Empowering Collectors to be Investors
Are Wine Ratings Good for Wine Investment?
by Joseph L. Breeden and Sisi Liang, featured on Forbes Lifestyle on 9/14/16
“We know how to make wines that will get higher Parker ratings, but we want to stay faithful to the terroir.” — Marie-Hélene Dussech, Commercial Director, Château Brane-Cantenac.
After almost 40 years, wine ratings are still controversial in the wine industry. The comment by Ms. Dussech is a clear statement that vineyards do not see wine ratings as the complete arbiter of quality, and yet wine ratings are carefully watched.
Our question is the extent to which wine ratings should influence wine investment.
Robert Parker is credited with commercializing wine ratings in 1978, and in doing so, changing the wine industry. “Robert Parker made Bordeaux by bringing visibility to American buyers,” says Lisa Perrotti-Brown, MW (Master of Wine), Editor in Chief and Reviewer for Australia & New Zealand for Wine Advocate, the publication founded by Parker. Her comment about “Parker made Bordeaux” reflects a belief by many that Parker’s ratings and reviews took the fear out of buying Bordeaux fine wines for American buyers, thus dramatically expanding the market to American consumers… and investors.
“You didn’t have the level of investment in wine before Robert Parker came forward with the scores,” elaborated Ms. Perrotti-Brown.
The Origin of Ratings
Wine ratings were first introduced at the University of California at Davis in 1959 with their 20-Point Scale. Perhaps in a testament to the importance of aligning information to consumer intuition, Parker’s 100 point scale introduced in 1975 was the first real success, even though the useful range appears to be only about twenty points – 80 to 100.
Parker’s fame came with the 1982 vintage, which he rated as superb—a clear “Buy” signal to collectors and investors. Bordeaux wines from that vintage continue to be among the world’s most expensive.
Wine ratings attempt to quantify what is viewed by many as inherently subjective: the taste of experts. Those who complain about ratings ask, "Why should Parker’s taste preferences be hailed as primary? How can Parker or any critic quantify the difference in taste between a 93 and 94 rated wine [for example]?"
Some interesting technical details also arise in the scale itself. As Ms. Perrotti-Brown explained, “We have little ‘*’ symbols meaning a wine could warrant a higher score in the future,” which begs the question: what would a 100* mean? If a previous wine is rated 100, and a better wine appears, is it also 100, or should it be a 101? Wine Advocate says there will never be a 101. The scale stops at 100.
The rationale is that all aspects of wine production have improved, causing wine ratings to trend higher. Training, technology and even the weather have all improved for Bordeaux wine producers. As Ms. Dussech explained, years with higher grape yields mean that the vintner has more juice to work with to find the perfect blend and still reach their production targets. Low yield years mean the vintner must “work harder.” Roughly speaking, volume equals quality.
Are ratings through time stable? Ms. Perrott-Brown explained that part of her job is to make sure that they are, but she also states, “The wines really are getting better.” Grade inflation is real, because the wine really is improving. Therefore, saying that the ratings scale stops at 100 is like saying there is no extra credit on this test. 100 means perfect, enough.
With all these criticisms, can wine ratings be trusted? Here it seems that the market has already answered with a resounding “Yes!” Wine ratings have proliferated. Wine Spectator competes with The Wine Advocate across the range, and many specialty and individual sources are available. Perhaps consumers agree with the experts’ taste preferences. Perhaps consumers who are just learning about wine have unknowingly trained their tastes to align with the experts. Or perhaps, wine ratings are the only metric available for choosing among the enormous variety of available wines, correct or not.
Causality between Ratings and Wine
Does the quality of the wine drive the ratings, or do the ratings drive the quality of the wine?
In any industry with a successful rating system, the ratings create a feed-back loop to the item being rated. The Wine Advocate believes that the Parker ratings exhibited such a feedback affect on Bordeaux.
“[Robert Parker] gave Bordeaux an opportunity to pull its socks up… It was a bit of a difficult period in the '60s and '70s. Robert Parker was sort of calling it like it is, no matter what the name was. The industry responded with ‘We can’t get away with making wines like this any more.’” Ms. Perrott-Brown explained.
Providing a more nuanced perspective from the producers, Mr. Aurélien Valance, Deputy Managing Director of Chateau Margaux offers the following view of the history:
High ratings result in higher demand, and higher demand … results in improvement in quality of wine. The higher demand therefore came from Parker, and the price increase led to the improvement in quality.
Wine is a product of nature—the weather condition in the 70's was very bad, especially 72 to 74. 75 was good, and 82 was exceptional. The climate change over that period [from the 70's to the 80's] contributed to the change in wine quality. Also, the oil crisis in 73 affected the economy, which also affected wine production/quality.
Mr. Valance is also confirming Ms. Dussech’s perspective that grape yield directly impacts wine quality.
The Scientific Perspective
Although opinion is strong about the connection between wine ratings and wine prices, we can let the data speak. Many academic studies have been performed on a range of wine price databases to assess the correlation between ratings and prices.1
A particularly broad study is available from auctionforecast.com’s Vincast. In that study, auction prices from wines of all ages and vintages were adjusted for the predictable increase in price with age of the wine. Prices were also adjusted for changes in the overall wine market, such as the famous Bordeaux price peak (“Lafite Bubble”) of 2010.
After these adjustments, the remaining price variability was tested for correlation with wine ratings. Ratings from The Wine Advocate and Wine Spectator were used, because they had the greatest available coverage. The results were normalized to show how highly-rated wines would be priced as compared to a $100 bottle of wine rated in the 80's.
The results clearly show that any wine rated below 88 is simply “average” from an investment perspective. However, above 88, wine prices increase exponentially, with 100-rated wines carrying ten times the price of an average wine.
Overall, Wine Advocate and Wine Spectator show the same price correlations, except for the highest rated wines. Both ratings show a dramatic jump between 97 and 98, but Wine Advocate is monotonic from there on, whereas 99-rated wines for Wine Spectator seem to have the best price performance.
En Primeur Ratings
If we agree that ratings correlate with price, then getting the ratings earlier is one clear investment strategy. Thus “En Primeur” ratings fill a need. These are ratings made while the juice is still in the barrel as an attempt to predict what will be the final wine quality.
Although a worthy goal, Mr. Valance of Chateau Margaux offers some cautionary notes. “Tasting in barrels is very difficult. [The reviewer] needs a lot of experience. They need to know each chateau very very well” in order to predict the final wine quality after the process is complete. En primeur ratings can be quite unstable because the immature wine is unstable, changing from morning to evening. Additionally, people's palates also change throughout the day.
Of course, the experts know these things too. According to Ms. Perrotti-Brown, as experience has grown with this process, en primeur ratings have become less volatile.
If one is to believe the en primeur ratings, 2015 is going to be another fantastic vintage. Futures prices are already rising.
The Future of Ratings
With the announcement in 2015 that Robert Parker is retiring from rating Bordeaux wines, every authority interviewed agrees that there will no longer be the singular authority to drive the market. Authority will be replaced with consensus, and has opened the door to new approaches.
Ratings of taste by trained experts do not capture all that is important about wine. That is the premise of Wine Lister (www.wine-lister.com), a London-based start-up with a new approach. Wine Lister’s CEO, Ella Lister (a fitting name) describes it as “…a definitive shorthand for the time-poor collector who needs a more sophisticated, impartial, 360-degree assessment of a fine wine.”
In addition to taste-based ratings from their panel of experts, Wine Lister considers brand, market presence and economics. Each of these are quantified and combined to a 1000-point scale, because a 20-point range is too constraining. This is also reminiscent of the 1000-point scales common in consumer credit ratings, although one must ponder what the real discrimination power is. In case you’re wondering, the banks know that your credit score is really +/- 20 points. Quite a range! For consumers, a 20-point scale would be just as accurate, ironically.
Although Wine Lister’s ratings are not specifically designed to predict market price, they actually include several factors that an investor should consider and that are excluded from traditional ratings, such as market liquidity, longevity and volatility, which happens to align nicely with the key tests for investment in our previous article.
Others like Cellar Tracker (www.cellartracker.com) have taken a wisdom-of-crowds approach by aggregating the personal ratings of their users. Enthusiast ratings are unlikely to replace professional ratings for investment-grade wines, but can fill a useful role in identifying appealing wines among the much broader market.
Although ratings themselves are controversial, their use for investing is clear. Across many interviews, we heard the following sentiment so many times that we cannot identify a single source.
Invest in what you like. You might have to drink it.
However, after studying the data, we would add…
Drink by taste. Invest by ratings.
1. As example, consider "Wine Tasters, Ratings, and En Primeur Prices" by Philippe Masset, Jean-Philippe Weisskopf and Mathieu Cossutta, Journal of Wine Economics, Vol. 10, No. 1, 2015, pp. 75-107 and “Wine Economics” by Karl Storchmann, Journal of Wine Economics, Vol. 7, No. 1, 2012, pp. 1-33.
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Joseph L Breeden, PhD has been building forecasting models for over 20 years for such areas as currency futures, sporting events, agricultural commodities, and loans. The methods he pioneered in his book, Reinventing Retail Lending Analytics (2014) are considered are considered best practice in the industry and performed well through the US mortgage crisis and many other international economic crises over the last 20 years. His love of wine and data analysis led to his participation in auctionforecast.com. Email: breeden@auctionforecast.com
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Sisi Liang loves to find connections between seemingly unrelated ideas. Her curious mind has taken her to places from business strategy to entrepreneurship, from angel investing to marketing strategy, from metals mining equity research to regulatory stress test modeling in the largest financial institutions. She's a trailblazer and a ruckus maker. Sisi holds a BA in English and Mathematics double major, with Honors, from Washington and Lee University, and an MS in Quantitative Finance. She is also an alumna from Seth Godin's altMBA program. 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
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