There was once a time in fine wine retailing when to be a wine merchant meant being a stockholder; buying and paying for stock you owned to sell or to lay down.
So what changed? Simon Farr, co-founder of Bibendum before becoming Chairman of Cru World Wine and Oeno (and a director of Wine Owners) says: “the biggest thing that happened to fine wine over the last 40 years was that the rest of the world got rich. More wealthy individuals chose to consume and collect fine wine. Demand for fine wine increased. Supplies of the most sought-after wines didn’t – can’t. Scarcity drives up prices for in-demand wines. As the cost of wine rises, the pressure on working capital increases and drives a reduction in stock holding by the wine trade.”
These pressures have created a fragmentation of stockholders. The days of a single dominant market maker have gone. It’s difficult in today’s market to create the big fine wine franchises of the past, as purchasing power of merchants reduces. Margins in high liquidity markets have fallen and that’s exerted pressure on costs.
Today there are two retailer archetypes firmly established.
Firstly there’s the low stockholder model.
The whole world is moving to low cost, low inventory models. Wine is no different. We are seeing a re-examination of what it is to be a wine merchant, with a focus on low working capital intensity and low cost.
A low stockholder merchant or retailer doesn’t want to tie up precious working capital in wine, whether physical or as wine futures. Historically there’s been little or no specialism. The low stockholder wants to offer as many wines as possible and attract buyers who would otherwise find it hard to source the wines they want from local merchants or retailers.
When the first generation of low (or virtual) stockholders first appeared in the 1990s consumer perception was of little value-add other than the very large database of wines, many of which were indeed otherwise hard to find.
Whereas consumers wouldn’t have perceived a low stockholder as having as much knowledge as a traditional merchant, latterly technology has shifted that perception. Increasing transparency of market pricing has also helped the professional sourcer of stock, who of course is relatively unconstrained by what can be offered for sale.
There are other constraints at play, nonetheless. In a perfect world the low stockholder needs accurate supplier feeds of inventory and efficient logistics. The reality is a little different. Few suppliers operate APIs (database-to-database feeds known as Application Programming Interfaces). Wine logistics and shipping is slow, and moving glass around comes with the risk of damage. Sources of supply are scattered across different geographies. Wine sourced internationally can come with different luggage tags and different packaging, whilst the desire to obscure sources can also obscure provenance. Then there’s the dreaded failure rate due to poor (or no) systems within sources of supply.
So in practise working capital that a stockholder might have put into stock gets spent on extra pairs of hands needed to compensate to deal with low volume, high value products. High administrative expenses end up being needed to operate this model.
Liv-ex helps with that problem, because they do the heavy lifting in shipping wine, managing logistical risks and helping to manage buyer risk with their Standard in Bond stock designation. From nowhere else can you source as much virtual stock with the pricing transparency of comparing offer prices to last trades and using that data and other parameters to filter down to a manageable list. A Liv-ex feed of virtual stock is a no-brainer for a retailer committed to the low stockholding model, but doesn’t automatically solve the immediate challenge of market differentiation. As you’ll see, the low stockholding business isn’t alone in needing to figure that out.
Secondly there’s the merchant who believes in the power of stockholding.
Today’s economics are favourable to stockholding businesses. The cost of capital is low and there’s a great deal of investor money looking for a home with a purpose and a stable return. Inflation is low. Arguably the opportunity cost for investors or business owners is low. Wine is a good store of value and stock builds in value over time.
Notwithstanding those facts, returns on wine can take time, and value starts to rise only when stocks of widely available vintages sell through.
A stockholder can’t offer the range that a low stockholding model promises. They are limited by availability to source and available capital, and so appeal to a narrower addressable market with a more limited range of wines.
But stockholders do have some advantages over their uninvested competitors. Stockholders can be much more efficient in their shipping costs given moving and storing wine is expensive and logistics is generally tricky. Certainty of stock availability means the failure rate is very low, and it’s easier to meet consistently high operating standards.
The nature of being a stockholder has changed in the last 30 years as a consequence of market transparency and higher prices. A stockholder needs better market insight and a clear sense of which stocks are worth buying into. Being a stockholder of high production, high availability wine that gets consumed slowly (such as classified growth Bordeaux) can be a struggle. The market overall is flat, Generation Y and Millennials are uninspired, and there’s limited scope for differentiation.
Back to Simon Farr who I asked, how do you carve out a competitive advantage as a stockholder? “The edge is having a slow wine approach. To do that you need patient capital. I look at a 3-5 year holding period so that trade quantities of pristine stock can be offered at a more mature part of the life cycle”.
“Building a franchise with a clear position is key here. You have to find something that you can do better than someone else. Then you back your judgement and take positions in wines and categories that you believe in.”
The new stockholders
Against the backdrop of a move to low margin/ low stockholding on the one hand, and increasing specialization among stockholders on the other, the question has to be asked, are collectors able to fill the stockholding inventory gap?
Of course a substantial part of the secondary market is already represented by the consignment or broking of collector wines held in storage. We know of at least one, once-dominant, stockholder merchant who buys very little these days, because they have so much client stored wine that they’re able to leverage.
However as the low cost, low inventory model develops, and perhaps as the two archetypes begin to break down into a blend of sourcing strategies in the search for market differentiation, the collector stockholder will have much more market power than they may realise, especially with the potential challenges of VI1 forms post Brexit.
Individually, top collectors hold more stock than most merchants. There are a lot more large collections than you might imagine. Collectors buy a lot more wine than they consume, so their collections mature and they have the opportunity to become providers to virtual stockholders. Could collectors be the salt and pepper of virtual inventories, providing mature stocks and interest by which differentiation can be achieved? What’s been missing hitherto is an effective channel.
The Hub market facilitation
The Hub business operating system (or ERP) for the independent wine market systematically supports these models, through its flexible approach to inventory management, workflow management and connectivity.
Low or virtual inventory models must be able to inventory sources of supply, then sell, then purchase, as supposed to the more traditional workflow of purchasing, recognising as stock and then selling.
Stockholders need to manage and track inventory, ship stock cost efficiently, and decide what to sell, via which channel and when.
Both models need to manage client stored wines and all are trying to add value to the client offering in order to secure the right to resell those wines.
Hub connectivity makes it possible to create a unique blend of inventory feeds that can include multiple sources of supply including Liv-ex and private collections. The Hub makes possible a range of symbiotic industry relationships that would otherwise be difficult and precarious to establish and manage.
One thing’s for certain: the question of what it is to be a wine merchant is a live discussion, as the pandemic exacerbates underlying pressures which in turn accelerates trends.
The Hub brings increasing agility and greater operational certainty. The nirvana of retailers transacting at close to zero marginal cost is a world away from being realisable, but in the meantime the goal of delivering operational excellence will be driving the independent wine industry and driving us as the industry business operating system provider of choice.
