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11/09/2018

Burgundy: Rarity is Beauty

by Matthew O'Connell (Head of Wine Investment)

In recent weeks we have provided an overview of larger-production, “investment-grade“ wine regions, specifically Bordeaux, Champagne and Italy.  Burgundy provides a fascinating counterpoint in this context: a region where production is comparatively tiny and investment performance is driven primarily by rarity.

The Burgundy region of central-Eastern France principally comprises the Côte de Beaune and the Côte de Nuits: the former – including the villages of Puligny-Montrachet, Chassagne-Montrachet and Meursault – predominantly producing white wines from the Chardonnay grape; the latter – containing villages including Vosne-Romanée, Chambolle-Musigny and Gevrey-Chambertin – mostly red wines from the Pinot Noir grape. 

Unlike Bordeaux, Tuscany etc, where producers have large, sole-owned, contiguous plots, Burgundy is made up of numerous individual vineyards known as ‘crus’, each of which will have sections within it owned by different producers.  While there are some larger ‘negociants’, who make wine from owned and purchased grapes, the majority of producers (referred to as ‘domaines’) own a limited number of plots which make up their entire output.

As a result, production by each domaine is small: for example, compare 112 hectares for Château Lafite Rothschild in Bordeaux with circa 25 hectares for Domaine de la Romanée-Conti (‘DRC’) across all of its crus.  However, given the fragmented holdings, this means a production of ~200,000 bottles of Lafite vs. ~5,000 bottles of DRC’s Romanée-Conti cru, 20,000 bottles of its La Tâche cru etc.

In the less recent past, Burgundy was predominantly purchased and consumed by the wine cognoscenti, with the most famous domaines’ wines allocated to long-term clients by merchants on release rather than offered for broader sale.  This tight allocation continues today, but there is now a far more active secondary market in Burgundy wines across the spectrum.

Market prices have seen a huge step-change, ultimately driven by global demand, originally from Europe and the US, but now also heavily from Asia as well.  Top-focus names for red wines include DRC, Leroy, Roumier, Rousseau, de Vogüé, Mugnier, Cathiard, Dujac; and DRC, d’Auvenay, Leflaive, Coche-Dury, Ramonet, Lafon for whites.  One or two now deceased producers, most notably Henri Jayer, command particularly outsized price premia for the entirely finite stock of bottles.   

Currently everything points towards a continuation of this upwards price trend, with the supply-demand imbalance particularly strained.  The phenomenon seen across Bordeaux and Champagne of increasing focus on large luxury brands purchasing domains is spilling over into Burgundy, while the producers themselves are increasingly aware of the significance of promotion of their wines globally and in some cases the importance of global distribution arrangements. 

In 2017, for example, one of the famous red Grand Crus, Clos de Tart, was purchased by François Pinault, founder of Kering, a luxury goods conglomerate, and owner of Bordeaux’s Château Latour; earlier, in 2014, a nearby Grand Cru, Clos des Lambrays, was bought by Bernaud Arnault’s LVMH group, also owners of Krug.  Both wines have seen outsized increases in market pricing (even in a short period in the case of Clos de Tart). 

Given the eye-catching price performance, Burgundy has naturally become more significant in the context of investment portfolios and this trend will continue.  The intrinsically lower liquidity for the region means that only the most risky portfolio would be solely Burgundy, but it is a perfect example of the increased levers available to us to tailor investment portfolios to individual investors’ risk appetite, return horizon and fit within broader investment asset distribution.

See below our previous City AM columns:

1) Making Money Takes Bottle

2) Fine Wine Fundamentals: Bordeaux

3) Fine Wine Fundamentals: Beyond Bordeaux

4) Champagne Investment: More fizz than froth

5) La Dolce Vita: Investing in Italians