Liv-ex, the revolution that transformed the International fine wines market

The fine wines market, like any other market, follows a very specific logic. In some respects it is similar to that of other luxury goods, while in others it follows its own rules. Rare items and the market demands obviously play a fundamental role, but the quality of the vintage - witness Bordeaux - constitutes another essential variable, in addition to the judgment of the critics and the prestige of the brand, which can radically change within a few years’ time. These data and aspects are very difficult to objectify, as they are sensitive to different interpretations upon which, in the end, it is almost impossible to build the right price for a bottle. This is true especially if we are referring to a niche market for a few, closely linked to the prestigious British wine merchants, who in the past have literally built the fortunes of entire territories, from Bordeaux to Champagne, and from Marsala to Porto. Briefly, this was the state of the art of the secondary market for fine wines until just over twenty years ago, when two Australian stockbrokers in London’s City, where billions of Sterling pounds, US dollars and euros are exchanged every day, and who were passionate about wine - James Miles and Justin Gibbs - decided to organize the category. Since then, the Liv-ex (which stands for London International Vintners Exchange) has become the reference point for every single collector or investor. This is where the exchanges happen, and this is where the real-time quotations of over 16.000 wine labels from all corners of the world, are made.
They basically used the same financial tools; namely, data analysis, entrusted to a team of 40 young analysts, who work in the offices of the new headquarters, in the modern Metal Box Factory, an incubator of digital companies, only a stone's throw from Tate Modern, in London's South Bank. WineNews met Justin Gibbs here, and he told them the story of the creation and growth of Liv-ex. It is now a privileged observatory on the fine wines market, which embraces investors and enthusiasts of all kinds and wines for almost every pocket. An absolute revolution.
“What has the Liv-ex managed to do? Before 2000, when James and I (Miles, co-founder of the index, ed.) started, there was already an online market. At the time. James and I were buying wine from London wine merchants. But we never really knew, when we purchased it, whether we were paying the right price. There was no way of knowing at the time”, recalled Justin Gibbs. “We had merchant friends who advised us what we should buy and we followed their advice. During the Asian crisis in 1997, when the Asian market collapsed subsequently causing the devaluation of so many wines, and a large part of the demand for Bordeaux wines came from Asia. James and I were both working on the Asian markets, and we therefore began to ask ourselves about how much the demand for wine would drop, to be able to make predictions. James, in particular, had wine and wondered how much it could be worth because of the market collapse. So, he went back to the wine merchant from whom he had bought it, who gave him an arbitrary evaluation, equal to 6 months before and a year earlier, when Asian markets were still very strong. A year and a half later, during the wine market crisis, there was still no efficient way to find out what the right price was to pay”, continued the founder of Liv-ex.
The fine wine market, up to that moment, was moving more or less in a sprawling way, as if detached from the economic reality in which, instead, it was definitely immersed. “What the markets should have investigated was whether wine was reacting efficiently to the change in supply and demand. However, this did not happen, because the markets did not require any sort of interconnection. Thus, when internet arrived in people’s homes, it was possible to effectively bring trading, and its related assets, to anyone's offices. We all started using the internet, and the software that allowed investors to access and control market trends. This was a turning point. It is from this point”, underlined Gibbs, recalling the real turning point, “that we decided to create the Liv-ex, thinking that we could bring together all the wine merchants, who could start trading wine among themselves. Actually, they were already doing it, but they were doing it over the phone, using pen and paper. It was really just about introducing something, in this case electronic and digital, that would bring greater transparency, because greater transparency means that people are more aware of the dynamics it brings to a certain price, and they are then more involved in the trend of the prices themselves. Therefore, all Liv-ex did was to bring transparency to a market that did not have it before. And the effect it has had is bringing more people into the fine wines market, which has consequently expanded, and is continuously growing, in the value of the individual wines and the market itself, as well as in the number of wines traded”, continued the founder of Liv-ex.
“During the first 10 years it was really all linked to Bordeaux wines. As a matter of fact, in 2010/11 the Bordeaux market peaked and was worth more than 90% of the wines traded on Liv-ex in value. Italy, at the time, instead, was worth less than 1%. Ten years later, the market has expanded significantly, as both the number of participants and the number of Liv-ex wines have grown, as well as the number of retailers' customers, in addition to many more players, in terms of territories. As far as values are concerned, Bordeaux today is worth 38-40% of the market, Burgundy is currently at 20/22% and Italy is at about 15/16%, while California is rising to about 7%. We have seen a huge change, in general, not only because of the larger number of wines traded and their higher quality, but also as a result of many more people in the wine market participating, which means that thanks to Liv-ex, its transparency and its efficiency, they have been able to understand the mechanics of the market”, said Justin Gibbs.
Greater transparency and efficiency have not only brought benefits to wine and its labels, but also to an entire supply chain, at least commercial-wise, and throughout the world, including wine criticism, which has grown – numerically as well – at the same speed. “If we, for instance, imagine an inefficient market, it tends to have few big players dominating the market, and then many small players. When the market becomes more transparent, and more accessible, it also allows many other small players to exist and be involved. There are a lot more companies in the industry here in the United Kingdom that have emerged in the last 20 years, thanks to more negotiation. The number of wine merchants has grown everywhere, however, in Italy and Germany as well as in the United States. And definitely in Asia, especially since Hong Kong lifted taxes on wine imports, which were 80% in 2006 and then zeroed out in 2008. Therefore, the Hong Kong market has gone from 500 merchants to 3.000 – some say even 5.000. Since there are more merchants, the number of customers of those merchants has also grown. And, consequently, there are more wines to sell and more stories to tell”.
This was one of the reasons for market expansion”, continued Gibbs, “while the critics have also been important in all of this, as a reaction to this dynamic. Robert Parker dominated Bordeaux. And, in fact, Robert Parker was our primary reference in the United Kingdom, then Jancis Robinson arrived, and I think at the time there was also James Suckling for "Wine Spectator". There weren't that many wine critics, though. Now, 20 years later, along with many of the critics from then, there are many others. For instance, names like Antonio Galloni and Stephen Tanzer with "Vinous", Neil Martin and many others, from Jeb Dunnuck who has his own site to James Suckling who has left "Wine Spectator" and has set up on his own. The number of critics has also grown massively, reflecting the expansion of the market, its regions and its investors. The effect of the transparency that we brought was precisely to make the market grow, involving a greater number of critics, wine merchants and collectors - it is a virtuous circle”, explained Gibbs.
Speaking about wine criticism and its role, according to Justin Gibbs, “it has an international dimension. However, Robert Parker has had a immense influence, probably the greatest impact, in any region and on any market, especially during his time period; that is, from the early 1980s to the end of the 1990s, a period of twenty years. Today in the UK we have Jancis Robinson, the Decanter team, while in Italy you have the Gambero Rosso “Tre Bicchieri”. I believe the "revolution" happened when Robert Parker produced the first publication on wine, which I think was a free pamphlet in its original form. That was probably somewhat of a revolution, and from there the model of the critical subscription magazine was born. I think critics today are important for the wine market on the whole, whether it's a collector who lives in Switzerland or Germany or the United Kingdom or Asia, where the weight of criticism is highly relevant. They are all very focused on the critics and their scores. Perhaps this is less true in Italy, but it is certainly no longer only an American issue”.
Looking ahead, “I believe the next great revolution for the fine wines market will be automation, in other words, the use of technology, because from this point of view we are still very far behind. It has always been a very fragmented market, with only a few big players who could afford to invest in this field. Now, though, the cost of technology has become more affordable, and many more companies have begun to adopt it, including small wine merchants, who also use the technology to monitor their inventory. However, there is still a lot of room to improve, in terms of spreading information, for instance, starting with prices. The trade itself should also be more automated, so as to conclude transactions more effectively. I think that from a trade point of view, in terms of efficiency and transparency, which is why Liv-ex was created, the automation of processes still needs to be improved, even if some progress has already been made”, said Justin Gibbs.
“And then, from the point of view of viticulture, I imagine that the revolution they are experiencing is global warming. This is the great challenge, which also offers great opportunities in the South of England, but also in Wales, where just 20 years ago not much was produced, while today wine is an important sector. As we have seen in the last few years, and especially in this year, 2021, there have been enormous problems in Champagne, but it has also caused numerous problems in Burgundy. It will have a big impact, no doubt. Further, I see that cultivation techniques seem to be evolving all the time, but that's not my area of expertise. I think that from the point of view of the consumer, as well as business, things are improving, thanks to transparency. Maybe in the next few years there might be less product due to climate change, so prices could go up, but surely there will be much higher quality wine to buy, produced in more and more parts of the world, and the consumers will definitely benefit”.
Closure will inevitably be on the future of Italian wine in the great market of fine wines, but very difficult to predict, “especially if we consider that 10 years ago the Italian share on the secondary market was 90% represented by Supertuscans, and it was just 1% of the entire secondary market. Today, it is 15-16%, and the growth is actually linked to the results of the last 2 or 3 years: it is difficult to predict”, said Justin Gibbs. “Only three years ago, the Supertuscans were worth 85% of the market, the Piedmont wines 15%. Today, Supertuscans are 50/60%, Piedmont wines are 30/35% and the remaining 5-10% is represented by Veneto, Umbria and Campania. Therefore, something is changing within the Italian market. I suspect that there is still a lot that needs to happen, but it is a relative game, in which if Italy gains, someone else loses. The market is getting gradually larger, and Italy will play its role in this increasingly large market, where Italian wines will continue to grow, as well as Italy’s share, which is destined to grow even more. I believe that there will still be steady growth in wine consumption, regardless of everything. Plus, if there is anything that will really grow, it is emerging markets, where, as we have seen in most cases, as incomes grow consumers are turning away from what they were used to drinking to move directly to drinking wine. So, I think the long-term trend for wine will continue to grow, and we will indeed need more wine. There will be ups and downs, but we must also think about what happened, for instance, to a strong global brand like Bordeaux. Bordeaux cannot expand its size more than it already is and even if the general knowledge one has is not at all total, Bordeaux’s history is in any case better known than that of Italian wine, despite the fact that Italian history is older and much more complex, and there is still a lot to learn. It would perhaps need more attention than what it has been paid so far by the critics we mentioned earlier”.
“Therefore”, resumed the founder of Liv-ex, “I think there are important margins at stake, in terms of value, among Italian wines, compared, for example, to many wines from Bordeaux and certainly the counterpart from Burgundy. The great wines of Burgundy are very, very expensive, the great wines of Bordeaux are quite expensive, but only a few great Italian wines are very expensive, and there are many that are relatively not. I would say that Italy has experienced a good, constant growth over the last 10 years, particularly strong in the last two, aided by a great 2015 Brunello and a great 2016 Barolo, and it seems that everyone is preparing to enjoy 2018. I would say, great vintages are being produced and the people's taste for Italian wines, as well as critics, are more and more aware of this. Italian wine has all it needs to continue to grow. Of course, it is important also that wine merchants, critics, consumers and collectors will always be looking for something new. In this sense, it is easy to see that there is still a lot to find out and discover in Italy. Maybe not in terms of volumes, but surely there are new stories, new wines, and new tastes to discover. I suspect there is still a lot to discover, although I'm not sure what that means in numerical terms… ” concluded Justin Gibbs.