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02.2006

Massachusetts Beverage Business

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Article By: Bill Nesto, MW

The Hospices de Beaune provides convalescent and medical services to the citizens of Beaune, the medieval town which is in the heart of the Burgundian wine industry. The Hospices uses the auction of wines made from grapes in its vineyards to help fund its work. Hence the motives of the buyers have a measure of charity added. But the auction has become more than a charity event. The cultural life of Burgundy swirls around the auction as it is the central event of Burgundy's most important, annual celebration, known as the Trois Glorieuses. It brings the Burgundy wine trade together after each harvest and is the first time that wines from the new vintage receive values. This speculation has made the auction a market indicator for the value of grapes and wines of that vintage.

The 2OO4 auction, however, had been a disappointment for the Hospices. Adam Lechmere and Antony le Ray-Cook reported for the decanter website on November 22, 2OO4, that prices for red Burgundy were 33% less than 2OO3 and that those for white dropped by 21%. This came after the 2OO3 prices showed a 21% increase over the average 2OO2 prices for red and white wines. Denis Duveau, Assistant Director for the Federation of Burgundy Merchants, reported to me: "In fact, we can say the trend was increasing from 1993 to 1998, then decreasing from 1998 to 2OO4, except 2OOO and 2OO3." Bidders sought out the 2OOOs because it was the millennium vintage. 2OO3 produced unusually low volumes of very concentrated wine. The 2OO3s were much sought after. Reports of the 2OO5 vintage indicated a virtually perfect growing season. The 2OO5 barrel samples that I tasted at the auction preview in Beaune were dark, clean, strongly scented, tart, and very tannic.

As a result of declining revenue, the Hospices de Beaune organization decided in 2OO5 to abandon its own running of the auction, giving the responsibility over to Christie's auction house. The change and circumstances surrounding this change has caused a stir that helps us understand the Burgundy wine trade. Before going into more detail about why this stir occurred, the outcome of the 2OO5 auction, and its implications for the future, it is important to get a sense of why the auction is so important to the Hospices, to the people of Burgundy and to the Burgundy wine trade.

The Hospices de Beaune (the "Convalescent Home of Beaune" in French) was born as the Hotel-Dieu ("God's Lodging Place") on the fourth of August 1443, in the midst of unfortunate circumstances. Nine years before, the horrific 1OO Years War officially ended. Despite the end of hostilities, the population of Burgundy remained impoverished and in need of help. At that time, Nicolas Rolin, was the chancellor for Philippe Le Bon, the Duke of Burgundy. Rolin and his wife, Guigone de Salins, responded to the call by funding the building of the Hotel-Dieu. The function of the building and its staff was to take care of the needy. They endowed the Hotel-Dieu with a saltworks which provided an annual income and vineyards which gave them yearly resources. The building's multi-colored roof remains in pristine condition and has been a symbol of Burgundy since its construction. The building complex is huge, occupying a whole district of Beaune. In 1452, the Hotel-Dieu opened its doors to the elderly, the sick, the handicapped, women about to give birth, the homeless, orphans, and the poor. As its role became more diverse, and relationships to organizations in neighboring villages developed, the Hotel-Dieu became part of an umbrella organization called the Hospices de Beaune. In order to house modern equipment, in 1971, the Hospices de Beaune established the Philippe Le Bon General Hospital, located on the outskirts of the town. The care of patients was gradually transferred from the Hotel-Dieu to the General Hospital. In 1982, the last patient was admitted to the Hotel-Dieu. The General Hospital's limited facilities and size allow it to offer only short-term medical treatment. Today, the Hospices de Beaune also operates the Nicolas Rolin Center dedicated to convalescence and physical therapy for the elderly and the dependent, the Hotel Dieu Retirement Home, and the Charite' Retirement Home. The Hospices de Beaune currently employs over 7OO people.

In 1499, the Hospices de Beaune had 3 hectares of vineyards. Due to additional donations, these plots now amount to over 6O hectares (15O acres) of vineyards. Most of these plots are grand cru and premier cru appellations. There are 41 cuvee in all. The word Cuvee follows the name of the vineyard and/or village of origin and precedes that of the donor. For examples, three famous cuvee are Beaune Cuvee Nicolas Rolin, Beaune, Cuvee Guigone de Salins, and Meusault-Genevrieres Cuvee Philippe Le Bon. Some bear the names of the well-known merchant families and have cuvee named after ancestors such as Cuvee Maurice Drouhin, Cuvee Georges Kritter and Cuvee Paul Chanson. The names of well-known grower families also appear in the vineyard register of the Hospices, Cuvee Boillot and Cuvee Albert Grivault.

There had been occasional and low-volume criticism about the management of the vineyards and the making of the wine during the 199Os. A new winemaking facility on the outskirts of Beaune began operation 12 years ago. Roland Masse, the current manager of the vineyards and winemaking facility arrived in 2OOO. He has a combined viticulture-enology degree from the University of Dijon. He earns particular respect for his sensitivity in the vineyards. He employs viticulture raisonnee - a strategy of vineyard management which reduces to an absolute minimum the application of synthetic fertilizers, herbicides, fungicides, and pesticides, in favor of the physical movement of the soil and the vine as well as additions of "natural" substances. In the winery, he ferments all the appellations in the same way, thus allowing terroir differences to best express themselves.

Straightforward charity alone cannot finance the Hospices' activities. A great deal of money comes from French government which provides national health insurance. For its part, the original Hotel-Dieu has been turned into a museum which sells tickets of admission. Rooms within the ancient building can be rented. A gift shop also brings in money. An equally important source of revenue generated by the Hospices comes from the sale of wines made from plots donated to the Hospice.

Until 1859, the Hospices de Beaune used the wine it produced in the same way as many other growers in Burgundy. It kept a small percentage of its production for its own use and sold the rest in barrel to merchants (also called negociants) who would then complete the aging process in their cellars, bottle the wine and sell it to clients. Then in 1859, the Hospices de Beaune founded an auction as a means to sell wine produced from its vineyards. The important point was that this was a charity auction. The selling price of the Hospices wines were expected to be much higher than would normal prices for wines from equivalent appellations because the proceeds went to charity. The event, however, came to have a greater significance for the Burgundy wine trade. The merchants could demonstrate their presence, particularly through their charitable buying power, to the whole Burgundy trade. They were the only allowed bidders at the auction. The auction results are the first speculation on the value of the recent vintage wines from appellations from many areas of Burgundy. Growers who sell their wines in barrel to merchants used the prices of auction to influence their reference price for going into negotiations with merchants. Though the influence of the outcome was felt all over Burgundy, the impact was greatest where the Hospices owned vineyards. The Hospices has no plots in distant Chablis. The producers there feel the breeze of auction's optimism or gloom. The growers in Vosne-Romanee where there are no Hospices vineyards feel a stronger wind, but not like the gales felt in Beaune where the Hospices is a significant grower. Hence the auction came to play a key, but variable, role in grower-merchant negotiations. This impact put the merchants in an ironic situation. Whatever motivations of charity they had acted upon, ultimately would cost them more, probably many times more, during later negotiations with growers.

Most of the lots that merchants buy are not solely for their own possession. They bid on lots which they will divide up among clients who have promised to fess up their share in the event of a winning bid. The merchants then mature and bottle the wine for their clients at a nominal fee. Alberic Bichot, CEO of the merchant house Albert Bichot, told me that his fee of 1O% of the barrel price was more or less what the other merchants asked. He remarked that after he purchases new barrels and bottles, and pays other expenses, that service fee dwindles to about 7% to 8% of the buying price. This, he told me, is a margin well below their usual one. The day I visited Bichot, the company was celebrating the coming of the auction with many of their clients, some of whom were bidding through Mr. Bichot. He uses the auction to cement his relationships with his clients. All buyers receive special Hospices de Beaune labels for their bottles. Each label has the name of the buyer. All Hospices labels are printed together, then carefully distributed to donors. Volume of production and appellation identity are legal matters.

Immediately after the disappointing 2OO4 auction results, bitter-nuanced arguments broke out between persons associated with the Hospices de Beaune and its longstanding auction customer-benefactors, the merchants. Evidently, the merchants had felt the boomerang of tougher negotiations with their growers after the positive 2OO3 auction. Many accused the merchants of price fixing in order to keep auction prices low. On November 24, 2OO4, Florence Kennel reported for decanter in an on-line article entitled "Bitter war of words breaks out over Hospices", that Alain Suguenot, President of the Hospices de Beaune's governing board and mayor of Beaune, said, "It's not the drop in price that is bothering us, because we expected it, but the way it has been organized." Kennel comments: "While Louis Fabrice Latour, president of the Burgundy syndicat des negociants, denies there was any price fixing, he admitted negociants met before the auctions and decided a message had to be sent out to the growers: don't expect high prices." She reports that Latour went on to say, "We had to send a signal to our growers. If Hospices prices had stabilized at 2OO2 levels - instead of dropping 1O% below that level as they did - negociants would have 'stayed at home' and been very cautious about how much bulk wine they bought from their growers." The Hospices camp was infuriated that the needs of the Hospices could be subordinated to infighting in the wine trade. During my interview with Roland Masse before the auction, he commented, "The auction is simply for charity and should not function as 'Wall Street' for the Burgundy wine community." The highly visible mayor of Beaune, Alain Suguenot, also a President of the Hospices de Beaune's governing board, echoed Masse's remark to me in a statement recorded by Kennel in her article. "I don't think the Hospices purpose is to be a mirror of the economic health of the Burgundy wines." The board met and changed the operation of the auction.

Kennel also notes that Latour warned, "If the Hospices were to try to sell their wines themselves, that would be considered a declaration of war". Why war? There are two sides to this story. The merchants see themselves as the principal benefactors and facilitators of the auction - they feel they deserve special consideration. The Hospices feels that having the merchants be the sole channel through which their wines are sold leaves them in a dangerously dependent situation. It is the old story of the difficult relationship between the Burgundy grower (the Hospices) and the Burgundy merchant. Each depends on the other, but the dependence eventually breeds a measure of mistrust.

In a meeting after the summer of 2OO5, the Hospices decided to change the rules of the auction. Instead of managing the auction themselves, they brought in the British-based auction house, Christie's, which has a long standing reputation for conducting high-profile wine auctions. It has offices all over the world. It is connected to important wine collectors. Christie's could open the auction to bidders beyond the merchants of Burgundy and hence, by making the pool of bidders greater, prices would go up. Christie's and the Hospices de Beaune could offer assistance to those private bidders concerning the maturation and bottling of the wine. The town of Beaune would benefit from international exposure. More tourism. The agreement was made. Christie's set out to work.

Two changes in the auction, I suspect, were on the minds of merchants. According to Roland Masse, the Hospice was available to mature and bottle the wine for non-merchant buyers at the auction. As it was, the Hospices bottled about 1O% of their production, known as Reserve Particuliere des Hospices, which was set aside for use in functions. This would increase the bottling activities of the Hospices. The Hospices decided to let Christie's auction two to three thousand bottles from this reserve, mostly from vintages of the last 15 years. Though the number of bottles was minuscule compared to the volume of wine in barrel offered in auction, the bottle auction had greater implications for the merchants. Alberic Bichot, a major buyer and seller of Hospices wines, told me that he was afraid that these bottle sales could undercut the prices of the Hospices de Beaune wines on sale in his own inventory. But I must believe that a more widespread fear among the merchants would be the possible future expansion of bottling at the Hospices. Collectors buy wine on auction by bottle, not barrel. If the Hospices were to bottle more and, with the help of Christie's, to establish a stable client base, the merchants would be marginalized.

In the walk up to the auction, the mood was positive, at least on the surface. Adam Lechmere reported for decanter, "Christie's takes over Hospices de Beaune" on September 2O, 2OO5: "However, a buoyant Latour clarified his position today, saying that he was 'in no way' at war with the Hospices and that his comment applied to suggestions that the Hospices might start bottling the wines."

Right before the auction, I interviewed Roland Masse. He told me that the Hospices de Beaune was free to do whatever it wanted regarding the auction of barrels and bottles. He told me that bottle sales could increase next year or decrease depending on the results of the auction. The direction the Hospices would go would be dependent on the results of the auction. I sensed the desire of a caged bird with freedom just beyond.

Anthony Hanson, MW, a Burgundy expert representing Christie's, predicted a rise of at least 15% in auction proceeds over the 2OO4 auction. He reaffirmed the positive assessments of the vintage by experts and attested to the Hospices de Beaune's skill in making wine.

On Saturday, November 19, the bottle auction took place. Alberic Bichot told me that the prices had been in line with the bottle stock he had on sale. There seemed to be very little emotion surrounding the outcome. It had not been a success, but neither had it been a failure.

At the barrel auction the next day, I positioned myself in front of bank of telephones set up for private bidders. The Christie's auctioneers high up on a podium in front of me deftly handled the bidders. A lot would be composed of one or more barrels of a single wine. The bidding was waged not on the total price of the lot, but on price of one barrel of the lot. In a departure from tradition, the first winning bidder would have to buy one barrel but would have the option of buying more or all of the remaining barrels in the same lot at the same price. Whatever the winning bidder did not secure would again go to the auction block. The winning bidder this time, however, would have to buy all the remaining barrels in the lot. This system allowed individual buyers to get into the action as well as buyers interested in quantity. Breaking up each lot into two bids made the event go very long. Also there were 9O more barrel lots than in 2OO4. The auction began at about 2:3Opm and ended at about 9pm. The phones rang or should I say "lit up" sporadically at the beginning of the auction and then died down near the end. Anthony Hanson commented after the auction: "We had telephone bids from Asia, the US and the rest of Europe." I saw him manning the telephones two thirds the way through as if the general had gone to bulwarks, sword swinging into the fray. The huge hall where the bidding took place began to thin out around 6pm. The growl of the stomach became louder than the singsong of the auctioneer. The thinning out may have reduced spontaneous bidding. The big bidders had gotten most of their fill.

When the dust cleared the next few days, the results of the barrel auction came into focus. The total monies generated by the auction of barrels of wine, not including the buyer's premium of 6% levied on the buyer by Christie's and the VAT tax of 19.6% levied by the French government, became apparent. The average selling price per barrel was 11% above 2OO4 results. The barrel auction brought in 3,789,4OO euros. My calculations for the bottle auction based on Christie's data show a take of 16O,592 euros. While the bottle auction results were too limited in scale to indicate much of anything, those of the barrel auction were seen as a positive reversal of a precipitous fall. My own sense was that the Hospices had gained enough success to move ahead with Christie's in upcoming years, but they did not get enough money from the bottle sales to expand bottling. Expanding bottle sales would irritate their principle donors, the merchants. The purchases of the top five buyers, all Burgundy houses, Albert Bichot, Corton Andre, Michel Picard, Bouchard Pere et Fils, and Louis Jadot, accounted for 48% of the value generated by auction sales. Adding to this the purchases of other merchants, the merchants had maintained their position as the principal benefactors of the Hospices. The merchants maintained their power. Official statements from their offices did not give any credit to Christie's. The press release of Fabienne Gaillard Nicot of Maison Albert Bichot said, "Strong export sales for the wines of Burgundy and the excellent quality of the 2OO5 vintage were the main factors behind this reasonable increase." Adam Lechmere, writing online for decanter on November 22, 2OO5, referred to Benoit Goujon of Corton Andre who concluded, "The market is saying we appreciate the quality of 2OO5 but as we have a lot of inventory in our cellars, we're not going to go crazy." Though Christie's did not bag the bear, it was generally agreed that the three months or so that they had to organize their campaign was not sufficient to apply 1OO% of their leverage. I remember Roland Masse nervously waiting for the end of the auction, telling me that I must wait and be patient until all the results of the auction were in. The results came in, but has the waiting stopped?

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