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Market Transparency and Efficiency:
Fine Wine’s Online Revolution
LIV-EX
•     Set up in 1999, the vision for Liv-ex was to create a global exchange
      for fine wine merchants.




                      400 members - 33 countries
RIPE FOR CHANGE

 •   Traditionally opaque

 •   Lack of trading liquidity

 •   Highly fragmented, both in terms of
     players and products
MARKET TRANSPARENCY

The internet’s most important innovation has
been transparency of:

•    Quality

•    Availability

•    Pricing
MARKET TRANSPARENCY
Ten years ago, price discovery was time
consuming and imperfect - even for insiders.
Outsiders had no chance.
MARKET TRANSPARENCY
Today, price discovery is instant and available to all:
THE RESULT

•   Dramatically lower barriers to entry

•   Increased confidence for both the trade
    and collectors

•   Margin compression, but market
    expansion
MARKET EXPANSION
Global fine wine turnover has quadrupled since
2004, reaching USD4bn in 2010.
                                          4.5

                                           4

                                          3.5
   Global market turnover (Billion USD)




                                           3

                                          2.5

                                           2

                                          1.5

                                           1

                                          0.5

                                           0
                                                2004   2005   2006   2007   2008   2009   2010
HIGHER PRICES
Prices for the top wines have increase 220% in ten years.

                                                  Source: Liv-ex.com

                     Liv-ex Fine Wine 100 Index
              380
              360
              340
              320
              300
              280
Index Value




              260
              240
              220
              200
              180
              160
              140
              120
              100
               80
                     Jul-07
                     Jul-04

                     Jul-05
                     Jul-02

                     Jul-03
                    Jan-04




                     Jul-08




                     Jul-11
                     Jul-01




                    Jan-08



                    Jan-10
                     Jul-10
                    Jan-03




                     Jul-06




                     Jul-09


                    Jan-11
                    Jan-06

                    Jan-07



                    Jan-09
                    Jan-05
                    Jan-02
WHAT NEXT?

In our view, the next ten years will be all
about using the internet to increase
efficiency, reduce costs and limit stock
movement.

The focus will move from improving the
trading experience, to improving post-trade
settlement.
A POST-TRADE REVOLUTION

Two key issues:

•    Accounting and logistics functions in fine wine
     remain little changed in 20 years.

•    Fine wine continues to use commercial wine’s
     logistics infrastructure, despite having very
     different requirements. The internet gives the
     fine wine trade the opportunity to develop its
     own platform.
IMPROVING SYSTEMS

 •   Increased data interchange between
     customers and suppliers using industry-wide
     messaging standards.

 •   Transactions, invoices, warehouse instructions
     and accounts entries will be electronic–
     allowing for straight-through processing.

 •   L-WIN – The Universal Wine Code – is a key part
     of this process. A common language for the
     trade: one wine, one code.
A NEW SUPPLY CHAIN


  From a business perspective -
  commercial wine and fine wine
  have nothing in common....

  So why do they share the same
  supply chain?
COMMERCIAL WINE
                                    Producer


                                    Distributor


                                    Consumer

Fast moving: Designed to be drunk within eighteen
months of release.
Low value: The average bottle price in the UK (before
tax and retailer margin) was $2 in 2010.
Short and Simple: Direct supply chain.
FINE WINE




Slow moving: Designed to mature for up to 50 years.
High value: The average traded price for a bottle of wine on
Liv-ex in 2010 was $400.
Long and Complex: Complicated supply chain.
ELIMINATE MOVEMENTS

 80% of the trade on Liv-ex is in wines from the
 last ten vintages, the majority of which are not
 for immediate consumption.

 So why move it?

 Eliminating excessive movement of stock
 offers huge upside.
THE SOLUTION

We are reorganising our logistics along
central depository lines, which is:

A mechanism for storing and managing
ownership records in multiple locations.

Ownership can be transferred via electronic
transfer, removing the need for physical
movements.
THE BENEFITS


 •   Reduced costs and risk

 •   Faster working capital cycle time

 •   Better provenance
TO CONCLUDE


        The revolution in transparency is well
        advanced, but the potential gains
        from reorganising the post-trade
        infrastructure could be even more
        important.


Visit our mobile site – www.liv-exHKIWSF.com – to download this talk or find
us on

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Market Transparency and Efficiency - Fine Wine's Online Revolution

  • 1. Market Transparency and Efficiency: Fine Wine’s Online Revolution
  • 2. LIV-EX • Set up in 1999, the vision for Liv-ex was to create a global exchange for fine wine merchants. 400 members - 33 countries
  • 3. RIPE FOR CHANGE • Traditionally opaque • Lack of trading liquidity • Highly fragmented, both in terms of players and products
  • 4. MARKET TRANSPARENCY The internet’s most important innovation has been transparency of: • Quality • Availability • Pricing
  • 5. MARKET TRANSPARENCY Ten years ago, price discovery was time consuming and imperfect - even for insiders. Outsiders had no chance.
  • 6. MARKET TRANSPARENCY Today, price discovery is instant and available to all:
  • 7. THE RESULT • Dramatically lower barriers to entry • Increased confidence for both the trade and collectors • Margin compression, but market expansion
  • 8. MARKET EXPANSION Global fine wine turnover has quadrupled since 2004, reaching USD4bn in 2010. 4.5 4 3.5 Global market turnover (Billion USD) 3 2.5 2 1.5 1 0.5 0 2004 2005 2006 2007 2008 2009 2010
  • 9. HIGHER PRICES Prices for the top wines have increase 220% in ten years. Source: Liv-ex.com Liv-ex Fine Wine 100 Index 380 360 340 320 300 280 Index Value 260 240 220 200 180 160 140 120 100 80 Jul-07 Jul-04 Jul-05 Jul-02 Jul-03 Jan-04 Jul-08 Jul-11 Jul-01 Jan-08 Jan-10 Jul-10 Jan-03 Jul-06 Jul-09 Jan-11 Jan-06 Jan-07 Jan-09 Jan-05 Jan-02
  • 10. WHAT NEXT? In our view, the next ten years will be all about using the internet to increase efficiency, reduce costs and limit stock movement. The focus will move from improving the trading experience, to improving post-trade settlement.
  • 11. A POST-TRADE REVOLUTION Two key issues: • Accounting and logistics functions in fine wine remain little changed in 20 years. • Fine wine continues to use commercial wine’s logistics infrastructure, despite having very different requirements. The internet gives the fine wine trade the opportunity to develop its own platform.
  • 12. IMPROVING SYSTEMS • Increased data interchange between customers and suppliers using industry-wide messaging standards. • Transactions, invoices, warehouse instructions and accounts entries will be electronic– allowing for straight-through processing. • L-WIN – The Universal Wine Code – is a key part of this process. A common language for the trade: one wine, one code.
  • 13. A NEW SUPPLY CHAIN From a business perspective - commercial wine and fine wine have nothing in common.... So why do they share the same supply chain?
  • 14. COMMERCIAL WINE Producer Distributor Consumer Fast moving: Designed to be drunk within eighteen months of release. Low value: The average bottle price in the UK (before tax and retailer margin) was $2 in 2010. Short and Simple: Direct supply chain.
  • 15. FINE WINE Slow moving: Designed to mature for up to 50 years. High value: The average traded price for a bottle of wine on Liv-ex in 2010 was $400. Long and Complex: Complicated supply chain.
  • 16. ELIMINATE MOVEMENTS 80% of the trade on Liv-ex is in wines from the last ten vintages, the majority of which are not for immediate consumption. So why move it? Eliminating excessive movement of stock offers huge upside.
  • 17. THE SOLUTION We are reorganising our logistics along central depository lines, which is: A mechanism for storing and managing ownership records in multiple locations. Ownership can be transferred via electronic transfer, removing the need for physical movements.
  • 18. THE BENEFITS • Reduced costs and risk • Faster working capital cycle time • Better provenance
  • 19. TO CONCLUDE The revolution in transparency is well advanced, but the potential gains from reorganising the post-trade infrastructure could be even more important. Visit our mobile site – www.liv-exHKIWSF.com – to download this talk or find us on