Transparency and its effect on market pricing

2016-12-14

Two pieces of news caught my attention in December.

The first was Martin Brown, CEO of Wine-Searcher, speaking at a conference in California, noting that increased pricing transparency had not caused market prices of wine to fall.

He wasn’t referring to just fine wine or collectible wine, but rather the effect of his price comparison site on retail prices and the wine market as a whole. I’m paraphrasing, and you can read the whole of the discussion on their blog.

The second was the news that Stanley Gibbons, the stamp specialist and now owner of a group encompassing antiques specialist Malletts and auctioneer Drewetts, has seen it share price tank over the last year (see chart).

Let’s begin with Stanley Gibbons and the stamp market.

STANLEY GIBBONS GROUP PLC ORD 1P

The share price tanked in part because of how it reported revenues from the sale of ‘plans’ in investment grade stamps.

Like fine wine, stamps are a collectible. Unlike fine wine, there is a great deal less price transparency in the stamp market.

As a consequence, Stanley Gibbons used to offer collectible stamp buyers a buy back scheme, whereby the company itself guaranteed the purchaser 75% of their original investment back if the value of the stamps purchased through their Capital Protected Growth Plan fell over a 5-10 year period.

Since the repurchase scheme booked stamps onto their balance sheet at a discounted rate to their own retail catalogue rather than at cost, its auditor has estimated the potential balance sheet liability (and asset write-downs) to be £64M.

Collectible markets are relatively illiquid, in large part because the things that people collect are rarely fungible*.

But just because a market isn’t fungible or liquid doesn’t mean it can’t benefit from price and market transparency. Not to mention direct market access.

The nature of a trading collectible market, as the Stanley Gibbons example highlights, is that very rare examples are quite hard to estimate, whilst more liquid collectibles will tend to sell within or just below the lowest cluster of available market offers for sale.

Onto Martin Brown’s speech on price transparency

Wine-Searcher has done a great job of price comparison and substantially improving price transparency, so that no matter where in the world you are, it’s easy to get a price for and find the wine you want.

The key point is that price transparency has not driven down retail wine pricing, contrary to economic theory, but it has substantially reduced price outliers, both high and low.

Actionable data

Wine Owners works with Wine-Searcher, receiving tens of millions of price point as the building blocks of our Market Level price – the price at which it’s likely a wine will find ready buyers (or the approximate point of market liquidity). That data is combined with traded wine prices and for the rarest wines in the world we’ll be cross-referencing with auction data from the biggest Houses.

Blue chip fine wine behaves like collectible markets, not like CPG markets. Production and therefore supply is limited. Where there is no demand prices fall or stagnate, but where there is a ready market of buyers, prices rise. Just as you’d expect.

In fact, price discovery is the underpinning of all successful and proper-functioning trading markets.

Reliable, actionable pricing data supports buy and sell decisions. It informs counter parties. It breeds confidence, and confidence boosts sentiment.

Direct market access

Combine market transparency based on realistic selling prices with direct market access that allows all market participants to buy and sell on a peer-to-peer basis, and the effect is entirely beneficial. Consumers get the opportunity to sell through their wines across the entire spectrum from interesting drinking bottles to desirable blue chips. Buyers can buy the wines they love to drink or to accumulate as a store of value from fellow wine lovers and collectors with little added market friction due to modest commissions. Counter parties’ confidence to trade is assisted by price transparency and all the settlement and logistics support we offer through the platform.

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* The word fungible is used in relation to a category of asset that is indivisible from each other. Pure gold and shocks and shares are indivisible. One of each is the exactly the same as the next. Collectibles are not fungible. In wine the things that make a difference are storage, fill levels, the condition of labels, capsules, and where the wine has been (wine that’s made the journey from Bordeaux to London to Hong Kong and back again doesn’t give buyers the same quality of juice as Bordeaux to Octavian for example).