What the Future Holds for the Fine Wine Secondary Market: In Conversation with James Miles and Justin Gibbs

Founded in 2000 by two stockbrokers, James Miles and Justin Gibbs, Liv-ex — the London International Vintners Exchange — is now the global exchange for the fine wine trade, with more than 600 members from 47 countries. Members are heavily vetted before they can join, and then they can buy and sell wine on the exchange. The goal of Liv-ex is to make wine and wine trading more transparent and safe, which in turn gives more people the confidence to trade.

Liv-ex also produces ongoing research using its own data, which it collates into an annual fine wine report. Pauline Vicard, CEO of ARENI, and Felicity Carter, Editorial Director of ARENI, caught up with James Miles and Justin Gibbs, to ask them about what’s happening on the fine wine secondary market.

In Conversation with James Miles and Justin Gibbs – Recorded on December 19, 2022

The below interview has been edited and condensed for clarity. The entire podcast is well worth listening to, as this transcript only captured a fraction of the conversation.

ARENI

James and Justin, can you talk briefly about how you met and what made you decide to found Liv-ex?

James Miles

We met in about 1994, didn’t we? We met in a dealing room in Hong Kong. I was an analyst in Asia and Justin was a salesman in London. I was writing research and Justin was selling that research to institutional investors. I suppose we were a similar age and we had friends in common and we instantly hit it off.

The Liv-ex idea was really a hunch. We had friends in the wine trade, and we were struck by how similar equities look to wine in the sense that it was a very, very fragmented market with lots of different players. And while many of the problems around price discovery and trading and settlement have been solved in the equities market, the wine market seemed to us to be incredibly opaque, inefficient, and rather risky. We started to wonder whether some kind of an exchange might add a lot of value to the players in that market.

The thing that made us decide to give it a go was that the business that we worked for at the time, BNP Paribas, got caught up in a takeover battle with a couple of other French banks. And it became pretty clear at that point that we were going to be made redundant.

I certainly felt like while I’d had a fantastic time in the financial world, I didn’t want to be doing what I was doing when I was 40. The fact that my wife was due to have a baby at any minute — I slightly sensed that this was my last opportunity to do something foolish.

We had a busy week setting this business up, and I got home at about six o’clock on Friday evening. And our first son was born at three o’clock the next day. So it was quite a busy first week.

ARENI

Can I ask you both what your definition of fine wine is, and if there’s any kind of difference between a fine wine and a wine that has value on the secondary market?

Justin Gibbs

I very loosely — maybe too loosely — define fine wine as a wine with any value on the secondary market. If people are prepared to trade it, it has by definition some value. But to move up the fine wine scale, I think it’s important that there’s probably heritage behind that wine. Certainly it needs the attention of critics. Increasingly, the market does rely on the support of critics as the market broadens. There are more and more wines trading that perhaps merchants are not aware of. And so the support of the critics is fundamental.

To James’ point about transparency. We thought it was going to be very important to the trade. I’m not sure our target audience, our members, were convinced that transparency was necessarily a good thing. There was not a great amount of research done into the market and price performance. And then when it does come to writing research, it’s quite hard to write research if you are a merchant selling wine because there’s a perceived conflict there. It actually fell back on to start writing research as an independent source of both data and commentary.

ARENI

This is probably a good point to talk about the role of critics. We’re seeing more critics come online as critics build their own brands. There seem to be more critics than there were. Are critics still important, or is it the number of critics that are important?

Justin Gibbs

Critics are very important. The broadening of the number of critics I would’ve thought is a good thing. Having one voice having all the impact is perhaps not a great way to create a nice broad marketplace for many more wines.  

ARENI

Do scores make a difference?

James Miles

Yes. There’s a wonderful simplicity about scores. I’ve never really understood the scepticism about it.  And, you know, I think it’s been a wonderful innovation for the wine market and incredibly helpful by and large. I think the scoring system that Robert Parker introduced has been extremely beneficial. But probably since Parker has retired the role of critics have become slightly less influential on pricing than perhaps Parker once was. But there are still critics like, like Neil Martin who can still move the market. The Wine Spectator Top100 wine list does have an impact on trade, and we see that on the Liv-ex screen.

There’s a wonderful simplicity about scores. […] If you’re a wine that no one’s ever heard of, and then suddenly it appears on a critic’s list with 100 points, the market will go looking for that wine without doubt.

James Miles, CEO and co-founder, Liv-Ex

ARENI

Really interesting. I want to go back a bit about the way Liv-ex is structured. You only have merchants on the exchange and they have to be heavily vetted before they’re allowed to join. Why don’t you allow private individuals to join?

James Miles

We took a view very early on that we were going to position ourselves as completely independent of our customers. We took the view that we weren’t going to compete with them. So we built our business entirely around the middle man.

ARENI

One of the great innovations that you’ve done has been the LWIN. Can you talk through what that means for the market?

James Miles

The LWIN is an identifier. The problem in the fine wine trade is that there is no standard descriptor for a particular label. I was having a chat once with London City Bond, and they reckon they had more than a thousand different descriptions for Chateau Lafite. And clearly Chateau Lafite is a reasonably simple name to describe. Once one gets to Italy or Burgundy or Germany the descriptions can get substantially more complex. We realized that if the wine trade was going to digitize, there would need to be a standard descriptor. We realized we had to come up with a numerical code so that machines could talk to each other and merchants could have tidy databases.

The commitment we made with LWIN was that access and use of the database would always be free, an open source. Anybody can use it.

We’ve currently got a team of six people who are permanently working on the database. We’re very much scaling up to a world where LWIN is the universal identifier used by the fine wine trade. The more people use it, the more valuable it is to users. LWIN opens the opportunity for people to create a whole lot of new businesses, which currently don’t exist. It doesn’t matter whether you are trying to make your wine more visible, or you are building a new cellar management system, LWIN is going to be a fundamental part of those businesses.

ARENI

One thing most people wouldn’t be aware of is the logistics of fine wine. How does it work if somebody in Germany does a trade with someone in Hong Kong on the Liv-ex system?

James Miles

We have a network of warehouses across Europe. We also have warehouses in Hong Kong and San Francisco. So when a merchant in Germany sells on our platform, we will go and pick up that case of wine and bring it into one of our warehouses in Europe, probably into our warehouse in Belgium where the wine will be checked. It will be made available to the customer in Hong Kong to collect or, alternatively, it’ll be added to our weekly shipment to Hong Kong and delivered to the merchant in that city.

ARENI

And what do you do to ensure that you’re not dealing in fakes and forgeries?

James Miles

We have a pretty developed system for checking stocks. We’re opening tens of thousands of cases a year and photographing those cases. We have a sort of algorithm that also picks out  particularly high-risk products. And for those wines we’ll do an authenticity check as well. So there’s a reasonably sophisticated system that we’ve got in place. We also share a lot of information and intelligence with our customers around forgeries and potential forgeries.

To be honest with you counterfeiting is not really our biggest problem in the supply chain. Our biggest problem is human error — people sending us the wrong wine or sending us the wine in the wrong condition.

ARENI

When you started, there must have been fewer than 500 fine wine merchants in the world, and you now have more than 600 on your site. Given that the market works with very small quantities of wine,  how big can the fine wine market get in terms of merchants? Is the professionalism going up as well, or are you seeing people who don’t know what they’re doing entering the market?

James Miles

If you’d asked me or Justin 10 or 12 years ago, we would’ve said there is a market for Domaine Romanée Conti and top Champagnes like Krug and Christal, but fine wine was really a Bordeaux market. The top 11 brands in Bordeaux accounted for something like 70% of our trade. What’s happened in the last 10 or 12 years is that trade has massively fragmented. So if we were trading, say, a thousand label vintage combinations 12 years ago, we’re now trading close to 15,000 different products. And if Bordeaux was 94% of our trade, it’s now 30% of our trade. And so, the definition of fine wine has broadened.

We used to go to America or to Italy, let’s say, and they would say, “what you’re doing is really, really interesting, but I actually don’t trade that much Bordeaux wine. I’m much more interested in Champagne or Italian wines”. Now, because our trade has broadened so much and we’re now trading wines from every fine wine region in the world — and not just the top names, but the second, third, fourth and fifth tier wines in those regions — we’ve become interesting to a much larger universe of wine merchants.

The top 11 brands in Bordeaux accounted for something like 70% of our trade. What’s happened in the last 10 or 12 years is that trade has massively fragmented. So if we were trading, say, a thousand label vintage combinations 12 years ago, we’re now trading close to 15,000 different products. And if Bordeaux was 94% of our trade, it’s now 30% of our trade. And so the definition of fine wine has broadened.

James Miles, CEO and co-founder, Liv-Ex

ARENI

I want to jump in and talk about Bordeaux. The situation in Bordeaux is, outside of the top chateaux, becoming catastrophic, with people pulling up their vines. What happened to Bordeaux? And why aren’t the top wines having a halo effect on the wines below?

Justin Gibbs

I think a major part of the life behind Bordeaux is the En Primeur campaign. It still attracts a huge number of buyers. But that pool of collectors is diminishing, because the idea was, of course, that if you buy Bordeaux En Primeur, you’ll never be able to buy it at a cheaper price. You have it locked away and over the years it evolves in terms of quality and price. It gets traded along the way until finally, 25 years later, it gets drunk.

If you are at a price that doesn’t yield a return for 10 years plus, it’s a less compelling prospect.

ARENI

If you look at Burgundy, as the top wines get more and more expensive, there’s been a trickle-down effect. So people are looking all over Burgundy for, for plots of interesting things, but this absolutely isn’t happening in Bordeaux.

Justin Gibbs

Well, I wonder how far down that trickle is. I mean, if you’re talking about Burgundy, you’re talking about insanely expensive wines and trickling down to village wines, it’s still £400-£500 a dozen.  This would be Bordeaux’s argument, that you can buy third or fourth growth for that prices. They would argue, with some justification, that they’re not all that expensive, but they are more highly priced than they were 10 years ago. Trickle down — I’m sure it’s going on.

Again, we are talking about the top estates and the Left Bank etc. Some of those chateaux actually play to that trickle-down effect by producing not just a second wine, but a third and fourth wine. They’re trying to capture each level of the market.

When we talk about vines being ripped out, this is where we’re down to a couple of euros, where there’s not a lot of money to be made. Maybe that’s more to do with the demand from the multiples or just a broadening of the market. Bordeaux used to be the place that people understood, particularly in the UK, and the wine market is just a broader, more competitive place.

Within the appellation in Bordeaux, you have enough volume to satisfy the market. Within Burgundy, you probably have to get outside those top appellations to continue to enjoy your Pinot and your Chardonnay.

ARENI

This is a good moment to talk about your fine wine report. So 2022 was a pretty spectacular year. You’ve seen a widening of the fine wine market. What do you see ahead for 2023 and why?

Justin Gibbs

The numbers of the high-net-worth individuals rose naturally for years and years, and there was some correlation with fine wine prices. The wealth destruction in the last 12 months, has been pretty substantial. Not just in the likes of crypto, but in more mainstream assets like bonds and equities, where trillions of dollars of wealth have been wiped off those markets.  But at the same time, when you are looking at people who own and collect wine, the majority of them do it at the margin of their total asset base.

So when they need to raise funds, it’s not necessarily to their cellar that they go. For the market to really drop, you need some forced selling.

The wealth destruction in the last 12 months, has been pretty substantial. Not just in the likes of crypto, but in more mainstream assets like bonds and equities, where trillions of dollars of wealth have been wiped off those markets.  But at the same time, when you are looking at people who own and collect wine, the majority of them do it at the margin of their total asset base. So when they need to raise funds, it’s not necessarily to their cellar that they go. For the market to really drop, you need some forced selling.

Justin Gibbs, Deputy Chairman and Exchange Director, Liv-Ex

ARENI

Do you mean by that wine is the last investment and therefore if they were in trouble, they would sell something else first?

Justin Gibbs

If you’re a forced seller, you look across your whole asset base. They used to call it a dash for cash. I’m not sure we’re seeing a dash for cash at the moment. This seems more like a steadier, slower destruction of wealth than 2008 or 2009.

But the total value of your cellar may be of no consequence to your total wealth.

ARENI

We’ve been talking a lot about transparency and how important transparency is to the market, but a lot of the wine world really hates the idea of transparency, whether it’s the Champenois refusing to release production figures to Italian vineyards that won’t even clarify where their borders are. How much does the resistance to transparency hinder the fine wine trade — or doesn’t it matter?

James Miles

There is probably a disconnect at the moment between what the fine wine collector wants and expects and what the trade is delivering to them. If you talk to the collector, they want more transparency, more liquidity, and more control over the process of buying and selling. They want more data analytics insights, faster transaction time, more opportunities to buy and sell. And they want to be able to do all of those things in their pocket on their phone.

The trade has been slow to identify that and I think it’s either not in their interests, or because they don’t have the technical capacity.

But the fact is that the kind of people who are trading wine are used to trading in that way. They’re used doing that electronically and having all that data and that control at their fingertips. I think the wine merchants who are going to win are the ones that are going to give the customer exactly what they want. Those who aren’t willing or able to may well struggle in future years.


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