Here is a guest feature by Nick Martin, founder of www.wineowners.com, the UK-based platform designed to meet the needs of global wine collectors and traders.

Nick Martin is founder of www.wineowners.com, a UK-based platform developed to meet the needs of wine collectors and traders around the world. Collectors catalogue, manage, value and track their fine wine portfolios.

Its integrated fine wine exchange connects buyers and sellers, whether private clients or trade participants.

Today, the core platform and its derivatives is used to manage £300 million ($504 million) of fine wines comprising 250,000 cases owned by 10,000 individuals.

Over the past decade, managing a portfolio of assets online - also known as self-directed portfolio management - has become the norm for investors in equity markets.

The benefits

These platforms are classically integrated with online trading exchanges. This allows private clients complete control of their portfolios, transparency of market pricing, trends and supporting information, and gives them direct access to global markets.

The principles of online portfolio management and direct access to global markets have spread into many other business sectors. For example, Bullionvault made accessible the wholesale pure gold markets to consumers at low commission rates.

Until last year, peer-to-peer fine wine trading was the preserve of professionals. As a consumer you couldn't store wine in a professional bond (wine warehouse) of choice and trade directly into the secondary wine market. Collectors had to go through traditional channels such as auction houses and brokers.

The market gap

This lack of direct market access frustrated a core of wine collectors and enthusiasts who were hoping for the same degree of market access, transparency and control that they enjoyed in other hobbies and asset classes. My own personal experience was typical. Like many collectors, I found it hard to keep the record of my wines up to date, whilst the process of cataloguing, valuation and portfolio management was hopelessly time-consuming. It was also frustrating how long-winded the industry-standard sales process could be, which often meant waiting months before receiving payment for wines sold on my behalf.

That was the impetus for spending 2011 researching the market. I discovered I was part of a £2 billion+ global and growing industry, and that my needs as a collector and enthusiast were widely shared. For a solution to be viable, we knew we had to build both world-class portfolio management and an integrated peer-to-peer trading exchange. It took 20 months to create.

For a collector, the essential starting point is being able to catalogue and value a collection via online portfolio management tools. Consumers lack the inventory management systems that trade participants take for granted, and commonly lose track of exactly what they own and where it’s stored. Portfolio management gives collectors the tools to organize, analyze and take decisions about what they wish to drink, lay down or sell. 

Without the portfolio tools that serve the purpose of inventory management for private clients, it’s much harder to pursue the path of an active collector.

Price discovery

For any self-directed private client, price discovery is a precondition. There’s always been an abundance of pricing data online thanks to Wine-Searcher and Google, but making sense of it and finding a reliable market level price – the point at which a wine is likely to find a ready market - requires analysis and a lot of data processing.

Safety first

For a market to thrive, participants must be protected by transparent and safe trading practices, which need to reflect the peculiarities of a market. 

Fine wine buyers must have the option to inspect condition, check provenance and be permitted to accept or reject matched offers to their bids.

Assuring the buyer’s position in this unique way may seem odd, but there’s a very good reason for it: one case of wine isn't indistinguishable from another due to variables such as storage environment, tax status, and packaging.

Peer-to-peer exchange

Portfolio management requires pricing, charting, reviews and scores (the equivalent of analyst reports), drinking dates, producer profiles - everything that self-directed investors take for granted in mainstream investments.

Integrating portfolio management with a peer-to-peer trading exchange streamlines an otherwise lengthy process. Selling wine through market intermediaries can be time consuming as:

•    Payment for wine sold through them might take weeks or months to come through.
•    First the seller needs to get quotes, decide what to sell through whom, then has to instruct transfer of the wine to the intermediary’s storage location where it can be inspected.
•    Only then is it put up for sale.
•    This necessitates repeated movement of wine in a very short period of time and increases the risk of exposing it to variation in temperature, especially during the warmer months.

Streamlining a traditional market

By contrast, a de-centralized inspection and tracking model streamlines existing market practices. Inspections are carried out in whichever specialist wine storage facility the wine is held, the wine’s condition is protected, and trades can be settled and transfer to the buyer can be completed in a day or so.

Supply and demand

But does the nature of the market justify this kind of transformation? Wine is the most popular of all treasure assets, with half of all high net worth individuals (based on 2013 research of a UK readership) choosing to lay down fine wine.

We know relative scarcity driven by demand underpins collectible markets. Fine wine fits this model due to its comparative liquidity and broadening, global demand base. In summary, a market for treasure assets becomes especially attractive when:

•    Demand is globalizing;
•    Supply is limited;
•    Authoritative information exists; and
•    Readily accessible analysis tools bring transparency to a market.

All of these preconditions are now in place for the fine wine market.

Long tail markets

The structural need for a trading exchange and a streamlining of the secondary market is further heightened where there is industry fragmentation. This is especially true of wine, a market where many micro-businesses are started up by collectors and professionals creating lifestyle businesses.

A feature of that kind of highly pronounced Pareto effect (80/20 rule) is that limited production is split across a wider range of distribution, and makes it harder for buyers to be allocated scarcer wines.

In the good times for Bordeaux (the world’s largest region of fine wine production) that fragmentation is encouraged and amplified via a three-tier distribution structure that is designed to allocate wine across the 25,000 wine merchants globally that ultimately connect producer with consumer. Wholesale and retail fragmentation also means that selling channels only address a narrow slice of the market.

The distinction in this kind of market between smaller traders and bigger collectors is blurred, reinforcing the importance of a transparent and freely accessible market where private clients and trade participants can be counterparties on a level playing field.

Store of value or passion?

A portfolio management platform is arguably even more important to wine collectors and enthusiasts than investors in equities, gold, property and other regulated assets: the online platform has to meet the needs of wine as a store of value as well as a treasure asset and hobby. In short, it must be reflective of fine wine appreciation in every sense of the word.

Yet without integrating portfolio management with a trading exchange function that provides the all-important market access, collectors and enthusiasts cannot buy into and out of their portfolio of wines and simplify their lives in wine. At long last, this is now possible in fine wine as it has been in many other markets for over a decade.