Corporate Q&A

Kapon on the A-to-Z of DRC

Acker Merrall boss discusses records set at latest Hong Kong wine auction

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Kapon: owner and auctioneer

Few people know more about which wines China’s collectors are buying than John Kapon. The owner of Acker Merrall and Condit hosts record-breaking auctions for rare wine in his native New York and Hong Kong, with mainland Chinese money driving much of the demand. Under his stewardship, Acker has grown into the biggest auction house of its kind, with Kapon becoming one of the wine world’s most flamboyant auctioneers.

The auctions are raucous events where buyers bid up the prices of top Burgundy wines like Domaine de la Romanée-Conti (DRC) and prized first growths from Bordeaux.

Acker Merrall’s most recent auction was in Hong Kong last week and Kapon met WiC to discusses how Chinese demand is driving up prices for DRC, his family’s 200-year connection with the trade, and the still sensitive issue of fake wine.

The latter is a sore point: a decade or so ago Kapon was one of many wine industry experts fooled by Indonesian-Chinese fraudster Rudy Kurniawan, who spent $40 million buying genuine wine before using his reputation as a top collector to produce fakes and sell them through the auction houses. Acker Merrall was a key channel (that is, until Domaine Ponsot exposed Kurniawan’s wines as counterfeit and Kapon stopped selling them).

The Kurniawan story is recounted in In Vino Duplicitas, published recently by Wine Spectator writer Peter Hellman. Kapon earns a chapter in the book, with the author concluding that the auctioneer was duped by a masterful conman.

Towards the end of this interview the Acker Merrall boss touches on the topic and says that lessons were learned. Third-party inspectors have authenticated inventory at all subsequent sales. The scandal was costly – clients were refunded for fakes – but surviving a fraud on this scale means his firm has emerged “stronger”, Kapon says.

How did your Hong Kong auction go on Saturday?

It was spectacular. It was an amazing sale. We are pretty good at estimating what we think the proceeds are going to be at our auctions. We expected sales of $4.5 million but they ended up being $5 million. The lots were 98% sold. And we set a dozen new world records for DRC: a 1999 DRC assortment case sold for $76,490. [The top lot of the day: six bottles of 1999 DRC fetched $108,361]

Are those sales proceeds similar to 2010-2011 when fine wine prices in Hong Kong peaked?

Bordeaux was the real boom in 2010-11 and those wines – with a few exceptions – haven’t really recovered to those levels.

However, Burgundy has gone up a lot since then, which has boosted proceeds. Back in 2010 Burgundy was still being discovered by a lot of people in Asia. Now it has become more established. In fact, for the past couple of years Burgundy has had bigger market share for us than Bordeaux. It used to be that Bordeaux was 50%, Burgundy was 30% but now Burgundy is 50% and Bordeaux is 30%.

A big reason for that is you don’t really see young Bordeaux selling at auction that much – such as the 2005 and younger. Prices were raised so much on release that the quick flip or quick trade doesn’t make as much sense to the average collector as it used to.

Burgundy, on the other hand, just keeps getting hotter and hotter. The best producers have gone up in price significantly. DRC is up 35-40% this year alone. Coche Dury has probably doubled over the past two years, and Rousseau is up 50% over the last year. So there has been a real surge in Burgundy’s elite names – and it’s really due to their scarcity.

So your best Chinese clients will buy as much DRC as they can get?

Mainland China is driving a lot of the demand for DRC. It’s kind of become known as the best wine, the best producer. And it’s the lion’s share of auction revenues. In fact, DRC wines make up 15% of our overall sales at auction. It has a huge importance in the market and in China the collectors are going from Lafite and Mouton Rothschild to DRC instead. That’s driving a lot of the price rises.

How much of the world’s DRC is in Chinese cellars?

It’s an interesting question. DRC has a very extensive distribution network around the world, meaning that the wine gets spread around on release.

As far as the secondary market goes, a lot of the newest releases are being bought in Hong Kong and much of that could end up in mainland China.

For instance, we had a new China client come to us this year and spend more than HK$5 million ($769,369) on mainly DRC wines.

Does the interest in Burgundy suggest the Chinese wine market is evolving, and getting more sophisticated?

Absolutely, no question. The Chinese are super passionate in general and the desire to learn is incredible. And they are fast learners. Once they discover something their learning curve is much more accelerated.

While I would say Chinese collectors are still more tilted towards the higher-end, A+ stuff – which is to say, the demand isn’t as ‘A-Z’ [i.e. diverse] as the American market – there’s definitely been serious gains in Burgundy buying out here over the past five or six years.

Are there any drinking clubs you know of in Chinese cities, akin to the 12 Angry Men [a famed American dining club where collectors would bring very rare vintages]?

There are, sure. We try to get people together too and do events and tastings. Acker Merrall is probably single-handedly the largest opener of fine and rare wine in the world on a yearly basis. We really open a lot of bottles! I call myself the Chief Drinking Officer – I like to drink all the profits through the great wines we serve to clients!

But that is part of what we do. I am a third-generation wine merchant and we have a very family-oriented business. We really look at our clients as family and we welcome them to the dinner table to share great wine. There’s nothing better.

Is it true that your wine shop in New York is the oldest in America?

Yes, it’s been open since 1820. We had wine that went down with the Titanic – about 75 cases, although I’m not sure what kind of wine it was.

There is a long history to Acker. I have advertisements that show us selling 1878 Krug and 1865 Lafite. After the Great Depression we lost the fine wine market for a generation – how many flavours of Schnapps were on your shelves was more important than how many DRC vintages. Then my father turned the shop back into a fine wine store and I turned it into an auction house too.

Is it true your father included a bottle of DRC in a Christmas bundle in the Seventies because he couldn’t sell it? The market was that depressed…

Yes, he put some DRC in the Christmas gift orders just to get rid of it, because he was tired of looking at it. People forget how cheap wines used to be. You could buy La Tache in the Seventies for $5 a bottle. On its release 1982 Mouton was $12 a bottle.

Your auctions are livelier than most and a lot of wine gets poured. Do you think this more sociable style appeals to newer Chinese wine buyers?

Absolutely. Every time people come they have a great time and they are amazed by how many great wines they get to taste. It can be a pretty lively atmosphere. It’s about fun – this is a passion, a hobby and they should enjoy themselves and not just sit in a classroom being talked at by a lecturer, so to speak.

How big a chunk of the auction market comes from mainland China and Hong Kong?

About 50% of our dollars come from Greater China – which is Hong Kong, the mainland, Taiwan and Macau – and 40% comes from the US. About 5% comes from Brazil and the remainder the rest of the world. But China is driving the entire market.

How big is the auction market?

The [total] auction market is consistently about $400 million in annual sales. We have hit $100 million in sales a couple of times and this year I think we’ll reach $75 million.

There’s also a retail element to what we do, so we might get close to $100 million in revenues this year.

Is it growing?

There’s a limit to how much auction-worthy wine is produced every year. I once tried to figure out how big the market was and came up with a figure of $1.5 to $2 billion of collectable wine being released annually (of that DRC would be $100 million based on today’s values, and Petrus is $50 million). Some of the wine gets consumed, so in year two there might be $1.8 billion left in the market, but some of that wine will have gone up in value so it’s still actually $2 billion. It’s an interesting model to try and figure out.

How do you attract new clients?

A lot of word of mouth. That’s why we like to make friends with lots of people as they will recommend us to their network.

Are the China clients primarily first-generation rich or is it their heirs buying more of the wine?

The average age is over fifty, though there are significant collectors in their forties.

You don’t see too many kids in their twenties spending a lot on fine wine. It’s something they have to discover. Most of the biggest buyers are over 50 and they have achieved a certain level of financial success.

Are they still focused on France or do they look at other countries?

France totally dominates the fine wine market – it’s probably 80% of the market. Burgundy is 40%, Bordeaux is 30% and Rhone and Champagne are 5% each. California is about 10%, Italy is 5% and the rest of the world the remainder.

Wine from California and Italy almost only sells at auction in New York, where there is much stronger demand. For Bordeaux there is much more demand in Hong Kong and mainland China. For Burgundy, it’s kind of split.

But in the case of the most expensive wines – between $50,000 to $100,000 a case – you see more demand at Hong Kong auctions than in New York.

Do you speak any Chinese when do Hong Kong auctions?

I don’t speak Chinese. I only speak Hong Kong dollars! My son speaks Chinese. He’s 18.

Will he take over the business from you?

We’ll see. He’s got a way to go. He has great social skills and he’s into the industry. I’ll have to send him to China for a year and see what happens.

You are quite unusual in being both an owner and an auctioneer…

It just kind of happened. One day our auctioneer couldn’t come to work and I’d watched enough and just jumped in to do it. At the beginning it was a little rough. But by the end of the day I knew I could do it. Also, some clients see a little more passion from me in the auctioneering, which they like.

Are you thinking of selling other drinks, such as very old whisky?

We have done some whisky. It’s about 2% of the overall auction market for old and rare drinks.

Moutai is another possibility that we have been talking about. Some of the prices being paid for it by Chinese clients are enormous.

Would you consider moving into retail in China?

We’d love to do it in the long term. We’d like to have a bigger and better presence.

Acker Merrall used to be a nationwide chain in the US. We’d like to bring that back and have the brand be synonymous with fine and rare wines.

This is something we are looking at from a brand perspective because even though we are America’s oldest wine shop and the world’s largest wine auction house, we’re not as much of a household name as, say, Christie’s or Sotheby’s.

Obviously there was a big issue about 10 years ago with fake wines being auctioned…

Yes.

What have you done since then to give your buyers more comfort that no counterfeits go under the gavel?

In large part as a result of that experience, Acker Merrall was, to my knowledge, the first major wine auction business to engage third-party inspectors to authenticate many of the fine and rare wines that it auctions prior to those wines ever hitting the auction block. That is a practice that continues to this very day. The entire industry has come a long way over the last 10 years. We were victim of a fraud and while we certainly weren’t the only one, we tend to be associated with it the most. The bottom line is there were numerous victims including wine auction houses, people involved in the private wine trade, and collectors alike. Looking back it is quite scary what we went through but when you are defrauded like that and you lose millions of dollars, you learn a lot very quickly.

By enduring that period we have come out of it stronger than ever before. In the end, it proved to be a very valuable experience because we lived it, learned from it, and came up with new and better solutions, such as working with third-party experts to ensure the integrity of the process. But even after going through that ordeal, year after year we have been number one in the auction market both in Hong Kong and worldwide. So I think our clients recognise the changes we made and that’s why they continue to do business with us.

Your view on Chinese-made wines?

I don’t know if the auction market is ready for Chinese fine wine just yet.

They have a lot of potential but it’s going to take a hundred years to establish their history and terroir.


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