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Recently, the US Department of Justice and the FBI launched an inquiry into the sale of counterfeit wines at prominent auction houses in New York and London. According to the Wall Street Journal, the investigation is focusing on whether auction houses and importers knowingly sold counterfeit high-end wines despite doubts of authenticity. The high-end wine industry, $1,000 or more per bottle, as a whole has boomed recently. In fact, several auction houses have reported double and triple digit year-over-year revenue growth related to wine sales. However, Wine Spectator magazine recently reported that as high as 5.0 percent of rare vintages sold at auction may be frauds.

At Quist, we've been involved in several valuations of closely-held wineries and wine related assets. Clearly, measuring the intangible value of a vintage label can be difficult. In several instances, the name alone is a primary driver for sales. Strong labels typically survive a bad weather vintage or a negative review in the press, whereas even minor setbacks can cause a weaker label to fold. In speaking with winery management teams, premium label building can be a delicate balance between supply and demand. Managers describe success in label building as releasing "just not enough" wine for any given vintage, a tricky proposition.

Building a label from an operational and marketing perspective can prove equally as challenging. Winemaking is particularly asset-intensive, the first hurdle involves securing assets and managing the inventory risk associated with the aging process. From a marketing perspective, premium and ultra-premium wines rarely advertise in the traditional sense. Instead, successful high-end labels strive to create and maintain a strong sense of loyalty among existing customers, making building an unknown label into an industry powerhouse particularly difficult. Marketing managers tout extravagant marketing events, Internet promotion and customer newsletters as the keys to building a successful high-end label. However, most management teams agree that time and word-of-mouth advertising is the single most important element to a building and bolstering high-end wine label.

So, the next time you're online bidding on that high priced bottle of Bordeaux, first be certain you're not buying rebottled boxed wine. Hopefully, an educated eye and refined palate will save you there. Then, take a minute to think about what value is actually in that label. While you may be buying the world's finest crushed and aged fruit, you're also buying an intangible asset that can take decades to build and maintain.

Category(s): Valuation Thoughts
Posted by Chad Wilbur at 07:42 PM | Permalink | Comments (0) | TrackBacks (0)