Robbie Stevens, Liv-ex’s territory manager for the Americas was invited to lead a discussion with members of the wine trade at Vinexpo NYC 2022.

  • To historically traditional players in the wine trade, the Internet has brought greater efficiency.
  • It’s also brought transparency to the price of every wine, increasing people’s trust in prices and encouraging trade.
  • Robin Hood-style investment bonds and fractionalisation are starting to bring wine investment to the masses.
  • NFTs or cryptocurrency models are being applied to wine using blockchain to guarantee provenance. Other models will surely follow.
  • Concerns over provenance are tackled by smart algorithms and expert inspections

“Historically, the wine market has been pretty opaque, risky and inefficient for the people who are operating within it…but all that is changing thanks in part to technology”, said Robbie as he described to the audience how broadband has enabled the conception and evolution of a global wholesale market, and a growing number of investment business models crossing over into the wine trade.

When discussing the role of technology in the wine trade, the story of Liv-ex is a fitting place to start. The London international Vintners exchange was founded 22 years ago to combat the inefficiency and opaqueness that permeated the wine trade. Like any other exchange, whether its stocks, metals, fuels or food, Liv-ex provides and independent meeting place. Our members, bound by a common profession, can come together to find out what’s happening in the market and identify opportunities for profit. Similar to other exchanges, and in collaboration with our members, Liv-ex play a crucial role in being spokespeople for trade. Via the data, insights and indices that we offer, and also as innovators, via the technology and efficiency we promote. Over the last couple decades, Liv-ex have pioneered improvements on price discovery mechanisms, defining or standardising units of exchange, end to end settlement and electronic real time trading to name but a few.  

E-commerce

Historically, the wine trade has been pretty traditional in its practices and there are a few notable reasons. We’re dealing in alcohol, which means there are high levels of bureaucracy, making it difficult for people to operate freely. It can be highly fragmented, for example in the US there is the 3-tier system: whether you like it or loathe it, it exists, and you need to be able to operate within the confinement of it. Wine is difficult to understand – whether that’s a consumer wanting to know what’s on the label, a business wanting to understand buying patterns or whether that’s a machine understanding they need to get a wine from place A to place B safely. It’s also a physical asset, and therefore cumbersome and costly to move around. In addition to this, and unsurprisingly, many of the market players are traditional, in that they have been around for decades or centuries, and so change can be difficult and slow when fighting established systems and processes.

The major change in technology over the last 25 years has been the internet. Most notably this has allowed increased efficiency and transparency. E-commerce, which has been around since 1994, has brought around the ability to look at prices and trade 24hrs a day, 365 days a year. Businesses are taking hold of these opportunities and growing from them.

Market places like Liv-ex, or price comparison sites like wine-searcher are bringing visibility and price discovery. As an example, a Bordeaux buyer in California has always been able to contact someone in London, in Bordeaux, or their local distributor, and find out a price of a wine via phone or email. But previously, this could take days whereas now it can be done in minutes, and automatically also set up purchase orders, and move the stock through the supply chain, in a very automated way.

 

Liv-ex Special Report – The Changing nature of fine wine buying

Changing nature of fine wine buying report cover

Automated Wine Trading

In the last 5- or 6-years Liv-ex has brought to market trading automation, which provides direct market access to Liv-ex members They as a business, can tap into the live offers that on exchange and feed them, via an API, it on to their own website. From there, they can add a margin to it, and when their customers purchase a product the API sends that bid back to the Liv-ex exchange. The functionality itself allows a 24-hour buying process. It’s like having another staff member, one who never needs to take a holiday, doesn’t ask for a commission raise, and can work 24 hours a day.

Merchants are able expand their offering with the flick of a switch: Liv-ex offers $135 million dollars’ worth of live buying and selling opportunities. The selling opportunities account for about $70 million. It also enables merchants to operate at a far lower stock position, improving their cash flow, and increasing their offering.

Business models also do this on the sellside. They list wines on their website, and on Liv-ex, and multi-channel sell. If a bottle sells in one place then its immediately removed from the other channel. In order to do this, you need an efficient data transfer, which is quite difficult with the complicated language of wine. For example there could 150 different ways of Château Lafite, and a machine can’t differentiate between them. To resolve this, Liv-ex developed a concept called LWIN which is the liv-ex wine identification numbers. It provides each individual wine with a digital code, so whether you call it chateau Lafite/Ch.Lafite/Chateau Lafite Rothschild, whether you put the accent on or not, the machine can identify the product. Its also possible to add appendages for vintages, pack size and so on. It’s like a universal translator for businesses, allowing computers and systems to communicate seamlessly with each other. LWIN was released and launched under a creative commons license which means it’s completely free and will be forever. With the idea being that it’s going to promote efficiency across the wine industry.

Claim your free guide: How to automate and accelerate your wine business

Price discovery and transparency

Some traditional businesses are adopting these practices for the afore-mentioned reasons. However, there’s also a new breed of businesses that are coming around, in particular, those offering wine investment to the masses. Wine investment is not necessarily a new thing, it’s certainly been around for decades if not centuries. Fine wine has long been considered a store of value and has longevity in terms of its lifespan. This means it is often said to have investment qualities which we can see in price performance. Previously, access to this has been reserved for either those in the know or those who can afford to buy a full case of wine. However, emerging technologies is bringing it into the mainstream. Wine has unique characteristics which make it appealing and in the last decade we’ve seen price performance increase in the 10s if not 100s of percentages upwards in certain regions.

We’ve seen a broadening of the market away from traditionally people only investing in Bordeaux into the “emerging regions” one might say of Tuscany, Piedmont, Rhone, Champagne and the USA.

The Liv-ex team at Vinexpo America

The internet has brought transparency which increases the trust that people have in the price. This means more players want to enter the space whether its consumers, investors or businesses. More players mean a bigger market. Liv-ex calculate 12 indices and our broadest measure of the market is the Liv-ex 1,000. This takes into account a cross-section of regions and over the last 5 years it has moved 47% and that is across Tuscany Piedmont, Rhone, Champagne, Australian etc. Using the indices, businesses can analyse the market, make their trading decisions and then offer products to their consumers and their market. In the last 2-3 years, we’ve seen a huge increase in the demand for investment in collectibles and physical assets, which has brought wine again into the mainstream as an alternative asset.

The role of the exchange in this instance is to bridge tradition with modernisation. It removes inefficiency and opacity as barriers by designing and applying new standards. Liv-ex provide the technology, then in collaboration with our members they can go and run with it and create new businesses that perhaps no one had ever thought of 2-3 years ago.  Liv-ex provides the backbone for those businesses to operate in terms of technology with the API and the data points that they might need to analyse the market.

Blockchain, NFTs, Fractionalisation and more...

Over the last 2-3 years, business models have emerged due to a huge amount of innovation was people looked at old things in a new way.

One such example is the Robin Hood-style investment model, offering wide investment to the masses. These businesses run on a low deposit business model, you can deposit as little as $1,000 and you can become someone who invests in wine. People who deposit either monthly or sporadically have low management fees; ranging from 2-3% and these companies build algorithms and robots to continuously analyse the market. The algorithm monitors all the live data and member interactions and uses that market knowledge to make automated purchases and sales. These also businesses act as market-makers. This is a concept which originated from stocks, shares and equities trade is now coming into wine thanks to the Liv-ex exchange. By embracing automation services and the global marketplace, Liv-ex provides an end-to-end service for consumers. Businesses can price the wine, buy the wine, store it in one of our warehouses and then sell it and you can offer all this out to the masses.

An NFT or cryptocurrency model is possibly the most nascent business model emerging as the wine trade takes a decision on how relevant the new technology. The most public example that people have quoted of where NFTs exist is in the art world and people buying digital images of monkeys for exorbitant amounts of money.

Robbie Stevens, Liv-ex Territory Manager for the Americas

People are trying to figure how these might operate in the wine space. For example, launching tokens or digitalized pictures or videos that are linked via smart contract to a bottle, case or carton of wine. A key benefit of technology like blockchain is creating traceability by guaranteeing provenance and fungibility. Difficulties can arise here due to a fragmented marketplace, slow adoption, and a lack of understanding. It is not yet clear where the profitability mechanism lies.

Fractionalisation is similar to the Robin Hood-style offering as it is generally geared towards retail investors, though institutional investors can profit from it as well. It’s linked to the rise in popularity of collectibles as people want to invest in Pokémon cards, wine or art. The difficulty with that is that there’s illiquidity, market access is difficult and there’s a high cost of entry. Fractionalised investments work by splitting up a case of wine or car into shares much like you would a company with an IPO. Companies then offer the ability to buy a share in a case of wine then trade their assets between investors who then over time hopefully realize a return. The wine market, historically, has shown low volatility with pretty stable historic performance and has provided a hedge against inflation so traditional investors are starting to see it as a place to diversify portfolios. Companies that have offered this type of investment are opening up the market to that diversification.

Finally, there is the collateral lending business model. Wines are mobile but they are a store of value and so once a business or collector buys wine, the money that they paid for it is locked off until they start to realize any benefit by either selling it or drinking it. Instead of seeing that as immobile cash until such a time, companies will lend against a wine merchant who would then, in a business scenario, use that money in wine as a store to then grow a business in a more efficient way. Liv-ex provides the data in order to value the wine. We provide real-time, independent valuation which allows those lenders can manage their risk appropriately.

 

Liv-ex Special Report – Introduction to fine wine investment

Can these companies be trusted?

The discussions with delegates that followed illustrated that concerns around trustworthiness remain in the wine trade. Robbie was asked whether Liv-ex had any interest in the ownership of its members, or vice versa. He reiterated that we are 100% independent, and that Liv-ex doesn’t take a position in the success of our members, nor do we hold stock to avoid conflicts of interest. The activity on the global marketplace, and the pricing data that it produces, is solely down to the real-time trading activities of almost 600 leading wine businesses worldwide.

He was also asked how buyers can be sure of the provenance of the wine they’re buying on Liv-ex. He described the lengths that Liv-ex go to in order to provide a safe, trustworthy environment for wine trading; how new members are carefully vetted, how trading limits are carefully controlled, and how we don’t trade with end consumers nor producers (only professional wine trading businesses).

He also explained how we handle every case traded on Liv-ex. In the last 12 months, we’ve opening, inspected, photographed around 80,000 cases of wine. The levels, the labels, corks, capsules and cases are all inspected for flaws. In addition, we authenticate using zoom photography, UV light and other tools any wines deemed high risk by our bespoke algorithm.

This all lets Liv-ex underwrite each and every trade so that the buyer is guaranteed to get the wine they bought, and the seller their money.

What next?

So, in conclusion, the technological landscape is changing across all industries. It is still developing. There is no doubt that we’ll see businesses emerging in the next 3 years that no one has ever thought of that are going to take the industry and world by storm. Existing businesses and companies are adapting to this and historically it’s been an antiquated industry but the opportunities for change are heightened because of that. So, fundamentally those opportunities are here, whether it’s traditional technologies; connecting to an exchange, connecting to a wider pool of sellers, selling to a larger pool of buyers and using real-time data to better inform your decisions, to the emerging business models that are coming out with wide-scale investment opportunities. All of it is allowing people to reach consumers that they wouldn’t usually and the common factors enabling this highlight the importance of Liv-ex; It provides access and liquidity and designs new standards and innovations in collaboration with our members to provide technological advances.

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