2010-07-07

Andy Xie: The Puzzle of Carruades de Lafite

The English translation of Andy Xie's latest article is out. This section deals with how Chinese luxury consumers are distorting the wine market.
The Puzzle of Carruades de Lafite

While I am not sure that the Lafite phenomenon is a bubble, I am quite sure that Chateau Lafite's second label, Carruades de Lafite or little Lafite in Chinese, is a bubble. The production of fine wine requires the vine age to average 30-40 years. Vines older than 80 years must be replaced. Hence, a chateau is always taking out old vines and planting young vines. But grapes from young vines cannot produce high quality wine. Great chateaus like Lafite and Latour use the grapes from young vines to produce second label wine to recover some costs. These second labels are usually quite cheap. They are usually much cheaper than second growth wines.

For example, Lafite's second label, Carruades de Lafite, sold for about 200 Pitish pounds per case until five years ago. Since 2005, the price of Carruades de Lafite has increased roughly ten times. Its price sometimes rival the prices of non-Lafite first growth wines and is usually higher than great second growth wines. Little Lafite is not a bad table wine. But it is definitely not a grand wine. Its meteoric rise is really due to mistaken identity.

As Lafite's price becomes a small fortune, the search for a substitute is a natural market response. In China, the substitute is little Lafite. The choice is way off the mark. If one shifts from Lafite to Latour, Haut Pion, or Margaux, it would be rational. Their qualities are similar. When Lafite's price is so much higher than that of others, they should become the next choices. But, in Chinese, little Lafite has the connotation of Lafite's junior Pother, probably similar but a bit less good. Hence, it becomes the substitute for Lafite. Moreover, as its price has risen, it seems to confirm its worth. At least the choice doesn't look cheap to the host.

The magnitude of price distortion in the Carruades de Lafite is probably similar to that of internet stocks in 2000. Of course, over time, the bubble bursts. So why should we be upset about it? The problem is that it has become an insult to other great winemakers. I'm really ashamed of the enormous Chinese demand that has created this phenomenon. I personally witnessed Chinese tourists unloading cases of little Lafite at enormous prices in Bordeaux to ship back to China.

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