Back to Burgundy

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?