Lafite datapoint of the day

July 8, 2010
Andy Xie on the market for fine wine in China:

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Andy Xie on the market for fine wine in China:

Some analysts estimate that 70 percent of China’s Lafite consumption is counterfeit. I personally experienced this on a few occasions. The people who served me fake Lafite didn’t know it, because at the very least, the prices seemed genuine. And the fakes were probably decent wines, possibly some good second growth poured into a Lafite bottle. They just weren’t the real thing. The forgers have targeted the legendary 1982 vintage in particular. Many rich Chinese have bought large stocks of 1982 Lafite. The odds are that these are all fakes. There are very few bottles of the vintage left. It is highly unlikely that one can get several cases of the real thing.

The interesting thing about this is that so long as no one says anything in public, everybody’s happy. Xie explains that Lafite is the drink of choice for buttering up government bureaucrats — not because it tastes good, but just because it’s expensive. If Yellow Tail cost as much, they’d buy that instead. So when you’re served a bottle of 1982 Lafite in China, the important thing is not that it’s 1982 Lafite, but just that it’s expensive.

All of this focus on the brand is great for Lafite, which gets to charge insane prices not only for its flagship wine, but also for its second growth, Carruades de Lafite, as well. It’s great for the forgers, obviously. And it’s great for the purchasers, who otherwise would never be able to get their hands on anything as expensive and special as a bottle of 1982 Lafite.

But Xie sees a dark cloud on the horizon:

A market is efficient when consumers are informed and make rational choices. An efficient market motivates producers to improve quality and control cost. The virtuous cycle leads to great brands that last. The French wine market is like that. I am afraid that Chinese demand is decreasing the market efficiency and may bring down great brands over time. When winemakers see the price a result of propaganda, not quality, they will focus on marketing and decreasing investment for improving quality. It would be a tragedy if Chinese demand, by bringing easy money, brings down a French legacy that has lasted for five centuries.

The wine market in general, and the market in first-growth Bordeaux in particular, has never been efficient. Certainly the big chateaux have never been particularly interested in cost control or in market efficiency, and it’s pretty obvious, as Xie recounts, that the success of Lafite in China is more a matter of dumb luck than it is anything to do with smart marketing. If the price of Lafite goes up, I don’t think that will bring down its quality. No one’s going to mess with a winning formula. Especially when non-Chinese buyers can bid up the price of Petrus to $40,000 a case before it’s even been bottled.

(Incidentally, every time a “br” appears in Xie’s post, it has been replaced with “P”. I’m sure this was an HTML find-and-replace gone rather wrong. Don’t let it put you off.)


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