Wines, Sneakers, Handbags – what’s the next big thing for these commodities? Flipping, or arbitrage trading is coming on strong as demand of tradeable wines continue to eclipse supply. Flipping blurs the line between buyer and seller. In the world of flipping, every buyer is a potential seller. Own and flip just about anything – all the way from wines, sneakers, handbags to your used sofa – is no longer a flimsy, mission impossible task. Online marketplaces facilitating flipping are attracting some serious capital. StockX, an online marketplace for sneakers trading, has just recently raised US$110 million to expand their stock market of things.
Here’s three concepts that will become increasingly important as wine flipping gains popularity.
Price Variation in different markets enables Arbitrage Trading of wines
Wine price transparency have led wine lovers to be increasingly aware of price variation of wines in different markets, and at different times. Price variation forms the basis of arbitrage trading. A same bottle of wine often comes with different prices in different markets. Apart from different duties and tax arrangements, logistics costs, provenance; varied demand in different markets also plays a part. To give a very specific example, look at price variation of a bottle of Burgundy wine in U.K. and Hong Kong market. On average there is a 20% difference in price for the same bottle of Burgundy. The difference does suggest the inclusion of a more substantial price premium on Burgundy wines in Hong Kong, given popular demand of wines from this region.
To play the game of arbitrage in wines, you can go two ways. Hunt globally for wines that are underrated in one market and/or overrated in another. Establish a secure, viable logistics link between the two markets and do physical flipping of wines. To enjoy the benefit of a zero-inventory model, you can start offering these wines to your target buyers as pre-sale items. This is very much how wine brokers operate traditionally.
Alternatively, the new way of trading wines is to trade them in situ. What it means is that you are going to buy a portfolio of wines and simply take legal ownership of the wines. You then sell them when they reap sufficient profits for you. What it means is that you may never even touch or see those bottles at all. These wines are often those that are kept within tax-free professional wine storages. In London and Bordeaux, those will be called bonded storage. In Hong Kong, since wine tax has been abolished since 2008, you can keep them at any professional wine storage. Trade wines like stocks as some like to call it. A good way to explore if you would like to dabble with wine investment, yet without having to commit to a substantial minimum investment amount or time limit for withdrawal.
Provenance to become digital and traceable
Provenance of a wine is, in essence, the travel story of a bottle of wine after it leaves its maker. In particular, buyers will, or at least should, care about the number of miles a bottle of wine has travelled (much like cars, mileage matters. The more mileage it has seen, the more value a wine loses). The temperature and humidity conditions during a wine’s travel and storage phase is equally important. Generally, wines should be transported and stored in an environment between 11 to 18oC, and at a humidity level of 65 – 85%. Daily fluctuation should be kept within 25% +/-.
The emergence of Internet of Things has led to the creation of smart tags that tracks and traces a wine’s provenance. Check out WWX’s affiliate project VinoGuard as an example. The future will see wine bottles bearing a digital “passport” and/or “health card” recording their paths of movement and state of conditions. With technology offering a more effective solution to tracking and tracing a bottle of wine, provenance is set to eclipse price as the leading buyer consideration when purchasing wines.
A relevant piece of advice for those who want to dabble in wine arbitrage trading. always keep your purchase invoice in good order, store your wines in recognized wine storage (keep your rent receipts and maintain an inventory list); and minimize movement of your wines.
Drinking window to become an indicator of trade-ability
Drinking window is a year range estimate that tells you when a wine will be prime for enjoyment. When it comes to wine flipping, drinking window can be a ticking bomb. Once a wine enters into its drinking window, which can last for just a few years to a few decades, the general rule is that you will want to sell them before the window closes. In fact, a seasoned wine investor will have secured the wine long before the drinking window opens up – for example, they may buy the wines as futures i.e. before they are bottled and released on to the market.
Flipping wines that have past professionally assessed drinking window takes things to another arena. The nature of things changes from targeting collectors instead of drinkers as buyers. A fine and rare wine past drinking window can be qualified as an antique collectible item. Given proof of provenance and satisfactory conditions, it can still fetch astronomical prices in secondary market.