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28/09/2018

Embrace the Pioneer Spirit: Investing in US Wines (City AM Column)

by Matthew O'Connell (Head of Wine Investment)

After two weeks wandering in the wilds of Scot(ch)land, this week we’re back to wine – and exploring one of the wine countries that really crosses the Old World/New World boundary: the USA.

Despite its immense scale, there are only a handful of states in the US that make truly great wine. The dominant force is California whose most famous region, The Napa Valley, lies just to the north of San Francisco. Increasingly there is also extremely good quality to be found south towards LA in the cooler hills of Santa Maria, Santa Rita and Santa Barbara.

The growing of vines suitable for quality wine has been in evidence in California since the late 1700s and commercial winemaking was recognisable from the mid-1850s – making it broadly the same age as Rioja’s modern winemaking industry. In this sense, California is hardly a ‘new’ winemaking region.

The defining element was the explosion of domestic consumption in the 1970s and 80s. This not only funded further investment both in land and equipment, but created the market conditions suitable for the production of truly fine wines.

Boutique producers making tiny volumes of expensive wines used a mailing list system to sell out their wines to wealthy collectors across the country, with a little reserved for top restaurants in order to build brand equity. Over time, with many foreign business travellers encountering the wines in the US - and with their fame growing throughout the world via the internet - many of these wines became sought after across the globe. The challenge was that, given their distribution, they were not easy to find and the lack of liquidity made assessing prices very difficult.

However over the past few years the best producers have taken the decision to further grow the reputation (and inevitably, value) of their wines by reaching a wider, global market of collectors. This has been done in two ways: by working with selected merchants in specific territories rich in demand, or by seeking distribution through the established ‘Place de Bordeaux’ system of merchants who have their own global distribution and promotional networks. Both methods have their advantages and disadvantages – but the net effect is evident in dramatically improved liquidity and visibility. As a result the crucial consumption-led market in Asia is rapidly discovering the leading names.

California is most famous for Cabernet Sauvignon and “Bordeaux” blends, although the cooler coastal and mountainous regions are producing some world-class Chardonnay and Pinot Noir. The lure of perfectly ripe fruit amid stunning scenery attracted some of the biggest names of Bordeaux, with their investment creating two of the most investible names: Dominus and Opus One. A strong alternative scene led to the creation of some so-called ‘cult wines’, created through the naturally pioneering, rule-breaking American spirit: this list includes Harlan Estate, Screaming Eagle and Sine Qua Non.

Sales of US wines at BI more than doubled from H1 2017 to H1 2018, making it the fastest-growing wine category in the period; during the same 12 months, prices of the key investment grade wines have been up around 15%, making it one of the best performing regions.  While certain Californian wines have long been a potential addition to an investment portfolio (and indeed have been traded on BI’s LiveTrade platform), it seems likely that over the coming years there will be a good argument to be Overweight the segment.