New Insights into the Lafite Bubble through Vintage Modeling

By Sisi Liang and Joseph L. Breeden,

When considering the fine wine market, our curiosity naturally leads us to the most traded wine in the world—most traded and, in this case, most dramatic as well. Produced in Médoc in the Bordeaux region of France, Lafite is ranked as a First Growth by the Bordeaux Wine Official Classification of 1855. Lafite wines are the most traded in our database, with ­­­­­over twelve thousand auction results. In particular, the 1982 Lafite is the most traded (and most celebrated) vintage. Lafite became astronomically popular among the Chinese buyers – so much so that its price went through a surge unseen in the industry during the years of 2010 and 2011. Shortly after, however, the buyers’ interests went elsewhere and the Lafite price was cut in half. This is the “Lafite Bubble,” which we shall explore in this post.  

As shown in the above summary time series for different vintages, our database clearly illustrates the 2010-2012 Lafite bubble. We only chose to show 8 vintages of Lafite in this graph, but the bubble of 2011 is resonant in all vintages. The 2000 vintage, for example, rose from below $1,000 per bottle in 2009 to almost $4,000 per bottle in early 2011. The price was cut in half only a year later in January 2012, and continued to drop to below $1,500 in early 2013. The other vintages are comparatively less expensive, but still clearly display the bubble. In the following sections, we shall use our analytics to distill deeper insights about the Château Lafite Rothschild wine.  

Lafite Lifecycle

The above graph shows the price lifecycle of an average vintage bottle of the Lafite wine according to its age. We see that the price for an average vintage is just above $2,000 per bottle within a few years of production, but within the first 5 years of age, the price is expected to decrease by several hundred dollars per bottle. After this dip, prices begin a rapid rise sustained through many decades. This shows that the Lafite wine is a long-term investment that can create returns over several decades, and yet the investor need not rush to buy the newest vintage. Five years in is the ideal buying opportunity for long-term gains, with a doubling in just the first ten years.

This lifecycle analysis has already cleaned away market moves over time with the decomposition analysis described in our first post. The pattern shown here will, of course, must be overlain with changes in the market. That is where the bubble comes in, which will be discussed in the section on the Market Index.

Lafite Vintage Scaling

In order to provide more precision in the forecasts for each vintage, we have also calculated the vintage scaling function from our auction data. The above graph shows the results for the Lafite wines: for each vintage from 1945 to 2010, we have calculated a multiplier through which the investor can obtain the expected performance of that particular vintage when combined with the lifecycle function above. Here we can see that the legendary 1982 vintage commands the highest multiplier, dwarfing most other vintages due to its supreme quality and prestige.

Vintages since 1982 have followed ever high price paths. However, this is statement about their investment pattern rather than the absolute quality of the wine. As wine investing has grown overall and demand for Lafite in particular, new vintages rise ever faster. The 2010 vintage should just now be emerging from the new-release price sag.

Lafite Market Index

To complete our Lafite analysis, we must study movements in the market. The above graph shows the Market Index of Lafite independent of its lifecycle and vintage scaling. Using our market indexing technology, we can distill all price data for all vintages into a Lafite Market Index without the bias of price growth for vintages over time. We can see a huge market surge from 2010 to 2011, and a disheartening drop by early 2012. During this time, the exploding Lafite price was mainly driven by a surge in demand from Asia, particularly by the Chinese megarich: the collectors, speculators, and those who need to stamp “prestige” on a business dinner table. The price then dropped dramatically within a year, as those interests waned almost as fast as it surged. It’s a mystery why the Chinese lusted after Lafite so intensely and for such a short period of time, although several theories exit, including the fact that the Chinese translation of “Lafite” is “punchy” and suggests affluence. This pattern of the Chinese thinking is reflected by the overnight price increase of the 2008 Lafite[1], when the producer flaunted a giant Chinese character “eight” on the bottle, which has a connotation of “wealth” in the language.

The Bordeaux Market sans Lafite

Was the Lafite Bubble an isolated event, or did it affect the market at large? Reports on the Lafite Bubble mention interest in Conti, but we wanted to compare the Lafite price dynamics to the rest of the Bordeaux market for confirmation.

In order to clarify the effect of the skyrocketing demand in Lafite on the Bordeaux market at large, we filtered out the data of Lafite, and created a Market Function for the rest of the Bordeaux wines. The above graph shows the result: the rise and fall are still present during the same period as the Lafite bubble, from October 2009 to January 2013. The Lafite index rose by 129% from 68.1 in October 2009 to 155.8 in January 2011, and fell by 43% to 89.3 in January 2013. During the same period, the Bordeaux index rose by 62% from an average level of about 90 in 2009 to 146.2 in January 2011, and fell by 41% to 85.6 in January 2013. This suggests that there was a ripple effect among the Bordeaux wines as a result of the Lafite bubble.

One of the unique advantages of our market indices is that they are complete and not anecdotal. This means that the Bordeaux market index includes all of the Bordeaux market with all vintages for each wine, and therefore it is a broad market indicator. The data is normalized for the systematic rise in value for maturing vintages and variation between vintages, allowing us make quantitative comparisons between market segments.

Comparison—The Burgundy and Rhone Markets

We see that the Lafite bubble was also a Bordeaux bubble. The question is, did it extend any further?

The above graphs show the Market Indices for the Burgundy and the Rhone wines. For the Burgundy, we can see almost a “reverse effect” from the Lafite bubble: the market experienced a sharp increase in late 2009, and peaked at 208.2 in January 2010, when Lafite was just warming up. Exactly a year later, when Lafite peaked in January 2011, Burgundy went through a trough, as shown by the market index. When the Lafite bubble burst another year later, in January 2012, the Burgundy index came back with a second wind. On the other hand, the Rhone wine market seems to have been rather unaffected by the drama of the Lafite and the Burgundy. Although, we can still see a slight (though bumpy) increase from 2011 to 2012, with a peak right before 2012, and right when the Lafite bubble burst. In addition, the interesting thing is that all three regions experienced a dip in early 2014, and are slowly making their way back.

Overall, it seems that the Lafite bubble sent a ripple through the fine wine market from late 2009 to 2013, and some regions, such as Burgundy and Rhone, even benefited from the burst of the Lafite bubble. From this analysis, we can see the interconnectedness of the fine wine market, as well as the nuances among different regions and vintages.

 

 References

[1] Andy Xie, “Bottoms Up for China’s Lafite Wine Bubble,” Caixin Online, http://english.caixin.com/2010-12-07/100205377.html?p1

[2] Joseph Mills, "Aging," Angels, Thieves, and Winemakers (Second Edition), 2015.

 

Sisi Liang currently works as a risk consultant, focusing on regulatory stress test modeling, and financial risk practice. Before her current role, Sisi has experience in Equity Research covering metals mining (production and commodities), energy, and the media sectors. Sisi holds a BA in English and Mathematics double major, with Honors, from Washington and Lee University, and an MS in Quantitative Finance. Her passions for forecast modeling, the poetic and commodity elements in wine, yoga, along with her curiosity in the interconnectedness in diverse fields have drawn her to the collaboration of auctionforecast.com.

Email: sisi.liang@auctionforecast.com

 

Wine photo by Elyza Bleau (www.elyzableau.com)