was understandably huge. The estate had to establish new networks, where-as the negociants networks were long established. It is important to establish a long-term relationship with a negociant, one who knows your wines and your business. When setting the price the livelihood of everyone involved in the production of the wine must be taken into consideration. The price ex-cellar is set by the estate, with the considerations for the production costs, the vintage (and the critics, as of late), the market situation, the previous vintages performance, and active input of the negociant. Setting the price each year is a matter of great importance for producers and negociants. Financial gain for the intermediaries must be in place for this system to be successful. Prices must be reasonable to keep customers, while taking into account the expenses of production and forecasted capital investments. Wine writers have a significant impact on the price. The chateaux do not release all the wine in one shot, rather they sell in 'tranche', a certain proportion of its total production, depending on its need for cash and reading of the market. The negociant is the practical link. It is important for the producer to keep a finger on the pulse of the market, and negociant/courtier is the estate interpreter of the market. There should ideally be a long term, family-type relationship between negociant and producer. Distribution of Bordaux: Q) "Already sold"..what does that mean? A) The wine is pre-sold in the spring following harvest well before it is bottled and ready for shipping. It actually means, it is sold ex-cellar, when if fact in may not be available for purchase by the final consumer

6 the wine can still be in any or all of the levels of the intermediaries on its way to the destination market. Comments were made that this distribution system resembles a cartel, however, Alexander's comments were to keep in mind that the chateaux still decides who to sell their product to, it remains a free system in that sense. They have the freedom to chose any of the 400 negociants to distribute their wine. The chateaux can also regulate the size of the allocation to each of the chosen negociants. If the negociant imposes too great a margin or speculates on the wine, his allocation for the next vintage may go up or down, or he may get nothing at all, with due explanation. This is, of course, a two way street. Q) Who decides what portion of the profit each party gets? A) Price is determined by the chateaux usually in conjuction with the courtier. For example, Leoville Barton sets its price the same every year or about the same. Year 2000 saw a change of only 10ff from 150 ff to 160 ff. Du Tertre keeps their prices reasonable, offering first 2001 tranche at 108ff. The 1997 vintage saw the market demand Bordeaux and push the price up, especially the Asian market hot off the 1996 vintage, wanted and demanded more and more therefore the price went up. -Two years later, bust --- resulting in the 1998 prices coming out lower, although it was a better vintage. Price is a lot like the price of big sports stars. If the top player in the league agrees to be paid 1 million dollars then the second most sought-after player would likely be paid just less than 1million, and so on. The pricing sets a pecking order, therefore it is not just the price but the timing of the price. Every year the trade is waiting for the 1st growth to come out with their future prices, as that would be a barometer of where your own estate's price belongs (with some exceptions as Leoville-Barton). As of late, this decision was delayed until Parker made his pronouncements; however in 2001 Robert Parker Jr. stongly suggested the chateaux set their prices for the 2001 vintage before he comes out with his scores, ( as they were not going to be high, nor would he recommend to buy 2001 in futures. Production costs at the lower end are about francs per bottle. A little more at the higher end. The present commercial structure is all about 'not putting all the eggs in one basket'. That is ensured by the production and distribution specialization, the number of the negociants. Also e-commerce is beginning to play an increasing role. Chateaux keep some reserves of each vintage back and potentially could sell small lots of the library vintages that way.