The stockbroker who made wine pricing transparent
James Miles was a young stockbroker working in Hong Kong when a friend offered him the chance to buy a case of Château Lafite Rothschild 1990 – which rapidly doubled in value. This introduction to a fine wine market he thought of as “terribly opaque, terribly inefficient and rather risky” led Miles and his business partner Justin Gibbs to launch Liv-ex. The global London-based trading exchange now turns over £57m and deals with 10% of the UK fine wine market and “probably 3%” of the global market.
Meininger’s: Why the name Liv-ex? Miles: It’s actually an acronym for the London International Vintners Exchange. As stockbrokers – and not terribly imaginative – we set out to build a stock market for wine and hence the name. Vintners are who we serve. We don’t deal with producers or consumers and we’re an exchange.
Meininger’s: Why did you succeed when others failed? Miles: Most of the people who try to compete with us have said, ‘Look at Liv-ex. They don’t deal with the consumer. How very stupid!’ Our merchants represent their growers or producers. They introduce wine to the consumer, restaurants or corporate clients. And they buy and sell stock. So those are the things we said we’d never do because we don’t want to compete.
Meininger’s: So you only deal with merchants. How many customers do you have? Miles: We started with eleven to twelve members, just in London. Today, we’ve got four hundred and twenty and probably forty per cent of those are British. To become a client, you have to satisfy a membership committee.
Meininger’s: And they pay a brokerage fee? Miles: Yes, we charge the buyer and seller two per cent.
Meininger’s: By 2003 you were turning over £2.6m ($3.33m) and by 2006, £ 10.5m? Miles: Yes, and by 2012, we were doing £55m.
Meininger’s: How did it grow so fast? Miles: At first, the technology didn’t work. It took two minutes to load a page. We built the business on the telephone, ringing around, asking, “What have you got to sell? What do you want to buy?” The business took off in 2004 when all our customers started having broadband. Our numbers went from, say, £5m in 2004 to £55m in 2011. And China opened up and wanted Lafite and we could do that. Then our turnover dropped to probably £35m pounds and now we’re back to where we were, which disguises a rather remarkable story. We now do two and a half times more trade in volume terms than in 2011. So, it gives an indication of what’s happened in the market. In the UK there was a government initiative to allow collectables like wine and art as part of a pension. That created a lot of press. Then there was the wine fund boom and two or three hundred million euros was put into wine. So until 2007 to 2008, our turnover more than doubled every year. Then came the collapse of Lehmann Brothers and we had a lot of receivables that we weren’t sure were going to come in.
Meininger’s: But your turnover went up after the crash? Miles: In response to the crash in the West, the Chinese printed a huge amount of money and threw it at state-owned enterprises in oversupplied industries. So the only thing they had to spend the money on was gifting and partying at banquets with Château Lafite. There were people trying to get money offshore and wine was mobile and useful for that. We had a lady who’d ring up once a week and order a pallet of Lafite. And then the new regime came in and stopped it overnight. Our turnover dropped but our volume of transactions never stopped growing. It was just that the average value per transaction fell a lot. We went from trading Lafite to lesser wines. But we also lowered the cost of trading. So, rather than having to buy ten, twenty or fifty cases, people could just pick up one. Unlike most freight forwarders where your minimum fee is €250 ($283.00) per collection, we said, “We’ll go and pick it up and we’ll charge you five euros a case.”
Meininger’s: Have the wines you’ve been trading changed? Miles: In 2011 we were trading one thousand wines and 97% of our business was Bordeaux. The eleven top brands were probably 70% of that. Some weeks, Lafite was 45%. Now, we’re trading nearly 10,000 wines and Bordeaux is quite often just over 50%. The availability of wine on Liv-ex has mushroomed beyond belief – from seven or eight million pounds of bids on our platform to more like £50m .
Meininger’s: What happened to the wine funds? Miles: They were probably 15% to 20% of our business – never as big a part as people thought – but now they are tiny. The vast majority have shut down or disappeared since Lehman Brothers went bust. I suspect active management in wine is a bit awkward because even though we have driven down the dealing costs enormously, they still are high.
Meininger’s: How much do you depend on technology? Miles: It’s an absolutely huge investment. We’ve got five teams here, in India and Bulgaria. We’ve probably got 40 people building technology. Originally we built ourselves up as a portal; you’d have to go onto our platform in order to place orders. But we’re building ourselves more as a web services platform where customers can place orders from within their own system and take our data or settle a deal, release stocks or order photographs or whatever – all from within their environment. That means their consumption of our services has grown considerably. The other thing we’ve done since 2011 is diversify and build up a data business and a settlement business with logistic transport. Straightforward broking was 75% of our income. It’s now 45%, and information provision is 30% of what we do. In the last twelve months, customers have consumed over three billion lines of data. Basically monetising our data in lots of different ways is very, very interesting. We spend a lot of time cleaning lists, taking out loose data and putting it into a standard format. And we’ve introduced wine matcher software which is a semi-intelligent system. Once you clean the list, it will remember the next time what to do. The more lists that get cleaned, the more intelligent it becomes.
Meininger’s: Was the fine wine trade slow to appreciate the value of data? Miles: Data is now absolutely fundamental to everybody’s business. Our unique selling point for the trade is not only knowing where competitors are trading which wines and the price; we also offer the fulfilment option. We have invested a massive amount of money in the last five or six years in a huge distribution network. We’ve got 125,000 cases and £150m pounds worth of stock in our warehouses in the UK, Bordeaux, Brussels and Hong Kong, and we’re running trucks to Bordeaux and back every week. We’re interested in removing friction in the trade wherever it is and moving stock around is a major form of friction.
Meininger’s: How do you see Brexit affecting frictionless trade? Miles: In some ways, Brexit will make it easier to hold stock in France and Belgium, but the UK has the bond system – probably our biggest advantage and why the UK trade dominates trading. The French are incredibly complex and the Dutch do have a bond system but they don’t have the critical mass to make it work.
Meininger’s: Are you saying that shipping wine into bond in the UK and out again isn’t that big a deal? Miles: We do it all the time. The absurd thing is that when we trade wine between one négociant and another, we have to ship it back to London and back to Bordeaux because it’s simpler. We’re trading all over. Seventy per cent of our business is export. We’ve got a weekly air service to Hong Kong and Americans consolidating and shipping out to America all the time.
Meininger’s: And all of that trading gives you lots of data… Miles: Yes, we have the transaction data. People complain about Liv-ex prices. We get producers saying, “Look, my wine’s worth a lot more than that.” And I say, “Well, buy it.” Our indices react with these transactions and that has never happened before in the wine industry.
Meininger’s: Are you in the luxury business or the collectables business? Miles: Collectables definitely. If you buy a Louis Vuitton handbag or a Ferrari you want instant gratification – you’re not really buying it as an investment. A brand new Ferrari is going to lose 30% of its value the second you move it out of the showroom. The other important thing is that immediate consumption might be one to two per cent of our market. Eighty-five per cent of the traffic goes straight into storage. The rest goes to a cellar. A very, very, very, small proportion is for consumption next week.
Meininger’s: Is it for consumption ever? Miles: When we surveyed eight hundred big collectors and we asked them, “What’s your motivation for buying wine?” more than 75% said, “I buy it to drink and to collect.” Only 12% said they only buy to invest and 13% only to consume. But, those 13% were actually lying to themselves because actually they don’t know. They may not be alive in 20 years’ time when it’s due to be drunk. They may have got divorces. They may have gone teetotal.
Meininger’s: Do you have an idea of how many big collectors are driving the market? Miles: Our data gets distributed through our merchants to about 80,000 different customers. Some of those will be very, very large and there’s probably some overlap. But, if you look at, say, Wine-Searcher, they’ve got 30,000 merchants on their platform. About three and a half to five thousand of those list the kind of wines that we’re trading now. We used to look at the market and say “there’s probably 500 Bordeaux specialists in the world, and the top 300 probably give us 90%” of the business. Now we’re thinking Bordeaux is only a part of what we’re doing. There’s the Californian specialist, the Burgundy, the Rhône, the Spanish, the Italian, the Champagne specialist etc. Our potential market size has grown a lot and we’re really excited about that. We’re doubling our sales team and are going to invest an enormous amount in marketing and technology, including SEO [search engine optimisation].
Meininger’s: Where does America fit into your plans? Miles: America’s very, very exciting. I mean America’s our fastest growing market, ahead of Europe and the UK. The slowest growing market is Asia. America bought a huge amount of stock in the eighties and nineties and it took them a while to get through [it]. They were selling all their wine to China in the boom. And they’ve been restocking ever since.
Meininger’s: Are they restocking the same wines? Miles: They have their own peculiarities. They like the trophy vintages, for example, so you know, the oh-nine Bordeaux, the ten Bordeaux, the ‘05s, the 2000s and the trophy Burgundies, the Musigny of this world. They like the Rhône. They like Italian wines. There’s definitely a different profile to your typical UK customer or your Asian customer.
Meininger’s: Is Burgundy now challenging Bordeaux? Miles: What we’re seeing in Bordeaux is that although the first growths have found the last seven or eight years pretty difficult, the second, third, fourth, fifth, sixth line Bordeaux have done fantastically well and have gone up in price pretty much every year in pretty much a straight line. I’m sure the same thing will happen in Burgundy. There’s only so much Le Musigny you can buy. There’s going to be a trickle-down effect and that will raise quality and prices across the board.
Meininger’s: In 2030 do you think we’ll still be talking about the scores from 2020, 2022 wines in the way that we are today? Miles: The consumer likes scores and it demystifies the wine world for them and they’re here to stay. Parker’s point scoring system is becoming more, not less, the benchmark. The world is modernising around that scoring system, but I think that it’s going to become more around the brand of the publication than the superstar critic. But not every wine is driven necessarily by scores. If you’re Pontet-Canet and you get 96 points then I can tell you exactly what your wine’s worth straight away. The correlation is 98% between price and score. If you’re Lafite it’s different. The correlation is all about age, because the market is Asian and it’s different.
Meininger’s: How much does the issue of fake wines affect you? Miles: Thankfully for us [it’s] a very small problem. There are much bigger problems we have to deal with every day, mostly to do with human error; people dropping wine, losing it, allowing it to get stolen. Just getting generally left on a dock somewhere.
Meininger’s: And technology in terms of tagging and so on presumably is part of your future picture? Miles: The thing I’m most excited about is LWIN, our universal identifier which is being adopted more and more. At the moment everybody has their own product code which makes it impossible for two computers to talk to each other without humans getting involved in the middle. We looked at a typical trade through our supply chain and it gets rekeyed fourteen times, which is really unnecessary.
Meininger’s: Now every wine will have its own identifier? Miles: We invested a lot of money in it and it’s free to everyone to use and it’s been adopted and that’s very exciting because that can really drive efficiencies in the supply chain, but really anywhere where people want to share data with each other. The universal identifier allows people to identify the Lafite Rothschild from the Kurniawan Lafite.
Meininger’s: How do you see your business being affected by economic cycles? Miles: Wine tends to do well late in the cycle. This is probably our purple patch where interest rates are going up, money’s being tightened. And, inflation’s rising … you know, that’s not a great environment for equities and bonds, but it is a good time for physical things like wine and cars and pictures. A market crash would impact wine. But, the immediate aftermath of that tends to be a good time as it was in 2009 to 2012.
Meininger’s: In seven years, Liv-ex will be twenty-five years old. Where do you see this business then? Miles: We’re working really hard – investing absolutely all our profits – to try and make it a bigger business.
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