The Value of Storage Provenance in Fine Wine Investment - Ella Lister, Fine Wine Strategy, Octavian

Ella Lister, Fine Wine Strategy, Octavian

               The Value of
        Storage Provenance
   in Fine Wine Investment

   Hong Kong International Wine & Spirits Fair

INTRODUCTION

• Fine wine has proved a highly rewarding investment over the
  last decade and more
• When you invest in fine wine you’re investing in its future state,
  a state that only you can determine
• Fine wine is fragile, and must be laid down for decades before it
  reaches its full potential
• Over this time, its value can easily be eroded if not carefully
  looked after
• The perfect storage environment is not easy to create, and
  shouldn’t be taken for granted
• Any serious investor in fine wine should actively seek to protect
  its value by ensuring proper storage

WHAT MAKES WINE VALUABLE?

• A wine’s value is derived both from what is inside the bottle, and
  what is on the outside:
   o Its actual quality, and the thus pleasure it gives the drinker
   o Its perceived quality and its subsequent reputation
• Optimal ageing will preserve both these elements in equal
  measure:
   o The liquid in the bottle, and
   o The labels, capsule, and packaging

VALUE EROSION

• Fine wine can all too easily be compromised by poor storage or
  transportation, for example:
   o Inside the bottle, the wine can become oxidised, or “cooked”, if
     subjected to the incorrect temperature or kept in dry conditions
   o Outside, the labels and packaging can be spoilt by long term damp,
     short term condensation, or careless transportation
• The perfect – and essential – environmental conditions for
  storing wine are:
   o 13˚C constant temperature
   o Average humidity of 75 per cent
   o Minimal exposure to UV light and vibration / movement

COMPROMISING TASTE

• The WFLO (World Food Logistics Organisation) states that high
  or fluctuating temperature is the greatest hazard to wine:
   o “Any elevated temperatures, above 60˚F (16˚C), accelerate the
     maturation process, may change their varietal character or their
     sense of origin (“terroir”), and can shorten the life expectancy of a
     wine (especially of whites)”
   o “Temperatures above 75˚F (24˚C) greatly and untypically age
     most wines, leading to undesirable aroma, flavour and colour
     changes”
• The WFLO’s storage manual stipulates that wine should be
  stored between 10˚C and 16˚C, and never above 30˚C, not even
  for 30 minutes

COMPROMISING TASTE (cont’d)

• ETS Laboratories research, commissioned by eProvenance,
  found that exposure to temperatures of 30˚C or above for 18
  hours irreparably damaged wine, causing:
   o Change in colour
   o Flat aromas
   o Turbidity / cloudiness (in white wines)
   o Decreased tannins (in red wines)
   o Change in taste
   o Reduced SO2
   o Increased Ethyl Carbamate (known to induce nausea, and a
     probable human carcinogen)

THE POWER OF PROVENANCE

• The wine market increasingly recognises that provenance is key
• Buyers pay more for proven stock:
          o Ex-château wine sold by merchants commands an average
            premium of 12 per cent1
          o Sotheby’s and Christie’s have set world records with ex-château
            Lafite and Latour in the last year
          o eProvenance research found that “super-provenance” wines sell
            for a 22 per cent premium at auction2
          o 65 per cent of collectors would pay more for Octavian-stored wine3

1 From a sample of 15 otherwise comparable wines listed on Farr Vintners’ website
2 “From pristine, documented cellars, versus wines of the same vintage and format sold at auction in the same month
3 Based on a 2011 survey of 450 Octavian Vaults customers

WHAT CAN YOU LOSE?

• Wine in less than perfect condition will sell for a discount
         o Soiled or scuffed labels lead to an average discount of 15 per cent1
         o Wine with low levels is sold for 22 per cent less than market price2
         o Wine with US strip labels sold in Europe – implying a return
           transatlantic journey – leads to an average 14 per cent discount3
• For example, a case of Latour 1982 usually worth £17,000 (HK
  $212,000) might only fetch £12,750 (HK$159,000) if it has low
  fill levels
         o Why? Because poor ullage implies a poor storage history that has
           caused the evaporation – and oxidisation – of the wine
1 From a sample of 30 otherwise comparable wines listed on Farr Vintners’ website
2 From a sample of 6 otherwise comparable wines listed on Farr Vintners’ website
3 From a sample of 11 otherwise comparable wines listed on Farr Vintners’ website

PROTECTING YOUR WINE (AND ITS VALUE)

• It is well worth protecting your wine by choosing the best
  storage possible
   o To store that same case of Latour 1982 properly will cost a tiny
     fraction of its value each year, or around one per cent for ten years
   o That is a one per cent investment to protect against a 25 per cent
     downside
• Never assume that your investment portfolio is being stored
  perfectly: take responsibility for its storage
   o After all, it might well be there for several decades
• As the relative cost of wine storage decreases, there is no reason
  to compromise

A SMALL COST FOR A SIGNIFICANT GAIN

• While fine wine prices have risen by over 200 per cent in the last
  decade, wine storage costs have risen at the rate of inflation

PHYSICAL RISKS

• With an inherently fragile product and an exposure over
  decades, the risk multiplies
• The risks of laying down wine are not only environmental:
   o Other threats include loss, fraud, breakage, and theft
• Great care, experience, and rigorous procedures are required to
  keep your wine safe
   o All your cases individually labelled with your name and stored
     together in one place ensures they won’t be swapped

FINANCIAL RISKS

•   In the midst of global economic uncertainty and rising debt,
    bankruptcy is a real threat
    o   You may not have considered the financial security of your
        storage business, but would you keep your money in a weak
        bank?
• Very few standard insurance policies will cover total and
  catastrophic loss
    o Your insurance policy may well cover a single incident of loss or
      breakage satisfactorily
    o However, in the event of a catastrophe that destroyed your storage
      facility and all its contents, would the insurance cover all the wine
      in the warehouse to its full market value?
    o Comprehensive cover can’t be taken for granted

THE COOL CHAIN

• The industry is trying to tackle the issue of provenance, with
  recent initiatives such as:
   o eProvenance’s RFID tags, which monitor temperature in transit
   o The HKQAA’s certification programme for wine storage,
     introduced in May last year, and its parallel wine transportation
     scheme, launched yesterday at this fair
• Reputable merchants go to every effort to ensure perfect
  conditions for their stock, both in storage and in transit
   o E.g. Farr Vintners book insulated air freight containers and mark
     cases ‘perishable’ to get them to Hong Kong unharmed
• However, it remains very difficult to prove a wine’s end-to-end
  storage and transportation history

THE NETWORK ADVANTAGE

• The longer the buyer chain, the harder it is to trace all the
  elements of provenance, but this needn’t be a problem
   o In a perfect world, wine would come directly from the château to
     the best long term storage specialists and remain there – perhaps
     changing ownership several times – until it’s ready to drink
   o A large storage business like Octavian acts as a hub, allowing
     merchants and their clients to trade with each other while the wine
     stays still

ON THE PROVENANCE TRAIL

• Buying at auction can make it
  harder to ascertain wine’s
  provenance. However:
   o Auction catalogues usually detail
     the source of a collection, and
     well-known single-owner cellars
     are popular with buyers
   o The better auction houses will
     have scrupulously traced the
     provenance and assessed the
     condition of each bottle they sell

           Stephen Mould, Sotheby’s Head of Wine, Europe, inspecting bottles at Octavian before committing them to auction

PHOTO EVIDENCE

• It is very difficult to
  prove a wine’s end-to-
  end storage and
  transportation history
   o Any serious buyer –
     private or trade – will
     request photographs
     of stock before
     agreeing a purchase,
     particularly for older
     wines
                               Studio photography at Octavian
   o Photos should depict
     labels and levels

PROVE IT

• Why go to lengths to
  protect your wine from
  various threats as it ages
  if you can’t prove it?
   o The Octavian Vaults
     service launched the
     unique Certificate of
     Pristine Storage in
     2007
   o The hologrammed,
     watermarked certificate
     declares the time the
     wine has spent in         An Octavian Vaults Certificate of Pristine Storage

     perfect conditions

CONCLUSION

• Octavian is expecting c.140,000 cases of 2009 Bordeaux to
  enter its care next year
   o Each one of those cases has the potential to be judged the
     definitive article, or they might be considered of questionable
     worth, depending entirely on whether they stay still or move
• The success of your investments can be enhanced if you:
   o Keep the chain as short as possible, reducing physical movement
   o Keep all records to document your wine’s provenance
   o Make sure you – or any wine fund you invest in – store with a
     first-rate, financially secure cellarer
   o Demand full insurance cover that will cover any form or size of
     loss