Lyle Fass–Word on the Street, 4-10-09;2005 Burgundy Pricing

[Lyle Fass]

2005 Burgundy : The Game-Changing Vintage

All markets, including wine, have established pricing structures that are generally reasonably consistent over time. A vintage had never changed the pricing structure for one region almost overnight. That was true before 2005. Before 2005, pricing went up and down according to vintage, with great Burgundy still relatively affordable up to the 2004 vintage. Up to 2004, things were slightly more expensive because of the falling dollar. Then 2005 came and everything sky-rocketed. From Bourgogne Rouge to Romanee-Conti it all went up.

The Ancient Regime

But there still was an established pricing structure in Burgundy that was thoughtful and reasonable based on quality. There were a few labels in the ultra sphere, like DRC, Leroy, Roumier (Musigny, Les Amoureses) and maybe a few other bottlings here and there (Faiveley Musigny, etc), but it was a very established first tier of producers. They knew what they could charge, as did everybody getting a piece of the pie in the pipeline. Increases were nominal and went with the vintage and the dollar

There were established 2nd tier producers (as far as pricing) like Rousseau, Fourrier, Dujac, Musigny, Roumier, (excluding Muisgny and Les Amoureies) and the like. They also had an established set of pricing and were still affordable for the Burgundy geek who was not a zillionaire.

Then there were the 3rd tier of producers that Burgundy geeks focused on, as up until 2005 these were EXCELLENT values. Producers like Chevillon, Gouges, Barthod, Pavelot and the like were always fairly priced and provided excellent quality for the money. People could line up their wine budgets every year with pretty well established prices on these wines that would go into their cellars. It was easy, it was reliable and everybody was happy.

There was the 4th tier of producers, which were high-level reliable negociants like Jadot, Drouhin, Laurent, Faiveley, le Moine, Bouchard, and those prices were very dialed in pretty much every year with only nominal upward ticks.

The final tier was the 5th tier of producer, whose prices did not change that much and were personal favorites of wine lovers, geeks, collectors etc. Producers like Joblot, Dureil-Janthial, Bertheau, etc who all had their fans, but were not in demand like the first four tiers and had less mobility when it comes to increasing prices.

The Brave New World

Well this whole thing that I have outlined above all went in the crapper with the 2005 vintage. Things just went mad. First of all, the wines at the top end of the spectrum like DRC, Leroy and the Roumier cult bottlings went through the roof, Windfall pricing! Romanee-Conti at $10,000 a bottle and in many cases higher. La Tache at anywhere between $2,800 and $6,000. The RSV and Richebourg were $1,400 to $2,000. The Echezeaux was $500 and in many cases more and the Grand Echezeaux was a cool grand. Roumier Musigny was being offered out at $7,000 a bottle. These prices were astonishing. Never before had so many speculators bought into a vintage, which drove prices through the roof. Bordeaux buyers were trying their hand at the Burgundy game.

If we want to look at one wine and compare it to 2004, DRC La Tache went from $975 to $3,500, an increase of 259%.

The next important thing that happened was that certain producers went from the 2nd tier to the 1st tier. Rousseau, Roumier, Dujac and Mugnier all became mostly out of reach for most Burgundy lovers. Lower end Rousseaus like Charmes and Clos de la Roche were retailing for north of $300. Beze and Chambertin were quickly hitting four figures. Clos St. Jacques was a cool $500+. Lavaux half that. Every tier at Rousseau increased 150% or more.

The second tier wines (those that remained second tier) had almost as significant price increases. Fourrier Gevrey Chambertin 1er Cru “Clos St. Jacques” went from $120 in 2004 to $320 in 2005, a 167% increase.

The third tier wines went from being an expensive treat for the non-hedge fund managing Burg lover to completely out of their reach. Barthod Chambolle-Musigny 1er Cru “Les Cras,” for example, increased from $94 in 2004 to $250 in 2005, a 166% increase in price.

Fourth tier wines were similarly priced out of the reach of normal Burg lovers. You couldn’t even find a decent premier cru for under $150. High-level producers’ sweet spot village wines (Think Mugnier Chambolle-Musigny, Dujac Morey St.Denis, Lignier Gevrey-Chambertin) were $100 minimum. Louis Jadot Clos de Vougeot, for example, increased from $75 in 2004 to $150 in 2005, a mere 100%.

Finally, the fifth tier wines, every day drinking wines for Burg lovers, had significant price increases. Bourgogne Rouge had a new $30 entry fee and some went all the way up to $50. So many Burgundy lovers were priced out of the market due to this increased speculation. Jean-Marc Pavelot Savigny Les Beaune 1er Cru “La Dominode,” for example, saw a 77% price increase from $31 in 2004 to $55 in 2005.


Who were these people paying these prices? The great majority of these people were speculators or rich Burg lovers who HAD to have every important 2005, or in some cases, any 2005 that was rated decently by Burghound.

A new reality quickly set in. Never before had there been such a pricing leap between vintages. Why did this happen? I think that there are a few reasons.
1) There is more hype for everything these days due to the vast channels of communication we have (and the vast industry of people committed to hyping things).
2) The financial and housing markets were awash in liquidity and the rich were getting richer.
3) So many other people bought into the hype machine and started buying Burgundy with the 2005 vintage who had never bought Burgundy before. This created an opportunity for retailers to cash in and definitely was a big factor in the 2005 Burgundian pricing bender. I was in retail at this time and as long as it had 2005 and Burgundy on the label, it sold.

Of course there were exceptions to the rule of crazy pricing. People who have been buying for years and were particularly dialed in to certain retailers got better deals than others. They still paid more, but even if they were paying 20-30% more than for their 2004’s they were happy. Everyone else was paying 50-100% more, so they felt good about their 2005 purchases.

Going Forward

The big casualties from all this are the vintages that followed and the massive disinterest from the consumer. The people who jumped in with 2005 were out because 2006 was a “terroir” vintage they could not speculate on. Also the 2006 prices were, and are still, too high. 2006 is mired as the very good vintage after the vintage of the century. So prices were still out of whack. 2007 seems priced a bit more according to reality but is still very high, especially for a vintage that is worse than 2006.

At this point in time, top 2005’s are down 40 to 50 percent at auction. La Tache was $5,000 at peak and now you can get bottles at auction for around $2,500. Also Ponsot Clos de la Roche was trading for $1,500 a bottle at auction peak and now was just sold for $9,600 a case, which is $800 a bottle.

The 2006’s are not selling through and will have to be closed out. As usual, retailers will take a loss after a hyped vintage which begins to question whether the hyped vintage, in the long run, is actually an economic boon or bust for them. Importers stuck with warehouses full of 2006’s that they overpaid for will be liquidating them for years.
2007’s are not selling at all. It is a lighter styled vintage along the lines of 2000 that not many people are interested in.

Let’s check in on prices of our benchmark wines for 2006.
- Tier 1 DRC La Tache is back at $1,300, only 33% above 2004’s price.
- Tier 2 Fourrier Gevrey Chambertin 1er Cru “Clos St. Jacques” is priced at $200, 67% above 2004 (nice work if you can get it).
- Tier 3 Barthod Chambolle-Musigny 1er Cru “Les Cras” is at $120 in 2006, only 28% above 2004.
- Tier 4 Louis Jadot Clos de Vougeot is priced at $100, 33% above 2004.
- Finally, Tier 5 Jean-Marc Pavelot Savigny Les Beaune 1er Cru “La Dominode is priced at $40, 29% above 2004.

Two points here. One, these are the prices in the midst of the worst economic contraction since the Great Depression. High-end wine is a luxury good and high-end wine sales are down across the board. If the Burgundians can really make the average 38% price increase (from our 5 examples) stick, then we have seen a permanent significant increase in demand for Burgundy.

Second, these are asking prices. Sort of like the house on your block that’s been sitting for six months with the sign on the lawn. Until the inventory starts to clear, it’s not a market clearing price. If retailers have to discount by 25% to move the 2006’s off the shelves, we’re back to 2004 pricing.

What to do? What to do? 2005 represented a new pricing paradigm and we can thank the great vintage combined with the massive marketing for that. It’s a shame, as so many people missed out on the 2005’s who love Burgundy.

Will the new economic reality of the post subprime crash push prices back to the levels pre-2005 or has a new generation of Burgundy addicts been created from the 2005 vintage, permanently increasing prices? Will things swing back to the pre-2005 equilibrium or have we been shocked into a new equilibrium? Time will tell.

Although I don’t have a crystal ball, I’d bet dollars to doughnuts that given the economic climate, there will be plenty of ‘special offers’ on the 2006’s. Given the economic climate and the huge spending on 2005 (depleting Burg dollars), there should be some pretty good bargains for the savvy, patient Burg buyers. Given the fact that 2007 and 2008 are not looking to be great vintages, I’d say that 2006 is a reasonable vintage for the price conscious Burg lover.

What has been your experience with 2005 Burgundy, Burgundy buying in general, and the 2006 and 2007 vintages? What do you think will happen to Burgundy prices going forward?

[matcohen]

We had an entry level Bourgogne tasting $25 and up in my group. Huge disappointment. Price to value was so far out of whack it was sad.

[Lyle Fass]

What wines did you taste?

[abreaks]

My guess/hope is that things will slowly inch back down to "normal." The economic crisis is obviously a huge part of that. I wonder to what extent the Sideways-fueled bump in Pinot popularity might have played a role? It seems like that would have more or less coincided with the early buzz over 2005, and maybe created somewhat of a perfect storm as far as score-chasing heavy hitters who otherwise might not have had much experience with or interest in Burgundy (it's too light!) are concerned.

I'm hoping that the great 2006 dump goes down as you predict - I love delicate, feminine, Truchot-esque Burgundy, and my early impression of 2006 is that transparency was king.

Was the 2005 Burgundy frenzy that much more pronounced than 2000 Bordeaux?

[Lyle Fass]

abreaks,

I think 2000 Bordeaux was bigger as the mainstream press, Charley Rose, CNN, etc got a hold of that and hyped it up even more than the trade so people who would not normally step into the game did.

2006 will be dumped as will 2007. I guarantee it.

Sideways could have played a role but I think that phenomenon was more with CA pinot. Remember Burgundy does not say Pinot Noir on the label!

[dbp]

I also agree that prices will slowly get back to "normal." We're already seeing this with the discussions in 2008 Bordeaux, First Growths seem to be leaning towards all coming out around 100 euros. I believe you'll find Burgundy prices coming down as well.

I began getting serious into wine around 2006, just in time for the 2005 Bordeaux and Burgundy craze. So I was certainly a new Burgundy buyer, and was aware of the pricing increases... though I do think some of your examples are overblown. For example, in February of 2008 I paid $43/bottle for Pavelot Dominode, and that wasn't even the lowest price available. Cellartracker average price is also $43, so not sure where the $55 figure came from. Sure, SOMEONE was paying that somewhere, but it wasn't usual. I also bought plenty of Jadot Beaune Premier Crus for around $35. The price increases did seem to be decidedly higher in the Côte de Nuits, though, which at the time, effectively priced me out of most of them... though I did pick up some of what you classified as 3rd and 4th tier 1ers and Grand Crus.

You're also right about the closeouts... In the last month I've bought several 2006 Robert Chevillon Côte de Nuits 1ers for $25/bottle! Also picked up some Laurent Corton VV Grand Cru for $25/bottle. There's even closeouts of the 2005's... also in the last month I've picked up 2005 Michelot Vaucrains for $35/bottle, and some Faiveley Côte de Nuits 1ers for $25/bottle. All these wines are basically half to one third price. Thank you Premier Cru for losing money on these wines...

I find that most of what you write is true... but it is coming down, and in this market, with the global economy, there are PLENTY of opportunities to be had. I was going to slow my wine buying this year, but due to all these close outs I just can't pass them up.

David

[robk]

In my experience, the 2005's so far have lived up to the considerable hype, but it's way too early to say if that will hold true years down the road. I have found that the wines -- while still primary as you would expect -- have not shut down and are showing the beautiful raw material that went into them. Caveat: I have not opened any of the bigger premier or grand crus, pretty much only the village wines and a few bourgognes including Geantet Pansiot Gevrey vv, d'Ardhuy Savigny les Beaune (1er), Huber Verdereau Volnay, Jayer Gilles Cote de Nuits Villages, Groffier Bourgogne. All wonderful.

I think we've seen what's happening with the 2006's before. In my experience, the same thing happened to the 1991 vintage, which got swallowed up and overlooked in the wake of 1990. I wish I had bought more of the 91's. They were cheap! I think the 2006's will suffer even more (price-wise) due to the economy. It's about time the consumer got a break (if the consumer has any money to spend on wine these days).

[Lyle Fass]

dbp,

There are always exceptions to the pricing rules. You sound like an informed buyer, even if you just started, so you are an exception. Yea PC had amazing prices on some wines and are closing out some killer 2006's. Chevillon rocked the house in 2006. D'ardhuy is a strange one. As I never saw them before 2005 so can't really comment there.

Re: Pavelot Dominode is a wine almost all geeks and insiders buy and pricing is variable on that particular item as it comes in grey and through traditional channels. For example in NYC always go grey as the distributor prices are outrageous. At Crush I was selling the 2002 for $50 with a normal markup.

Jadot Beaune's are always great values but are only for a particular consumer as the taste profile of Beaune 1er's is unique and not everyone's cup of tea. On a grander scale CDB will always be priced less than the sexier CDN.

[Lyle Fass]

robk,

I love 2005. I have had very few dissapointing wines and so many wines from nobodies that were incredible in 2005. But the pricing was always out of whack with what was in the bottle due to high demand, small production, BH's coming out party and all the other hype etc.

1991's are great and it seems to be the better vintage when you look at the wines in the long run which is the way you HAVE to look at Burg vintages as they change so dramatically in bottle and can even fool the most informed palates.

The sources I talk to are only selling 2006's if they sell them near cost or slightly above. I think the real steals will be when the 2007's start getting closed out as that seems like an early-drinking 2000-type vintage. Lots of appeal for drinkers and zero appeal for collectors.

The consumer will get a break and the retailer will not. From experience closing out wine as a retailer is a defeat. You make friends while you lose money though!

[Lyle Fass]

One more thing to add. de Montille and d'Angerville were firmly 3rd tier wines until 2005. They seem to have slipped back into normal pricing very quickly as CDB is just not sexy in many people's eyes.