WineSleuth 12: Prices Outlook 2015-16

Outlook for Prices 2015-16

We reported last year that we expected to see the general price stability of imported wine over the last 3 years largely continue in 2014 with some variation according to price point. It really didn’t do that at all. So why was that? The picture turned out to be more complex that our overly simplistic view, then taken. Over the period of the last 4 years there have been some interesting developments in oversupply and consolidation against a backdrop of ‘double dip’ and ‘triple dip’ recession, European financial woes, greater production and a scramble to join the perceived economic ‘party in China’. The waters got muddy, the messages garbled and some economic indicators flew not only against the grain but in very opposite directions to each other and in unexpected inverse relationships. What a headache to muddle through…

Recent history

The major price hikes around late 2009/2010 (resultant from the global financial calamity, as importers protected themselves against currency fluctuations and uncertainty), were almost entirely across the board. This step up was followed by almost 2 years of sustained strong pricing. By December 2011, however, annual increases had slowed; prices showed on average a 7% up-tick 12 months ago after a period of calm. We managed at the time to hold off passing on the 2011 rises for 4 months and had largely held that position to the end of the first quarter 2012. Most of the rises since 2011 can be put down to inflationary pressures.

Across 2012, there were 3 major factors affecting pricing. Smuggling, interest rates and inflation.

Much of the upward pressure in the legitimate market was relieved as food price inflation in mainland China was held in check and even fell. Imported food and beverage prices saw downward movement on that wave, on the back of low global interest rates and a strong Renminbi. Prices for imported wines via proper channels generally held firm, perhaps due to strong local consumption, although there was also a notably high influx of cheaper wines onto the market from Spring/Summer 2012. This precipitated widespread price cutting of ‘bottom end‘ wines as an oversupply problem from too many new importers.

Those (often smuggled) wines became a common feature of the marketplace. Unfortunately, apart from their very real handling concerns, they serve to skew and destabilise the market. Their appearance in the marketplace can depress prices down for short periods: give false market indications to players. But as smuggled wines and one off dodgy deals are generally fixed volume, those bundles lack consistency of supply, are unsustainable, and are mostly red herrings.

One consequence has been a period of confusion with actual market prices being undercut by the black market imports (which don’t pay and therefore pass on the import taxes). Examples of these pop up regularly in less consumer (protection) orientated bars and restaurants. More often, the owners just don’t understand and can’t tell the difference. Care is needed. We are not sure if the authorities will be minded to tackle the problem. Whilst they want to support the Chinese wine industry from lower priced (illegal) imports and enjoy the benefit from import duties that a crackdown would initiate, it’s not clear who is funding/enabling and therefore benefiting from the smuggling.

Initially, some larger established, legitimate operators injected their own antidotes via loss-leading, high quality wines attempting to maintain market share and put off the myriad of less professional ‘importer pretenders’: maybe we can call them the ‘Les Importers-Nouveaux’. There have been increasing signals that this tactic is going away, particularly given unstable and (at times) markedly unfavourable movements in exchange rates and interest rates, plus increased political and economic instability in some of the source countries.

Furthermore, some some of the 2009/10 rises mentioned earlier, which had been previously overdone, allowed room for prices to actually fall too on some of the medium priced wines available. And there has been some fairly gentle trickling up over the last 18 months from purely economic factors (inflationary/interest/exchange rates movements) but it has been modest.

The Xi Factor: Much publicity concerning high end counterfeiting in China has had a huge impact on demand for those wines (especially top French Bordeaux) in the period 2010 to 2013. Crackdown’s on lavish expenses have decimated this market. Unfortunately that has had a knock on effect on real wines, at lower real pricing. We can’t comment much on the extent of counterfeit products as we are not directly in contact with it but no doubt affected by it. If you are worried about avoiding the evils of counterfeiting products for putting inside your body, this we can help with.

Here’s another perspective from the US situation:

The explosion of wine prices during the last five years is reflective of the fact that around the world, during an international depression, the rich are getting richer and the middle and working class are getting poorer. Many inexpensive wines have fallen in price, particularly those from Australia, South America, and Spain. Taxes on the excessive earnings of the upper classes would do a lot to restrain the ridiculous prices of the upper tier wines. I think this is especially true for Napa wines sold in CA.

Interest rates and inflation continue to be the main global determiner of wine price inflation, amid a slowing of growth in Chin, and with that declining general inflation numbers had been the norm. Clamping down by central government on socialite excesses, has caused ructions in the industry as the party time flow of easy money has dwindled rapidly to zero.

A mixed picture for 2015 but one thing’s for sure…

Mid to high end prices are coming under upward pressure. A general review which took place this time last year in that segment is now reaching the retail arena. As part of any price review we look to maintain stability where possible, and shop around for the best deals (subject to ethical considerations).

So why are some of our wines so cheap compared to their recommended and actual retail price, whilst others seem to lack the same competitive edge? We get better prices through some channels than others. It’s as simple as that.

By having as broad a range as possible and a greater variety of wines compared to any other retailer in Shanghai (and we are pretty sure we do). Some wines inevitably aren’t going to ride out the intricacies of international trade gyrations and therefore represent as good value as others, which are better placed by virtue of influencing factors, such as currency. Some products are quite volatile price-wise, requiring periodic tweaks from us. Others only ever gently increase (or not), once in a blue moon, mirroring general levels of inflation. In fact, some wines have hardly changed their unit cost at all in four years, and then, only for trifling amounts. Others can fluctuate fiercely every 6 months within a range. There really is no single blanket approach to handling machinations of the price roller-coaster.

In choosing to offer the most complete range of great wines from the greatest number of regions we can, our supplier rates vary according to their economics too. Supply and demand for particular lines of supply. In other words, costs of similar products from different sources vary due to individual circumstances.

We are always on the lookout for proper, well made, wines offering the highest value for money. Get in touch if you have specific wines you would like us to seek out.

The Wine Man

May 2015

NEXT TIME: “Your wines don’t give me a headache…”

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