The Collapse of America's Bordeaux Source

America’s leading Bordeaux importer quit last year; will consumers be able to get their favorite wines now?
Mar 28, 2011

Chris Adams was in the middle of the 2008 Bordeaux futures campaign when the wine hit the fan. Adams is CEO of Sherry-Lehman, a top retailer for Bordeaux in New York. It was late 2009, the economy was in the dumps and Bordeaux was still suffering from a hangover induced by overpriced 2007 wines. Bordeaux futures were not an easy sell. Then, in late 2009, Adams found out his major source for Bordeaux was calling it quits—and the 2008s he thought he had sourced for his customers were no longer available.

Chateau & Estate, which had been the leading importer of classified-growth Bordeaux for three decades, was pulling out. Diageo, the importer’s parent company and the world’s largest spirits corporation, had decided that wine, and particularly Bordeaux futures, didn’t make financial sense for a large publicly-traded company. For years, Chateau & Estate had bought huge allocations of futures and sold them to leading retailers and restaurants. The firm would also hold on to significant stocks of the finished wines for years, selling them later. For clients like Sherry-Lehman, it was a great luxury to get older vintages without having to age them in their own tiny storerooms. Now that source has evaporated, leaving some of America’s leading wine merchants scrambling to find new sources.

“It left a gaping hole in the U.S. market,” said Steve Wallace, of Wally’s Wines in Los Angeles, a major retailer.

More than a year later, the landscape for selling classified-growth Bordeaux in the United States has changed dramatically. New players have scrambled to fill that gaping hole. One leading négociant, Joanne, has bought up a significant portion of Chateau & Estate’s stocks and is trying to replicate its distribution network. Others are doing the same thing on a smaller scale. Serious retailers like Wally’s and Sherry-Lehman send staff to Bordeaux for the annual en primeur barrel tastings and now buy their futures directly from négociants. But retailers and restaurateurs in smaller markets have a tougher time finding allocations. Several large wholesalers are no longer carrying Bordeaux futures.

Everyone involved in Bordeaux—from the château owners to the négociants to U.S. importers and retailers—says that fans of the wines should not worry. According to them, Bordeaux is not going to re-route allocations that once went to the United States to China instead, despite the current mania for classified growths among the nouveau riche of the People’s Republic. America remains one of Bordeaux’s most important markets.

Retailers like Adams will begin arriving in Bordeaux this week to taste samples of the 2010s. There are multiple signs the U.S. economy is waking up, despite the lingering unemployment rate. Many American wine lovers passed on the classic 2009 vintage. If they decide to bet big on 2010 futures, will the wines be available?

The Ab Simon Method

Abdullah Simon’s name will never be as well known as Robert Mondavi’s or Baron Philippe Rothschild’s, but when he passed away a few months ago on New Year’s Day, he left a major legacy for Americans who love Bordeaux. In 1974, the Bronfman family at Seagram tapped “Ab,” as everyone knew him, to be chairman of a new import division called Chateau & Estate Wines. America was becoming a big market for Bordeaux. Within a decade, Simon turned Chateau & Estate into the leading source for classified growths. The New York Times wrote in 1988 that he was responsible for selling one out of every five bottles of the first-growths alone.

Chateau & Estate succeeded partially because it had Seagram’s extensive distribution network. It also had the capital to buy large amounts of Bordeaux futures, pay for them up front and then hold onto them. “It was the Ab Simon method,” said John Laird, a former senior vice president at the importer. “Sell one-third to the best retailers and restaurateurs, sell one-third to the rest, and then hold onto one-third.”

C&E would sell that remaining third later, after the wines had aged and prices had risen dramatically. Since wholesalers don’t want to hold onto large inventories, C&E was a great source. “It was like a wonderful bank,” said François Thienpont, a négociant. “The château got their money right away; the retailers got their wines when they wanted them.”

Diageo bought Seagram in 2000. Soon the large British spirits corporation’s management looked at C&E’s business model, and it did not look so wonderful. It required a large outlay of capital for several years and holding on to substantial inventory. And the profit margins on wine were never as good as on vodka.

A few years ago, C&E began pulling out of smaller U.S. markets and buying less wine. “Diageo wasn’t interested in being in that business anymore,” said Adams. Then, in 2008, the company was hit by a double punch. The 2007 vintage wasn’t a bad one, but it was no blockbuster. The wines were priced, however, before the recession started. By the times the futures were released, the global economy had taken its worst plunge in decades. In 2009, Diageo began selling off its Bordeaux stocks at a big discount. And it announced it would be taking no more futures, not even the 2008s it had already planned to buy. The châteaus were suddenly stuck with the wines.

Nature Abhors a Vacuum

“We bought the vast majority of our Bordeaux from Chateau & Estate,” said Adams. “Their exit created a virtual panic.”

But others saw it as an opportunity. Several leading négociants pounced to take on C&E’s allocations and buy back their inventory of past vintages at a discount, including the formerly overpriced 2007s. “The flexibility of the Bordeaux system ensured that there was continuity,” said Jean-Charles Cazes, whose family owns Château Lynch-Bages and the négociant J.M. Cazes Sélection. “La nature a horreur du vide, as we say.” Nature abhors a vacuum.

The biggest player to try and fill that vacuum was Joanne, Bordeaux’s largest négociant for classified growths. The firm purchased as much of C&E’s inventory as it could get its hands on and as much of the futures allocations as the châteaus would give. It also hired David Milligan, a veteran importer, to run a new American division based in New York and a New Jersey warehouse. And it partnered with C&E’s old distributor in the New York area.

“The way Diageo exited, the allocations went back to the various châteaus,” said Milligan. “We set up Joanne U.S., [a new office] in Bordeaux focused on getting allocations set aside for the U.S. market.”

Other négociants did the same, to a more limited extent. Compagnie Médocaine des Grands Crus bought part of C&E’s stock and partnered with importer Frederick Wildman to bring the wines to the United States. Other négociants bought lesser amounts and hired representatives in the States to sell the wines.

It was up to these French merchants to do the heavy lifting because Bordeaux is no longer the big sell it was a few decades ago. The top classified growths sell well, but the lower priced wines do not. Most wholesalers want big brands, and Bordeaux has few of those. “Essentially what has happened,” said Milligan, “is that the wholesalers are no longer interested. The retailers who are serious about Bordeaux come to us, and serious collectors look to those serious retailers.”

Are You a Player?

Adams and the team at Sherry-Lehman have been going to Bordeaux each spring to taste barrel samples for many years, but it has become a lot more important now that they are dealing with the négociants directly, merely paying a clearing fee to an importer when the wines are later shipped to them. “We have learned to manage the logistics,” he said. “It presented a lot of challenges at first, especially with cash flow. I’m not sure how other retailers are handling it.”

Other retailers may find it too much to handle, for now. “A dozen top retailers in the U.S. go directly to Bordeaux,” said Wallace, who is one of the dozen. “If a small restaurant outside a major market wants half a case of Lynch-Bages, I suspect it’s more of a problem. The wholesalers don’t have those wines.”

According to Milligan, Joanne is selling about 50 percent of its wines in the New York market, and the other half in the rest of the country. It is trying to build wholesaler relationships so it can reach more markets, but it doesn’t have the distribution Diageo had. The company is also working to try and bring in a greater diversity of wines. “We want to sell the second wines of great properties and wines from lesser-known properties owned by major château owners. These are the wines to introduce Bordeaux to new, younger drinkers.”

Milligan, who is returning to his own import firm after a year working on setting up Joanne’s U.S. division, is not worried that people who want classified growths can’t find them. “I think the Bordeaux lover is very resourceful,” he said. But he admitted they might have to work harder these days, perhaps buying from out-of-state retailers, something that’s not legal in every state.

As for the Bordelais, they think C&E’s departure is not necessarily a bad thing. “It’s not that bad that Diageo left the floor,” said Jean-Luc Thunevin, who owns a négoce firm in St.-Emilion and owns Château Valandraud. “It created some good opportunities and gave a chance to Bordeaux to be on the interesting side again as small companies like mine could compete with the big Bordeaux wine merchants who did business with Diageo.” On a recent trip to the States, Thunevin bought “100 cases of various 2007 Bordeauxs with U.S. government warnings, sold to us with a 15 percent to 30 percent discount.” Thunevin won’t say who he bought them from, but odds are they were once C&E’s. Now he can sell them at a much more attractive price than the wines went for as futures.

It may take a few years for the new landscape to form, but everyone in the industry appears to agree that Bordeaux will not be sending all its wine to China anytime soon. “The château owners have been through this before—the Japanese craze, followed by the Russians,” said Wallace. “The U.S. is an important market to them. And there’s a lot of interest in the 2010s.”

While the euro is higher than it was compared to the dollar than it was during the 2009 campaign, there’s a lot more buzz in the United States than there was last year. If the wines are as good as early tastings hint, America could be getting off the sidelines soon.

France Bordeaux News

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