After two wine merchants went bust last year, buyers of en primeur in 2007 need to make sure they safeguard their assets, says Jim Budd
After two wine merchants went bust last year, buyers of en primeur in 2007 need to make sure they safeguard their assets, says Jim Budd
Fine wine is booming: auction records are smashed seemingly monthly; demand for the first growths in the Far East is sending en primeur prices sky high; after years of little change, Decanter’s Bordeaux Index – which tracks wine auction prices, (see p140) – has risen substantially over the past year from 120.73 in March 2006 to 142.54 a year later.
With the soaring price of fine wine, it is ever more important that your precious stocks are properly and securely stored. Buying en primeur has never been as potentially risky. The risks in the past used to be those of the market and the ageability of the wine. Now, alas, the trustworthiness of merchants is also part of the equation. 2006 saw the fine wine trade rocked by the collapse – due to internal fraud – of Mayfair Cellars in April, leaving dozens of clients struggling to reclaim wine stored with the merchant. Then, in late September, came the debacle and collapse of Uvine – the universal wine exchange – amid £2m debts, enquiries into possible criminal conduct and accusations of selling clients’ wines without permission. The DTI has appointed solicitors to investigate the directors’ conduct.
In both cases, customers lost substantial sums of money with little chance of getting more than a tiny fraction repaid. Graham Wolloff, Uvine’s administrator, is still in negotiation with interested buyers. Negotiations started in December and one can only presume that the longer these continue the less likely it is that anything can be salvaged. Grant Thornton, administrator for Mayfair Cellars Ltd, will shortly be writing to the defunct merchant’s en primeur customers with an offer (see sidebar, page 63). As far as the criminal investigation is concerned, depressingly little appears to have happened over the past year. In November, Grant Thornton presented a report to Hammersmith and Fulham Police, which is investigating the collapse. As yet no arrests have been made, even though the liquidators’ report to creditors indicates that Dominic Smith, the firm’s ex-finance director, defrauded Mayfair by selling client reserves onto other merchants – notably Farr Vintners and Wilkinson Vintners.
There is no proof of complicit action of behalf of these merchants, though the case led to widespread concern over the practice of inter-dealing between merchants, and led to questions being asked over the security, and provenace, of clients’ reserves. Are merchants really free to buy and sell such reserves, to be replaced at a later date? If so, how can customers be sure their wine hasn’t circled the globe by the time they come to take ownership of it, rather than lying undisturbed in a cool warehouse?
Asked how long the investigation was likely to continue, Hammersmith & Fulham Police told Decanter that, ‘it is likely to be some time due to the nature of our enquiries, the number of clients believed to be involved and the fact that most of them live abroad.’
Given that this appears a simple case, it seems incredible that by now charges have not been brought or the investigation completed. The unavoidable conclusion is that, as the UK authorities appear very reluctant to tackle fraud (the Attorney General himself admits there isn’t sufficient deterrant against the offence), the only course of action for consumers is to make as sure as you can that you are not a victim of fraudulent dealing.
A year ago Decanter’s recommendation was that it was best and safest to store your wine in your own account and under your own name. That certainly remains our view, and one shared by a number of fine wine merchants. Patrick Wilkinson of Wilkinson Vintners explains: ‘With regard to client reserves it is (and always has been) our policy NOT to offer to store wines on behalf of private clients. We always encourage clients to open their own account with a commercially bonded warehouse as this gives them complete control over their own stock.’
Although having your own storage account may cost a little more, this is an increasingly attractive option: London City Bond has over 8,000 private accounts – most at its Vinothèque facility in Burton-upon-Trent – while Octavian has 1,800 (up from around 1,000 in 2002). If you buy from several merchants, it is certainly better to have your own account.
Merchants who store wine for customers argue that there are advantages. ‘It takes away the hassle,’ says Tom Mann of Bordeaux Index, ‘as we deal with the bonded warehouse for you. Our customers’ wine is stored at Vinothèque, completely separate from day-to-day stock at Tilbury.’
Alun Griffiths MW, of Berry Bros & Rudd, agrees. ‘Legally the wine is as safe with an external provider as with a merchant. If the merchant or storage agent goes bust the client’s wine should be ringfenced, unless of course it has been removed fraudulently. At Berry’s we have stringent checks in place, which would alert us to movement of a client’s stock to anywhere other than his or her nominated address. The likelihood of fraudulent instructions getting through are minimal.
‘I imagine that some merchants decline to offer storage due to lack of space or a belief that there are specialist operators who handle such logistical functions and the job is best left to them. From a different perspective, of course, customers may prefer to store their wines with a merchant as it helps build a relationship.’
Ian Ronald of Armit adds: ‘The less a wine has to move, the less likely it is to be broken or lost, and the less handling charges are incurred, so we encourage customers to store their wine with us having bought it from us. Because visibility of what customers have bought in the past is helpful in future buying, it is in our interests to offer a high-quality secure service.’
If you choose to store with a merchant it is essential that, should the merchant go bust, the liquidator is able to identify your wine and that it is not treated as part of the company’s assets. Check that your wine will be clearly labelled with your account number and the rotational number, approved by HM Revenue & Customs, and that it is stored separately from other customers’ stock. This is not always the case, as Griffiths explains.
‘Berry Bros has always stored customers’ duty-paid wines separately from its own stock, individually labelled. The aim is to do the same with customers’ bonded stock, although in the past year the huge rise in volume of such wines, coupled with a lack of storage space, has led to us operating temporarily a system with a pallet of wine under varied ownership being identified by individual rotation numbers rather than being broken down into separate storage areas. We are, however, acquiring additional storage space which will enable us to revert to the position of having all customers’ wines physically separate from our own stock.’
Beware. Any errors in a company’s records could result in mixed ownership pallets being treated as the company’s assets by a liquidator.
Do your homework
It is important that you do your own due diligence on bonded warehouses as over the years some have gone bankrupt or been closed by Customs & Excise. About two years ago there was a case where a small bonded warehouse alleged that a customer’s stack of boxes had come crashing down, breaking all the bottles. Soon after, the company went into liquidation and a new company started up. Despite legal action, the unfortunate customer has been unable to get compensation.
Octavian and London City Bond are the two largest UK companies offering private storage accounts and both offer the possibility of visiting their storage facilities. Companies such as long-established Private Reserves or the more recently set up Nexus Wine Collections Ltd, who will arrange storage with bonded warehouses for you, are an alternative worth considering.
Unfortunately it is far more difficult to protect yourself when buying en primeur, especially Bordeaux. It is the long gap (around two years) between ordering, paying for and then receiving your wine that makes Bordeaux the most risky, especially as there are a number of links in the chain between the customer and the château. Together, Mayfair and Uvine took in excess of £600,000 from customers for en primeur orders that they failed to pass on to the Bordeaux négociants, who naturally cancelled the orders. It appears likely that Uvine used these funds to delay the company’s collapse even though its terms and conditions promised to keep en primeur funds in a separate account.
Although the fine wine trade finds en primeur a profitable operation, there is no agreed code of how these purchases should be conducted or any scheme in place to protect customers. The wine trade needs to work together to reduce the risks.
It can be risky for merchants too, as Michael Saunders of Bibendum explains: ‘The chain can be uncertain for the merchant. The most potent guarantee is a customer buying wine from a company that is well financed, and has a reputation that has taken a number of years to build. Such companies will replace wines for customers when the négociant they bought from fails to deliver.’ Clearly wine merchants should check their sources carefully too…
Decanter urges anyone considering buying en primeur to carry out their own due diligence on wine merchants before they place orders. Ask yourself whether you can trust this company with a two-year, non-interest bearing loan and be sure to take delivery of your wine. Where possible pay by credit card, as this gives you protection under the Consumer Credit Act of 1974.
Jim Budd runs the drinks fraud website investdrinks.org. For more on how to set up private storage facilities, see this month’s Collector’s News, p137
Provenance: what the merchants say
How to ensure that your wine is not traded behind your back?
If you have your own account this will not arise. If you store with a merchant, ensure that no wine can be moved from your account without your permission.
Opening a joint account
Whether opening an account directly with a bonded warehouse or through a merchant, it is worth specifying whether instructions to move or sell wine must come from one or both of you. After all, this is standard practice when opening a bank account and should be for a wine storage account too.
Buying older vintages is an important part of a wine merchant’s role and there are regular adverts in Decanter from merchants looking to buy your wine. But what checks do they carry out before buying, and can they give the seller any guarantee?
Bill Baker (Reid Wines): ‘We try very hard to check provenance and, as we buy mostly from private cellars, we are able so to do. When we buy at auction we do try to check how the wine has been stored. After years of experience I can usually deduce storage conditions from the case, the levels and so on. We tell people what the condition of the wine is before they buy it. If it is doubtful we will usually have sampled it to ensure we are happy to sell it.’
Tom Mann (Bordeaux Index): ‘We tend not to buy duty-paid stock and only buy wine in the UK and the rest of Europe as temperature extremes are manageable here. We don’t buy wine from America or Asia. We check levels and photograph every bottle.’
Michael Saunders (Bibendum Wine): ‘We ask for history; refuse slip-labelled stock (i.e. wine for the US with the obligatory Surgeon General’s warning); if bought in bond, there is often a history to the storage; and there is a qualitative check on receipt at the warehouse. We give details as we know them when asked – but wine does not carry a passport, so a guarantee is not possible.’
(I contacted several wine merchants for this article and am very grateful for their helpful and detailed responses. Unfortunately there is space for only a few of their comments.)
Do your homework
How to check out your merchant’s financial wellbeing
The internet has made it amazingly easy to check a company’s financial health. Details of all UK limited companies and Plcs can be found on the Companies House website (www.companieshouse.gov.uk) through its WebCheck. Details such as the address of the registered office, when the company was founded and whether annual returns and accounts have been filed, are available free. Current appointments and the latest accounts are available at £1 each to download. It could be the best £1 you’ll ever spend.
Check to see if the company makes a profit, what its assets are and whether the auditors have qualified the accounts. Sight of Uvine’s 2005 accounts would have shown that this was not the safest place to put your en primeur money. It made a loss of £496,126 and the auditors warned that the company was only a going concern with the continued support of its shareholders.
If the company you deal with is not registered with Companies House, it is time to ask some hard questions. Sole traders or partnerships do not come under the Department of Trade and Industry’s remit and there is nothing to stop a disqualified company director from going on to become a sole trader or a partner.
Other checks you can make include Google searches and posting a query on sites such as Tom Cannavan’s wine-pages (www.wine-pages.com). About a fortnight before the collapse of Uvine, one of its creditors posted a query on the forum of wine-pages – the replies rang all sorts of warning bells. Sadly in this case it was too late!
Mayfair Cellars: what happens when
en primeur goes horribly wrong
The initial legal advice to Grant Thornton, Mayfair’s administrator, was that any en primeur stock should be considered part of Mayfair’s assets. However, the administrator has come to a different conclusion. ‘Morally these wines belong not to Mayfair but to their customers,’ Grant Thornton’s Andrew Hosking told Decanter.
Unfortunately, due to the complexity of buying en primeur, it has proved impossible to match customers to specific cases of wine. ‘It is an archaic way of doing business,’ says Hosking. ‘The chain is incredibly loose.’
The problem, says Hosking, is twofold. Mayfair paid in full on some of its orders, in part on some and not at all for the rest. Futhermore, like all other en primeur merchants, it dealt with a number of négociants. This made it quite impossible to identify and allocate cases to individual customers. As an example, out of say eight cases of Latour 2003 ordered by four customers, there might be 24 bottles fully paid and a further nine bottles available from part payment – a total of 33 out of the 96 bottles ordered.
‘We will shortly be writing to all the en primeur customers offering them a divided dividend – apportioning the cases that we do have. Every customer will have to agree to this; if one person says no to the scheme, it’s a no-go.’
‘No money should change hands until you can establish title,’ adds Hosking. ‘This would be the solution. If you ordered three cases the agent would hold that and you wouldn’t pay until a sticky barcode could be issued that would identify your wine.’
Written by Jim Budd