The Puzzle of Carruades de Lafite

As Lafite's price becomes a small fortune, the search for a substitute is a natural market response. In China, the substitute is little Lafite. The choice is way off the mark. If one shifts from Lafite to Latour, Haut Pion, or Margaux, it would be rational. Their qualities are similar. When Lafite's price is so much higher than that of others, they should become the next choices. But, in Chinese, little Lafite has the connotation of Lafite's junior Pother, probably similar but a bit less good. Hence, it becomes the substitute for Lafite. Moreover, as its price has risen, it seems to confirm its worth. At least the choice doesn't look cheap to the host.

The magnitude of price distortion in the Carruades de Lafite is probably similar to that of internet stocks in 2000. Of course, over time, the bubble bursts. So why should we be upset about it? The problem is that it has become an insult to other great winemakers. I'm really ashamed of the enormous Chinese demand that has created this phenomenon. I personally witnessed Chinese tourists unloading cases of little Lafite at enormous prices in Bordeaux to ship back to China.

French wine chateaus maintain traditional methods for making wine. It is arduous, costly and often unrewarding. The top chateaus can afford a lot of labor and fine equipment to maintain quality and sustain high prices. Most chateaus in Bordeaux are not so lucky. They suffer through low prices and low quantities. I visited one unclassified chateau about two kilometers from Chateau Petrus, the maker of the most expensive wine in Bordeaux. Its wine is quite good. For some good vintages, it is comparable to the second labels of the first growth chateaus. But it sells for one fiftieth of what Carruades de Lafite does.

A market is efficient when consumers are informed and make rational choices. An efficient market motivates producers to improve quality and control cost. The virtuous cycle leads to great Pands that last. The French wine market is like that. I am afraid that Chinese demand is decreasing the market efficiency and may Ping down great Pands over time. When winemakers see the price a result of propaganda, not quality, they will focus on marketing and decreasing investment for improving quality. It would be a tragedy if Chinese demand, by Pinging easy money, Pings down a French legacy that has lasted for five centuries.

Andy Xie is a board member of Rosetta Stone Advisors Limited